You Gotta Love the Hype!

It’s been years since I’ve gone on a press junket with an automobile company, though I still get all the invitations. Sure, it might be fun to go to Belize for a week and drive a new Acura MDX six weeks before the public sees it. Heading off to Napa Valley to see what Lexus has in store for us this fall, in its next-generation RX crossover, has the potential for a good time. After all, the manufacturer pays for everything on these trips, and the people involved couldn’t be lovelier or more gracious. On the downside, though, one must sit through hours of meetings learning about all the improvements or virtues of whatever vehicle is about to be introduced. It’s the industry version of the free Bahamas cruise (provided you sit through the pitch for a timeshare).

For someone with Adult ADD, those are extremely painful meetings to attend. Naturally, the car company is excited about its new product – but if they’d just let us drive it for an hour on city streets we’d know everything we needed to about the car.

A decade ago I still went on such junkets, attending five different "long lead" events that year; and by the third one I found myself stifling laughter in one of those endless meetings: The presentation illustrating improvements for that vehicle sounded exactly like those at the two previous events. It felt as if every car company in the world hires just one writer to come up with these presentations, and that writer’s spiel fits the description of every vehicle’s improvements that year, whatever the car company. The script for each week’s presentation is customized simply: all that changes is the vehicle name.

As you can tell, attending hundreds of factory meetings during my 20-year career inside the automobile industry has sharpened my ability to distinguish hype from substance or reality, usually after just the first few minutes of any meeting. This "hype alarm" triggered when, on July 1, the car companies posted their sales for June; the stock market rallied by more than 200 points – and an analyst said that the investor enthusiasm evident in the stock market was "because General Motors’ sales weren’t as bad as had been expected."

According to the media that day, GM’s sales had fallen by more than 18%.

And These Guys Are Pros?

I know I’m not the brightest bulb in the string of lights. Even so, I’m having a really hard time believing that investors’ sudden burst of passion for the future of the American economy – and their desire to show that newfound love by buying massive amounts of stock – blossomed because GM’s sales collapsed in the first month of the summer selling season. Those stories were best summed up in this paragraph from the Toronto Star on July 2: "The release of U.S. auto sales for June swept away a dour mood among investors that initially pushed U.S. equity markets down more than 1 percent." Incredibly, that was the story being put out for public consumption.

I had one other little problem with the stories on the automobile industry’s June performance: New car sales didn’t fall by 18.3 percent last month; nor did GM’s sales drop by that amount.

The sales decline mentioned is year-over-year, and June of 2008 was not the same as June of 2007: We had three fewer selling days last month than in June a year ago. That’s right, this year the real first selling day for June happened on the 3rd of the month because the 1st fell on a Sunday; manufacturers gave their dealers until Monday night to book their weekend car sales. The last day of June 2007 fell on a Saturday – so dealers were allowed to post that week’s business as late as July 2, 2007. This is a normal month-to-month adjustment the industry allows itself so it can compare apples to apples and determine how new car sales are really performing.

In a nutshell, new car sales were off by only 8 percent in June, not the 18.3 percent we kept reading. Likewise, GM’s sales were off by only 8 percent from a year ago; and, while Honda showed a 1 percent increase in sales, the rise was actually more like 10 percent. But here’s the question: Industry reporters know that one has to adjust the actual number of selling days in any given month to accurately appraise the industry’s performance; so why did only the Detroit News manage to get it right at first?

Depressing Non-Facts

"Me too" journalism doesn’t mitigate the fact that sales did fall in June; but it wasn’t the tragic fall it was made out to be. And yes, some reporting included direct quotes, such as from Superior Chevrolet of Athens, Georgia, where sales did fall substantially. But our own Classic Chevrolet came in just shy of 400 sales; Volkswagen showed dramatic improvement; Meador Chrysler Dodge Jeep posted a startling 150 percent improvement in sales since April; and Moritz Kia sold so many vehicles that it is now the #1 Kia dealer year to date in the nation.

You may find it interesting that our local car dealers were actually buying into the statistic that car sales had fallen by the 18.3 percent figure — until they were reminded about this June’s much shorter selling period.

True, an 8 percent sales drop-off nationally is not news that the industry likes much, but what I can’t figure out is why the car companies didn’t correct the stories that reported the much higher figure. Or did they, and their protests were ignored?

Destroying Our Desire

The word "hype" always makes me think of the discussion on oil. When car sales are down for any length of time, it creates what is known as pent-up demand. The 220 million vehicles on the road today will all have to be replaced someday, and that makes the price of oil pivotal when many current car owners are deciding whether it’s time to make the change.

Two weeks ago in BusinessWeek and last week in the Star-Telegram, I wrote that oil demand destruction caused by the high price of oil had found the U.S. using approximately 525,000 barrels of oil less per day this year. That figure came from the Energy Information Administration, part of our Department of Energy – but that figure was wrong. The very day I sent that column off for publication, the EIA revised its figures for oil demand in America, saying now that since April we have been using 863,000 fewer barrels of oil per day. ("Oil Rises Over a Dollar as Focus Back on …", Reuters Online, July 1.) It should be noted that the EIA has revised these figures on oil demand several times this year – and in each revision demand has gone down.

We have now reached the point where we can attempt to chart how much damage the high price of oil has done to demand.

Sure, all the hype that is generated by vested interests suggests that the high price of oil has had no effect whatsoever on America’s or the world’s economy. However, we know now that when oil started the year at $100 and by April was around $10 higher, our demand for crude as compared to a year ago fell by 525,000 barrels per day. Likewise, as its price rose from $110 to $120 a barrel, our demand for crude fell by 839,000 barrels, equaling a 60 percent increase in demand destruction from a price rise smaller than 15 percent. One can only imagine what today’s oil price is doing to demand.

Don’t Forget to Flush

You’ll hear many say that the China Factor more than offsets what we are now not using, but that’s not true. The Oil Daily published the full set of figures on July 6 for Asian Demand – from China and India to Vietnam and Bangladesh – and entire Asian continent’s total demand for oil is growing in 2008 by only 582,000 barrels a day, far less than we have taken out of our crude diet just since April. The very next day that same publication, billed as "the Wall Street Journal of the oil industry," published a story under the headline, "Data Shows Oil Supply Outrunning Demand."

Moreover, we are in the most peculiar of situations right now: The oil market is once again in contango, meaning the forward price is higher than the spot price for crude. This is supposed to encourage stockpiling of oil, but no such thing is happening.

Again, the media suggests that the stockpiles of oil on hand are falling because the supplies of crude are short, when there’s no shortage. It’s far more likely that refiners, whose profits are substantially down from last year, simply aren’t wanting to stockpile any excess oil at today’s prices. Of course, that’s what all industries do when sales and margins are down; the refiners don’t want the expense of carrying large and very expensive oil inventories.

So, car sales weren’t down nearly as much as was reported, and another round of excuses for the high price of oil has been discredited. Everything you knew 10 minutes ago can now officially be forgotten.

If we can clean our minds often enough, maybe some economic sanity will move back in.

© 2008 Ed Wallace

Ed Wallace is a recipient of the Gerald R. Loeb Award for business journalism, given by the Anderson School of Business at UCLA, and is a member of the American Historical Society. He reviews new cars every Friday morning at 7:15 on Fox Four’s Good Day, contributes articles to BusinessWeek Online and hosts the talk show, Wheels, 8:00 to 1:00 Saturdays on 570 KLIF. E-mail: wheels570@sbcglobal.net