DETROIT, Nov 3 - The U.S. auto industry faces a glut of excess capacity that will have to be trimmed, and that could hurt the economy of the Midwest, Chicago Federal Reserve President Michael Moskow said on Monday. In a speech that did not discuss the economy or monetary policy, Moskow outlined some of the changes in auto manufacturing in recent years, including the shift of foreign automakers' assembly plants to the south and west of the United States and away from the Midwest. "The question now seems not if, but when and where capacity reductions are going to occur," Moskow said in prepared remarks at a manufacturing conference at the Detroit branch of the Chicago Fed. "The Midwest could be adversely affected if reduction efforts are disproportionately taken by the Big Three, since they have a larger share of their plants in the region," he said. Moskow noted the recently ratified contracts between the UAW and the "Big Three" Detroit automakers included plant closures affecting about 12,000 jobs and primarily closing plants in the Midwest. According to some estimates, the auto industry has the capacity to produce about 20 million units a year in the United States, about 3 million above the average sales pace of the past three years.
Moskow also said the strong dollar in recent years had weighed on U.S. automakers and given importers a sales advantage. "Exchange rate movements during the last few years put the Big Three at some degree of a cost disadvantage and contributed to a strong rise in import sales," Moskow said. Import market share has risen from 12 percent of light vehicle sales in 1996 to 20 percent of sales this year. Moskow added that health care costs and high retirement benefits also have contributed to high costs for the Big Three. Market share for the Big Three has fallen from 73 percent in 1996 to 60 percent so far this year, and sales incentives have "significantly" reduced profit margins on vehicles, he said. "But, faced with high fixed costs for labor, plant and equipment, it was less expensive to produce vehicles and sell them with heavy incentives than it was to shut down plants." Monthly auto sales figures are due out later on Monday, and most analysts expect a soft reading for October sales.//