In her Nightly Business Report blog, Terri Cullen summarizes the potential economic impact of Toyota’s problems in “Toyota Recalls and the Economy.” In this article, Cullens suggests that what is bad for Toyota (TM) might be good for the U.S.:
“The Toyota recalls may turn out to have a positive impact on the U.S. auto industry — and in turn the U.S. economy itself — in the near-term as nervous owners trade in their vehicles for competing models. With the federal ‘Cash for Clunkers’ stimulus program now over, the industry will take whatever consumer incentives it can get.”
This reasoning looks like an automotive version of the “broken window fallacy.” That is, you can stimulate jobs for the window industry by smashing every window in town, but this windfall comes at the expense of the budgets of the window-owners who planned to spend that money elsewhere. Similarly, we can certainly stimulate the American auto industry by smashing every Toyota vehicle (nevermind the American workers employed by Toyota), but this would force households to spend money they had not otherwise planned to spend at this time. The unplanned expenditure takes money away from other spending. Even worse, this spending likely involves creating more debt, and the interest payments create an additional budgetary burden.
I daresay many, if not most, Toyota owners plan(ned) to keep their cars for many, many years. (I kept my Toyota Corolla through undergrad and grad school! After that, I bought GM, but I guess even my spending could not help save the company). Thus, a forced and premature replacement is a clear losing proposition for Toyota owners…and whatever companies would have benefited from the spending now redirected to another car.
As far as Toyota’s stock goes, it still looks like it is in the process of bottoming as the company goes about repairing its image and fixing its manufacturing processes. Overhead resistance still looms from the 50 and 200-day moving averages (DMAs). I am guessing it will take time to break that resistance given that the 200DMA served as support from April, 2009 to January, 2010. For now, the W-bottom still looks firm.
*Chart created using TeleChart:
Be careful out there!
Full disclosure: long TM calls