Investors in car companies -- particularly U.S. auto manufacturers -- must wonder whether the Chrysler decision is due to larger problems in the industry. Car companies will shortly announce March domestic sales, which are expected to be up nearly 20%. But March sales may not say much about the balance of the year.
The most obvious challenge to domestic car sales is the parts shortage due to the March 11 earthquake in Japan. But that may be the least of the industry's worries. Auto manufacturers face several other problems.
The first hurdle for car companies is that consumers may be disinclined to buy new cars as gas prices rise toward $4. The second is that some real estate experts, including guru Robert Shiller, say home prices could drop anther 10% this year. As many people see their mortgages move further underwater, concerns about personal finances and retirement funds will grow. Some estimates put the number of underwater mortgages in the U.S. at over 20% of all home loans. Finally, persistent unemployment has taken millions of potential buyers out of the car market. The growth in jobs has been slow and halting.
Chrysler may be a canary in the coal mine. If so, car companies could face three quarters of compressed earnings.