Troubled US economy has Honda second-guessing its forecasts

The Standard and Poor's downgrade of the US government's debt has more than just the stock market reeling. Honda has said it may be altering its forecasts for its earnings for the first half of 2011 as a direct result of yesterday's plunge, pulling the stock market down to its lowest levels since the recession in 2008. Honda CFO Fumihiko Ike said that "a prolonged drop in U.S. equities will lead to a decline in consumption and delayed car purchases."

The uncertainty in the United States economy will lower the value of the dollar against the Japanese yen, meaning that there will be slimmer profits for Honda on cars that they export, like the Fit, which is 100% designed and assembled in Japan. This setback comes just a little over a week after Honda raised its forecasts on August 1st after it had recovered from the March earthquake in Japan ahead of schedule. Ike said the changes to Honda's fiscal predictions as a result of the US economy are largely dependent on the length of the turmoil. "This is a new scenario not incorporated into Honda's current forecast," he said.

Honda is not only affected by currency exchange rates in the United States, but in Europe as well, where a weak euro will also affect profits. Furthermore, Honda is concerned that a weakening US economy will bring down the European economy and certain Asian economies heavily tied to the US (like China) with it as well. However, if the dollar re-strengthens to an exchange rate of 80 yen to the dollar, Honda says it can meet the initial August 1st forecasts. "Mulilateral intervention is needed to prop up the dollar as last week's unilateral action has proven to be ineffective," said Ike.

Shares of Honda fell 2.8 percent to 2,722 yen a share when the Japanese stock market closed at 3pm local time. The yen has risen as high as 77.06 against the dollar today as investors fled the dollar for the yen as a source of more secure currency.

Source: Automotive News