Only a few months ago, the tire industry's economic picture looked upbeat, according to Dennis M. Byrne, professor emeritus of economics at the University of Akron.
But that was before the collapse of the subprime housing market, the freefall of the U.S. dollar and other factors combined to make a perfect economic storm, Mr. Byrne told his audience at the 24th Annual Clemson University Tire Industry Conference, held March 12-14 at Hilton Head Island.
``The economy today is changing more rapidly, and in many more strange ways, probably than ever before in history,'' Mr. Byrne said. It isn't only the falling dollar and the housing crisis that is hurting the economy, but high debt, the war in Iraq and general uncertainty about the future.
This in turn creates uncertainty for the tire industry as for every other sector of the economy, he said, and this is ironic because in the past few years the players in the industry have done a very good job of managing their businesses.
Mr. Byrne singled out Goodyear for making sound business choices. ``I said a few years ago that Goodyear might not make it,'' he said. ``I'm glad to see I was wrong. Their problems are now manageable. They had some good luck, but luck is what you make of it. The U.S. has had a fairly low interest rate, allowing them to get rid of debt. Their financials have turned around, they have a much more rational business plan, and they are selling off peripheral activities.''
In the last half of December, the U.S. economy started showing problems that today have it teetering on the brink of a recession, perhaps a very serious one, according to Mr. Byrne. That slide may even already have begun in the fourth quarter of 2007.
While the world economy is changing rapidly, it's still true that American consumers drive it, Mr. Byrne said. ``If American consumers stop buying, the American economy is in real trouble.
``What's happened over the last few months is that American consumers have gotten battered, and it's starting to show up in the economy. It doesn't matter if you're building the world's greatest plant if people won't buy the stuff.''
Meanwhile, the war in Iraq is costing the U.S. $1.5 billion a day, which means it has become too expensive for the U.S. economy to afford, according to Mr. Byrne.
``The Iraq war already has lasted well over the length of U.S. involvement in World War II,'' he continued. ``It is one of the major reasons for the weakness of the U.S. dollar.''
Because commodities generally are denominated in the U.S. dollar, its weakness is in turn a major contributing factor to high energy prices, he added.
Also, the economy is reeling from 4,000 mortgage defaults every day, Mr. Byrne said. As many as 2 million Americans will end up in default, he said.
``The housing crisis is capitalism gone wild,'' he said.
Mr. Byrne said he believes banks and other financial institutions-possessing a lot of loose money and looking for new markets-decided to write mortgages for any and all applicants. But most of those applicants simply didn't achieve the income levels they expected to have. ``It's an absolute catastrophe,'' he said.
While Americans have often been faulted for low savings rates, those rates ignore the fact that for most Americans, their houses and the improvements they make on them are their savings, Mr. Byrne said. But now in some markets housing values have fallen by half, while homeowners are raiding their retirement funds to try and stave off foreclosure, he said.
The impact of the housing crisis is much wider than it appears. Financial institutions such as Countrywide Financial Corp., the largest mortgage lender in the U.S., are laying off employees and going into survival mode. The banks and other institutions that bought the mortgages as an investment also are suffering, he said.
Employment figures have not fallen as much as other economic indicators, but that is because military personnel are listed as employed, according to Mr. Byrne.
Besides the actual cost of fighting the wars in Iraq and Afghanistan, the human burden of military casualties, ongoing psychological problems and the plight of the Iraqi citizenry will be with the U.S. for an unforeseeable number of years, he said.
``Economically speaking,'' he said, ``Iraq is a black hole.''
All of this bad economic news is also bad for the tire industry, which has already been weathering trouble because the U.S. vehicle market has been in a gradual decline since 2002, Mr. Byrne said.
``The vehicle industry had a down year in 2006, and estimates are that 2007 and 2008 will be worse,'' he said.
Tire manufacturers showed steady production and sales growth until 2006, when both figures fell by 5.5 percent. A recession is likely to affect both the original equipment and replacement tire markets, he said, because consumers will put off buying both new cars and new tires.
The bad news about the current economic situation is that it doesn't seem to be responding to the usual remedies, according to Mr. Byrne.
``Deficits are not a problem for the economy if you use the money for social spending,'' he said. ``If you use the money for current spending, that's a problem.''
The government will send out its economic stimulus payments soon, he noted. ``We should look to see if people spend or save the money. If they save it, it will have no effect on the economy, and I suspect that will be the case.''
The good news, however, is that the tire industry is in its best financial shape in years, Mr. Byrne said. Most tire makers have either closed or modernized obsolete plants, low-profit tires are now sourced from China, foreign transplant operations are doing robust business, and new labor and health care contracts with the United Steelworkers union will help manufacturers, he said.
While the North American outlook is bleak, tire companies will remain profitable in China and other developing countries, he predicted, meaning that tire makers should be able to weather the coming economic storm.