01 WON'T BE GREAT, BUT NOT AWFUL EITHER

Okay, vehicle sales this year will most likely fall about one million units short of 2000's blockbuster 17.4 million units. And, yes, the buffed up economy of last year will lose some muscle.

But will 2001 be that bad for the auto industry? Will dealers be forced to pawn their inventories, and apply for disaster relief?

Hardly, says Paul Taylor, the National Automobile Dealers Association's chief economist, offering an economic outlook for 2001.

“It's been a very strong economy and it remains fairly robust,” even though measured consumer confidence and dealer optimism are showing declines,” Mr. Taylor says at the NADA Convention in Las Vegas last month.

He forecasts 2001 vehicle sales will drop to 16.3 million. But that would still be the third-best year in history.

Selling fewer vehicles, though, means dealers must better manage their operations, he says. That's why so many NADA convention workshops focus on management controls.

“Better dealership management is the theme of all the sessions here in Las Vegas,” says Mr. Taylor.

But the economic slowdown — which is rattling a lot of people, including dealers — must be kept in perspective, according to Mr. Taylor.

For instance, even though net household worth — a barometer of car-buying likelihood — has declined, it's still an impressive $21.8 trillion, which is double what it was in 1994.

“It means there's still spending power in American households,” says Mr. Taylor. “Recent consumer reports indicate the economy is doing quite nicely.”

He notes that January auto sales — while less than they were a year ago — nonetheless were strong, a good way to start 2001.

Other hopeful signs: the Federal Reserve Board lowered the interest rate and lower taxes are in sight, probably by July, Mr. Taylor predicts.

Yet he predicts a decline in the growth of the gross domestic product — from 5% in 2000 to 2.4% this year.

He expects the unemployment rate will increase from 4% to 4.3%. That should offer some relief for dealers who've had a terrible time filling jobs that remain vacant, such as service technician positions, he says.

Dealers are making the necessary adjustments to face the anticipated sales slowdown.

Dealership expense controls (expenses as a share of total sales) are about 11% compared to more than 13% a decade ago.

Meanwhile floorplan expenses are expected to drop to 6.4% in 2001 compared to 7% last year as dealers better manage their inventories.

Sales personnel productivity also is improving. Annual new units sold per salesperson went from about 102 in 1993 to 117 in 1999, according to an NADA industry analysis.

Mr. Taylor this year foresees no recession, defined as two bad quarters in a row. That said, he expects dealers, in order to compensate for the expected sales downturn, will concentrate more on service and parts sales this year — something they traditionally do in a recession.

In segment sales, Mr. Taylor notes an explosion in growth of 78% from 1999 to 2000 of crossover vehicles. They're essentially cars designed to look like sport utility vehicles and such, but they're smaller and get better gas mileage. He points to the Chrysler PT Cruiser, the Ford Escape and the Audi Allroad — three products that debuted in 2000. In contrast, traditional SUVs' growth was only up by 2.2%, says Mr. Taylor, citing Ward's Communications data.

“The crossovers are becoming dominant. They meet the needs and flexibility of drivers today,” he says. “They are well-received. When manufacturers figure out what consumers want, they can't sell enough of them. Chrysler could sell twice as many PT Cruisers as they are making now.”

Factors influencing the anticipated slowdown of vehicle sales include gas price increases, the Federal Reserve's increase in short-term interest rates (although the Fed recently lowered the rate by 1%) and fears of domestic inflation even as growth slows.

Alan Starling, a GM dealer outside Orlando, FL, agrees with Mr. Taylor that dealers will focus on controlling the expense side to offset a potential decline in overall sales.

But Mr. Starling adds, “Then again, dealers are funny. We think the drop in sales is going to come out of somebody else.”