The auto industry is losing steam

It’s been years since we’ve heard about production cuts by automakers, but here they come.

After a record-breaking 2015, the hot air is audibly hissing out of the auto industry. September sales were down 0.5% from a year ago. Year-to-date sales were about flat. Some individual models got clobbered. Inventories are piling up on dealer lots. Automakers lavished incentives on the market. Nothing worked.

Yet, auto production in September had jumped 7.3% year-over-year, according to the industrial production report this morning. In my article earlier today on this phenomenon [Is this Why US Industrial Companies Don’t Invest?], I explained: “Something has to give: either a miraculous jump in sales or a cut in production.”

The digital ink wasn’t even dry when we got the answer from the horse’s mouth. And no, sales hadn’t miraculously jumped. Instead, production is going to get cut.

The harbinger that auto sales and swelling inventories would hit production and manufacturing came on October 11, when Ford announced that it would halt production of Mustangs for a week at its Flat Rock Assembly Plant.

“We continue to match production with demand,” spokeswoman Kelli Felker told the Detroit News.

Mustang sales had plunged 32% in the month from a year ago, despite about $2,700 in incentives per deal. Year-to-date sales were down 9.3%. Mustang inventories on dealer lots at the end of September had ballooned to 89 days’ supply — so let’s face it, the dreadful 90 days — when 60 days is more than enough. That’s nearly 50% overstocked!

But no big deal, it was just a week, and it was just the Mustang, not Ford’s lifeblood, such as high-profit-margin F-series trucks — the F-150 being the best-selling model in the US; or SUVs, such as the compact Escape, Ford’s second-best selling vehicle; or even cars, such as the Fusion, Ford’s third best-selling vehicle.

But sales of F-series pickups had fallen 3% in September from a year ago, with inventories ballooning to 95 days’ supply, according to Automotive News. Overall light truck sales, including SUVs, were down 2.9%, according to Motor Intelligence.

So this evening, the inevitable happened: Ford announced that it will shut down production of its F-150 assembly plant in Kansas City for a week, though the Dearborn Truck Plan in Michigan would continue production.

And there’s more: Ford will also shut down production of the Escape, whose sales had plunged 12% year-over-year in September, and of another SUV, the Lincoln MKC, at its Louisville Assembly Plant for two weeks.

And it will shut down two plants in Mexico. Both make cars: the plant in Hermosillo, which makes the Lincoln MKZ and the Fusion whose sales had plunged 17.5% in September; and its plant in Cuautitlan which makes the Ford Fiesta.

Ford said it would lay off about 9,000 workers in the US and 4,000 in Mexico. So 13,000 of the 14,000 employees at those plants will be laid off for the period.

Affected workers in the US won’t be hung out to dry: those with more than one year of experience will get about 80% of their normal pay during the layoff, including state unemployment benefits and Ford supplemental pay, according to Ford. It did not say what laid-off workers in Mexico would get paid.

The announcement shed some more light on what might happen next:

During our second quarter financial call, we said we expected the overall retail industry to decline in the second half of the year from the same period last year. We also said to expect to see some production adjustments in the second half — this is one of them. We continue matching production to meet demand.

“Continue matching production to meet demand”: so there will be more production cuts and shutdowns.

Other manufacturers have similar problems. And there will be more announcements of this type.

The auto sector in the US is huge and impacts a number of industries. Auto sales (new, used, parts) make up 21% of total retail sales. So declining auto sales will hit consumer spending and auto dealers. When automakers cut production to meet this lower level of demand and to deal with their inventories, they slam the transportation sector, particularly railroads that ship new vehicles from plants and ports to cities around the country.

One of the few bright spots for railroads was the volume of motor vehicles: carloads of motor vehicles were up 2.7% in September year-over-year. The sector accounted for over 7% of total carloads.

But last week, I warned that it “is turning into the next brake shoe to drop” on the railroads. So unless a miracle happens, as I seem to like to say, railroads are going to lose one of the few remaining pillars of growth in what has become a calamitous market for them.

NOW WATCH: Former Navy SEAL commanders explain why they still wake up at 4:30 a.m. — and why you should, too

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.