From the Wall Street Journal: “Ford Motor Co.’s plan to cut North American production as much as 12% in the first half of next year signals that Detroit’s Big Three auto makers — as well as their many suppliers — could face headwinds in 2007 despite industry cost-cutting efforts.

Meanwhile, as a fresh sign of the ripples the auto makers could send across the manufacturing belt with further production cuts, Dura Automotive Systems Inc. became the latest auto-parts supplier to file for Chapter 11 bankruptcy-court protection. The separate developments highlight the continuing pain faced by General Motors Corp., Ford and DaimlerChrysler AG’s Chrysler Group, amid signs of a slowing economy.

Ford’s projected first-half 2007 cuts — reported yesterday by trade publication Automotive News — come on top of a 21% production cut planned for the current quarter.”

Many voices complain that the US companies – the Big Three – are in decline because of incompetent management that can’t design and market a decent product. Nonsense. They do quite well considering that their labor contracts force them to concede a several thousand dollar per car cost advantage to their non-union competitors. This advantage allows the competitors to put more “content” in their products and spend more on R&D to improve product and manufacturing technology, putting more and more distance on their handicapped competitors. The UAW is interested solely in maximizing the amount of money it can bleed from the car companies to the benefit of its present members. It cares nothing about future jobs or the shareholders, and so does not act to allow the companies the financial “room” to invest and be successful.

Yes there was incompetence – or perhaps a failure of foresight to be more precise – that the car companies got into this situation, where they are spending $60/hr. for essentially unskilled labor. They thought that it didn’t matter what they paid, just that everyone paid the same and the customers be damned, they would pay their price because there was no choice. But foreign competitors broke up that cosy little deal and now thay can’t afford to take a strike and they can’t afford not to. Probably bankruptcy and voiding of the labor contracts that way is the inevitable result.

At the heart of this problem is the anti-trust exemption for unions in the Sherman Act. It allows a union to effectively control all the union jobs in an industry and set wages at levels which are grossly out of line with the free-market price of the labor. This works for a while, but the companies involved are then vulnerable to competition because their prices are artificially high, thus providing the high returns that new competitors need to justify the start-up cost of entry into the market. We see this over and over again – the airlines, for example. The steel industry. The fundamental structure of labor unions makes them responsive purely to the very short term interests of their present members. They do not “invest”, they milk. Dunno how this gets fixed, maybe just be extinction of the species. But if the union movement is to be healthy, then repeal its anti-trust exemption. It is an irresistible lure towards self-destructive behavior.

For many mutual fund managers and hedgies, performance for bonus purposes is calculated as of the end of October, so that necessary meetings and calculations can be completed by the year-end. As a result, illegal tape-painting tends to reach a crescendo around the October month-end. Much of the program activity today was probably for that purpose and certainly allowed the indexes to ignore the increasingly dismal economic news. How long they can hold it up? We’ll only know in retrospect. Where is the SEC? Who knows, they occasionally go after egregious corprate offences like the option backdating, but never go after Wall Street. It is well-known that they monitor the last day of the month for tape-painting but not before. So the tape-painting moves a day earlier.

From Bloomberg: “An unexpected increase in auto production last quarter was a statistical fluke that will be reversed, making current U.S. economic growth even weaker, according to a former Commerce Department economist.Last quarter’s annualized 26 percent increase in auto production shocked Joe Carson, now director of economic research at AllianceBernstein LP in New York. Without the gain, the economy would have grown at an annual rate of 0.9 percent, not the 1.6 percent the Commerce Department reported today….. A 5.5 percent drop in price of SUVs and other light trucks last quarter made output look stronger when adjusted for inflation.”

Oh and by the way – CHICAGO (Reuters) – “Wal-Mart Stores Inc. on Saturday estimated that October sales rose just 0.5 percent at its U.S. stores open at least a year, hurt by disappointing apparel demand and disruption from store remodeling efforts.”

SignOnSanDiego: “MIAMI – AutoNation Inc., the nation’s biggest car retailer, said Thursday that third-quarter profit fell 37 percent, weighed down by a drop in new car sales in California, its biggest market…. For the quarter, new car sales fell 8 percent in total and 12 percent in California, a state that accounts for one-fifth of AutoNation’s new vehicle business. “

In July, Nouriel Roubini forecast a 1.5% GDP growth rate for the 3rd. quarter and it came in at 1.6%. Close enough. He is currently forecasting Q4 at between 0 and 1% and Q1 2007 as negative. I think he is too optimistic, but we’ll see.

Of course, many economists who were wrong are pointing out the strong personal consumption number in the release to indicate that it is just an aberration, and that the fourth quarter will likely be strong. The market seemed to agree, and resumed its climb on Friday after a modest pullback until Goldman Sachs reduced its forecast for motherboard shipment growth this quarter, saying demand is `falling off a cliff”. Shipments in October declined 4.2 percent from September, Goldman estimates. That compared with an earlier prediction for 3.1 percent growth and average month-to-month growth of 12.7 percent between 2001 and 2005. That, unsuprisingly, took the wind out of the semiconductor stocks and the market ended the day lower. Next week will be interesting.

In the spirit of everyone joining in the pumping for the election, Alan Greenspan did his bit for his patrons. “Most of the negatives in housing are probably behind us,” Greenspan said at a conference sponsored by the Commercial Finance Association “The fourth quarter should be reasonably good, certainly better than the third quarter.” Of course, his forecasting record is terrible. That’s why he went in to government, he couldn’t make it in the private economic forecasting business.
Noriel Roubini has a quite different forecast.

The new home sales report this morning showed a dramatic falloff in prices as builders hustled to unload their inventory and pipeline. Sales were up at a seasonally adjusted annual rate of 1.075 million, relative to an August that was revised down to 1.021 million, from 1.050 million. Numbers for June and July were also revised down. This is a systemic problem with the Census Bureau that causes the initial release to be way overstated, and all revisions to be downward in a down market. For example, July was originally released at 1.072 million SAAR, but revised down today to 0.984 million SAAR, an 8% drop right there. So we won’t see the “real” numbers for September for a couple of months.

Calculated Risk has a nice piece on what this means for the economy. Just look at the pretty picture and draw your own conclusion on whether or not we are going to see another gray stripe (recession).