Summer of Discontent: It May Take Auto Sales a While to Pick Up

Last Updated Jul 5, 2011 4:09 PM EDT

We think you need to buy a brand new car!
June auto sales numbers for the U.S. have been released, and they're resoundingly... meh. This wasn't unexpected. May sales were weak, and most analyst who follow the industry are in the process of recalibrating their yearly forecasts. There is good news, however: a dry summer should give way to a lush fall and happy winter.

A little perspective is useful
The data contains a bunch of micro-narratives: Toyota (TM) and Honda still suffering, Nissan gaining momentum, the Koreans coming on strong. Most importantly, the Detroit Big Three have grabbed a collective 50 percent share of their home market for the first time since before the financial crisis.

In the context of tepid sales results, this might sound like cold comfort. But in fact it's huge, given the woeful state of General Motors (GM) and Chrysler just two years ago. True, GM and Chrysler, along with Ford (F), got plenty of help from the supply chain crisis that followed the Japan earthquake and tsunami.

But Americans are seriously starting to buy American cars again. Motown is so optimistic that both Ford and GM are sticking with ambitious full-year sales targets, with a 13-million-plus market forecast for 2011. This contrasts with outside observers, who are struggling to predict 12 million.

A lot of pressure on the second half
Auto sales right now are an unholy stew of intersecting factors, made up of limited inventories, curtailed incentives, balky consumers, resurgent brands (like Jeep, up more than 70 percent over last June), and unpredictable gas prices.

You could overlay a volatility index on this situation and get a good picture of why sales have stalled of late, after surging through the first quarter. Consumers just don't want to commit.

The Detroit News highlights a good point, however, quoting an economist from Ford:
Just as reduced auto output in the second quarter slowed U.S. economic activity, "we anticipate that, as production ramps up in the third and fourth quarters, we'll see a pickup in the overall economic pace," said Jenny Lin, senior economist at Ford Motor Co.

In addition, many consumers now on the sidelines will have to replace their vehicles soon. After nearly three years of sluggish auto sales, vehicles on American roads are, on average, more than 11 years old, Lin said.
Replacement is key
If the second half of 2011 sees the U.S. market catching up on the replacement rate, then the carmakers' optimism could be justified. Also remember that Honda and Toyota won't stay down forever -- actually, both are coming back to full strength faster than expected -- and when they're able to replenish dealer inventories, they may begin to offer aggressive discounts to halt their market-share slide.

Do the math: Consumers with old cars plus carmakers cutting prices equals a happy fall and winter. That gas prices didn't climb to alarming levels over the summer will help drive this equation, which could have the added benefit of making more profitable vehicles -- trucks and SUVs -- extra-appealing.

What could go wrong?
Auto sales aren't anything to get excited about at the moment, but they are hanging in there. You can't say the same for jobs or the housing market. The latter isn't going to return to health any time soon, so what's really causing trouble is the dicey labor market.

This has already compelled economist to drastically trim their overall growth predictions for the economy in 2011. Joblessness is what will prevent the U.S. auto market from hitting that 13 million annual sales figure.

I think it will come in under that, probably at something like 12.5 million. This will be evidence of stabilizing unemployment, and people who are currently worried about losing their jobs will stop fretting and go ahead and take advantage of the great car deals that will be out there.

I mean, it's not like they're going to get a good return on their money in the stock market or a savings account (although they could certainly pay down debt). They might as well spend some money so that they economy can really get rolling again. And they'd be hard-pressed to find a place to spend more than on a brand new car.

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  • Matthew DeBord

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