Skip navigation
Newswire

U.S. auto sales look strong despite tepid recovery

By Justin Hyde

DETROIT, Aug 21 (Reuters) - Automakers and auto industry experts see August shaping up as another hot month for U.S. vehicle sales, thanks to interest-free loans and other hefty rebates.

But a number of observers are beginning to question how long new vehicle sales, a linchpin that accounts for roughly 10 percent of the U.S. economy, can thrive amid America's tepid economic recovery. A sudden drop in the automotive industry's strength could signal that the wheels of the economy have stopped moving.

Analysts expect auto sales in August to run roughly 7 percent to 9 percent higher than last year, at a seasonally adjusted annual rate of about 17.6 million vehicles -- off from July's blockbuster pace of 18.1 million, but well ahead of the 16.4 million rate in August 2001.

The decline from July's pace would come as Detroit's Big Three automakers start to run low on the 2002 model year vehicles carrying the zero-percent loans and large rebates. Earlier this month, all three began offering far less generous rebates on 2003 models just beginning to hit dealerships.

Once again, General Motors Corp. is expected to lead the industry, with a sales gain of 10 percent to 15 percent over August of last year. GM has been the most aggressive in offering zero-percent loans and other deals, counting on its lower manufacturing costs to maintain profits.

Ford Motor Co. and DaimlerChrysler AG's Chrysler arm are expected to report smaller gains. Ford broadened its interest-free loans earlier this month to include its Explorer sport utility vehicle and Mustang sports car.

Automakers have been immune so far to the malaise most other retailers have felt over the past few months and some commentators have even suggested consumers are spending on cars and trucks at the expense of everything else.

Much of that has been thanks to incentives that averaged almost $2,900 on vehicles from Detroit's Big Three in July. But a number of other economic factors, including interest rates at 40-year lows, growing personal incomes and rising home values, may have also help prop up sales.

"Although the temptation will be to attribute the (sales) strength to higher incentives, we believe that underlying demand for cars and trucks would be fairly strong even if incentives were lower," said J.P. Morgan analyst David Bradley in a research note.

Automakers have made "cautious optimism" their slogan for predicting sales all year, but optimism has been beating out caution as of late. Chrysler chief economist Van Jolissaint told a meeting of industry executives earlier this month that U.S. consumers' ability to buy vehicles and their willingness to do so had improved from this time last year.

"I think its fair to say the risks to the outlook have been heightened ... but the basic fundamentals still look good," GM Chief Executive Rick Wagoner told Reuters. "The stuff that's important for car sales still looks solid."

Some economists are preaching more caution, however.

"AUTOS, CRUISE MISSILES AND HOUSES"

"With the exception of autos, cruise missiles and houses ... it seems to me the economy is kind of stalling out," said Paul Kasriel, chief economist with Northern Trust securities.

"Corporations are still under tremendous pressure to improve their profits, the only way they're seeing to do it is through cutting costs, and the biggest part of their costs are people," he said. "I don't expect to see much hiring and maybe more firings."

New jobless claims rose earlier this month and the number of claims from people who have been seeking work at least a week have remained high. While automakers are expecting a good August, other retailers have reported sales running below expectations in the key back-to-school period.

And the last income report from the U.S. Commerce Department found Americans boosted their savings rate in June to 4.2 percent of their income from 3 percent a year earlier, suggesting their bias against spending was strong.

"People are trying to save more after they finally realize they're poorer, their wealth has taken some substantial hits in past 2.5 years," Kasriel said. "They probably feel the need now to increase their net worth the old-fashioned way, by saving more."