2004 to Hit 17 Million

It's shaping up to be a strong year for the U.S. light-vehicle market, which will end three straight years of decline.

If forecasts for the rest of 2004 prove correct, the industry's bloated inventories should shrink closer to normal levels by fall.

Ward's forecasts sales to end the year at 17 million units — 17.4 million including medium — and heavy-duty trucks — 2.4% above 2003 results, and the third time in the last five years they will hit the 17 million mark.

Including this year's forecast, sales will have averaged 17 million units over the past six years, after never having reached 15 million over any prior 6-year stretch.

As a result, there is little in the way of pent-up demand, and incentives will continue to play a large role in how well the market performs for the remainder of the year.

Ever since auto makers flooded the market with post-Sept. 11 0% financing programs and big rebates to “keep America rolling,” the industry has seen sales surge in the third quarter on a seasonally adjusted annual basis (SAAR). This year should be no different, as auto makers prepare for the official start of the new model year by clearing out excess inventory caused by overly aggressive production schedules and imports.

July-September sales are forecast by Ward's at a 17.7 million SAAR, compared with 17.4 million in like-2003 and 17.6 million in third-quarter 2002. As in 2002 and 2003, the third quarter SAAR will be the strongest of all four quarters this year.

The second-quarter spring selling season has remained the strongest quarter on a pure volume basis. But overall, its share of industry sales has been declining. The second quarter accounted for 26.9% of sales during 2002-2004, down from 27.4% in 1992-2001. Meanwhile, the July-September period has seen its share increase to 26.6% over the last three years, from 25.1% over the 10-year period ending in 2001.

This year, assuming the economy continues its recovery, the fourth quarter should be stronger than last year on a seasonally adjusted basis. Ward's is forecasting a healthy 17.0 million SAAR for the period, up from 16.8 million last year.

Because sales remain at historical highs, it's not surprising inventory levels also are at all-time highs, with records set in each month this year and inventories topping 4 million units for the first time ever in February.

But stocks are higher than necessary. Based on Ward's estimates, U.S. light-vehicle inventory will total 300,000 units above the optimum level — 3.8 million units — heading into the third quarter. Forecast inventory at the end of the third quarter is 3.5 million units, which would be the highest ever for September.

Fortunately, thanks to some minor production schedule tweaking, the Sept. 30 inventory level will remain manageable as long as fourth-quarter demand is stronger than a year ago. Inventories still should total about 150,000 units above the estimated optimum level, but that's only about half the surplus expected for the end of June.

If the fourth quarter mirrors the prior two years, auto makers will lessen incentives in the early going to see how well their new products perform on their own. But even without a big drop in incentives, there likely will be a short-term downturn after the third-quarter surge. Thus, a noticeable drop in sales will look like a setback until a December spike — spurred by increased incentives — brings inventory closer in line with demand.