Double-Digit Cutbacks in North American Vehicle Production Will Continue Through Mid-2007, says Scotiabank Economist

    TORONTO, Jan. 31 /CNW/ -After six months of declining assemblies, North
American vehicle production edged up in November and December, prompting some
commentators to suggest that much of the downward adjustment in motor vehicle
output has run its course. However, automakers will likely continue to adjust
their assemblies lower, according to the latest Global Auto Report released
today by Scotia Economics.
    "Despite the recent stabilization in vehicle production, we expect
automakers to continue to cut output through at least the first half of 2007
due to high inventories and slowing economic growth," says Carlos Gomes,
Scotiabank's auto industry specialist.
    According to the Federal Reserve Board, U.S. vehicle production (cars,
light, medium and heavy trucks) edged up in the final two months of 2006,
climbing in December to an annualized 11.3 million units from a low of
10.5 million in October. A temporary pick-up was also evident in Canada, with
output rising to an annualized 2.6 million units in November from a low of
2.3 million in September. However, preliminary data for December indicates
that even with the ramp-up of Ford's new crossover utility vehicles in
Oakville, Canadian vehicle assemblies slumped to a new low in the final month
of 2006.
    "Given sluggish U.S. sales at the 'traditional' Big Three in December,
General Motors trimmed its first-quarter North American output schedule by an
additional 20,000 units (2 per cent) in early January," says Mr. Gomes.
"During the announcement of its full-year 2006 financial results in late
January, Ford also cut an additional 10,000 units from its first-quarter 2007
North American production schedule. General Motors and Ford now plan to slash
first-quarter output by 14 per cent year-over-year, only slightly less than
the 17 per cent slump posted in late 2006.
    "Vehicle production had until recently held up better at DaimlerChrysler,
with fourth-quarter output actually advancing 2 per cent above a year
earlier," adds Mr. Gomes. "However, in early January, the company temporarily
idled both of its Canadian assembly facilities due to high inventories."
    Car and light truck sales across North America (Canada, the United States
and Mexico) ended 2006 on a strong note, as mild weather and year-end
clearances lifted volumes to an annualized 19.6 million units, up from an
average of 19.2 million during the previous eleven months.
    However, U.S. volumes remained weak at the 'traditional' Big Three,
falling 9 per cent year-over-year. Light truck purchases were particularly
anemic, undercut by weakness in pickup trucks. In recent months, sales of
pickup trucks have softened significantly, taking over from large SUVs as the
main source of weakness among light trucks.
    "Automakers did make some progress in reducing their stock of unsold
vehicles in 2006, with U.S. vehicle inventories currently 2 per cent below a
year earlier," says Mr. Gomes. "However, the month-to-month decline moderated
in December to only 17,000 units, well below the 125,000 unit drop that
normally occurs at year end. As a result, the Big Three's stock of unsold
vehicles remains excessive in the United States at 75 days' supply, compared
with a normal 65 days. The inventory overhang is concentrated in light trucks,
especially in full-size pickups and full-size SUVs, with Big Three inventories
at an excessive 78 days' supply."
    In addition to the inventory overhang, the auto industry remains
vulnerable to declining U.S. house prices.
    According to Mr. Gomes, "U.S. households will sharply reduce their home
equity cash-outs over the coming year, as house prices continue to soften.
This lower level of re-financing activity has already begun to reduce
household purchasing power and will cut into vehicle sales and production in
    In Canada, passenger vehicle purchases improved in December for the
second consecutive month, advancing to an annualized 1.65 million units, the
second-best monthly performance of 2006. Gains were broad-based, as year-end
clearances lifted full-year purchases to 1.61 million units, up from
1.58 million in 2005.
    "Despite the strength in vehicle sales in late 2006, we still expect
Canadian purchases to decline to 1.54 million in 2007, as slowing economic
growth dampens activity in Central and Atlantic Canada," said Mr. Gomes.
    Vehicle sales in Mexico were also strong in December, climbing to an
annualized 1.22 million units, up from an average of 1.12 million in the first
half of 2006. Full-year 2006 purchases edged up by one per cent in Mexico,
climbing to a record 1.14 million units. Further gains are expected in 2007,
as economic growth continues to advance in excess of 3.5 per cent and credit
demand is supported by declining interest rates.

    Scotia Economics provides clients with in-depth research into the factors
shaping the outlook for Canada and the global economy, including macroeconomic
developments, currency and capital market trends, commodity and industry
performance, as well as monetary, fiscal and public policy issues.

For further information:
For further information: Carlos Gomes, Scotia Economics, (416) 866-4735,; Paula Cufre, Scotiabank Public Affairs, (416)