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Will Sales Slow in 2008?

The economic environment is slowly climbing to the top of the list of concerns for consumers and carmakers alike ahead of the meeting of the Federal Reserve Board this week.

The American industry's big guns — General Motors chief executive Rick Wagoner, Ford Motor Co. chairman Alan Mulally, and Chrysler chairman Robert Nardelli, have all called for the Federal Reserve Board to cut interest rates.

"I would say we should be looking at (rate cuts) to get some confidence, some consumer confidence back and to get some energy back into the markets and some cash back into the markets, which would be good for all of us," Nardelli said recently.

As it is, most major forecasts for new car sales have been reduced. J.D. Power & Associates said it now expects sales of only 16.2 million vehicles this year.  Doubt also is beginning to creep in about the forecasts for 2008 and some observers are beginning to speculate car sales won't recover until 2009.

Meanwhile, the threat from another hurricane in theGulf of Mexico drove oil prices over $80 per barrel briefly. The recent upward pressure on oil, despite a commitment from OPEC to pump 500,000 more barrels of oil per days, has left American gasoline prices near the $3 per gallon price. Gasoline prices haven't retreated much, expect for brief periods, since Hurricane Katrina came ashore outside of New Orleans two years ago, undermining consumer confidence and wrecking the long-range economic and consumer behavior models used by the automakers.

The steady upward pressure on the price of oil also has undermined the price of the dollar. Years ago when the U.S. dollar was fundamentally strong, currency fluctuations really didn't matter much, and the Federal Reserve board could, when necessary, simply ignore them. A falling dollar basically meant that a few German and handful of French companies had to raise prices a bit. Nobody really blinked if the price of a Mercedes-Benz crept up a couple of percent.

The world has changed fairly dramatically, however, since the late 1990s and early 2000s, when then-Fed Chairman Alan Greenspan could stabilize the economic environment by cutting rates.

This time around the situation surrounding the falling value of the dollar is more complicated. Cutting rates also would weaken the dollar further and wind up exacerbating the situation. Consequently, Americans could wind up paying more for a lot more products that are now imported rather than made in the U.S., including foodstuffs, oil, and all kinds of basic materials such steel and aluminum used in a wide array of products.

The conventional wisdom is that oil and other raw materials have gotten more expensive because of the swift expansion of the Chinese and Indian economies, which also caught commentators by surprise.

However, another factor has been the decline in the value of the dollar, which has prompted producers to raise prices on materials sold in dollars in the global market.

This time around, it’s not only Mercedes-Benz and BMW that will pay the prices. Domestic carmakers also now have a growing stake in making sure the dollar isn't scuttled in the rush for lower rates.

The other difficulty is the unfolding housing bust, which likely will require a workout phase similar to the one put in place after the savings and loan disaster of the late 1980s.

For automakers, it also means another round of belt-tightening that goes beyond Detroit's Big Three. Volkswagen has already announced some cuts and other companies are likely to follow.

Greenspan, punctuating a week of unhappy news in Detroit, told the CBS' 60 Minutes that the Big Three should quit whining about a rate cut and concentrate on building better vehicles.

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