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What's Bad for Toyota Is Bad for the Economy


Top carmaker's decision to cut capacity is grim sign.

Orders for durable goods, led by aircraft and communications equipment, jumped 4.9% in July – the largest increase in two years.

The modest demand plays out against depleted inventories and is likely to spark new production. That's good news as the economy tries to move out of a severe recession, but auto sales may not be as encouraging.

President Obama's $3 billion "cash-for-clunkers" offered discounts up to $4,500 to trade in older vehicles for new, fuel-efficient models. The program appears to have worked, at least in the short-term. J.D. Power and Associates says new car retail sales are likely to exceed one million this month for the first time in a year.

In July, Toyota (TM), reported a 33% increase in sales, followed by Chrysler at 30%, Honda (HMC) up 14%, General Motors (GMGMQ) up 8% and Ford (F) up 7%.

Some automakers may soon restock inventories. This could mean increasing production, a move that also would boost related suppliers.

But Toyota, the world's largest automaker, tells a different tale.

The company plans to suspend a compact car production line in Japan for at least a year, the Wall Street Journal reports. The may be ominous because buyers typically turn to small, fuel-efficient cars in an economic downturn.

The production line halt would be a first for Toyota. In the past, the company slowed production by reducing shifts or cutting production days.

The planned suspension represents about 220,000 cars a year. Worldwide, Toyota has the capacity to produce 10 million cars. Toyota is also considering production cuts in California and the United Kingdom.

This suggests that Toyota may have trouble adjusting its production without hurting workers at home. The company sells about 75% of its vehicles worldwide, but builds about 60% of them in Japan. But trimming costs is good news for stockholders.

Toyota's continuing troubles may mean that the cash-for-clunkers program provided little more than a temporary jolt to US sales. If totals for September, October and November lag, it will be clear that the program generated little lasting benefit.

The junk in the clunk may not be an accurate gauge of consumer confidence and demand. Toyota's planned cutbacks may reflect future consumer demand more accurately. If so, the recovery will be slower and bumpier than today's good news about durable goods suggests.
No positions in stocks mentioned.
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