Fewer Reasons for Incentives

On the heels of a strong second quarter, Ward's forecasts third-quarter U.S. light-vehicle sales to equal a 16.9 million seasonally adjusted annual rate (SAAR), slightly below year-ago's 17.1 million.

There will be fewer reasons this year to goose third-quarter sales via incentives, because the solid second-quarter performance has reduced pipeline pressure and inventories have become less top heavy.

In the last three years, the second-quarter SAAR has averaged 16.5 million, and the third quarter followed at an average of 17.3 million. This year's second quarter is estimated at 16.9 million, including a June estimate of 16.8 million, which should draw down the third quarter in a balancing act of sorts.

That doesn't mean third-quarter sales can't go higher. If the economy is stronger than the consensus outlook and auto makers open the spigot on spiffs, sales could spike to a 17 million-plus total. The third quarter has paced at that rate over the last three years, mainly due to some manufacturers clearing model-year-end inventory.

If the forecast is on target, the year-to-date SAAR through September will stand at 16.8 million vs. 16.7 million during 9-months 2004.

The year is expected to continue tracking closely with 2004, with the results varying from year-ago only slightly one way or the other.

Thus, Ward's expects the year to end close to 2004's 16.86 million. The fourth-quarter likely will fall short of year-ago's 17.2 million because last December's record 18.3 million-unit SAAR is unlikely to be duplicated this year.

Sales volume for the third quarter is forecast at 4.35 million units, 1.4% below year-ago's 4.41 million.

Light-vehicle inventory is forecast to end September at 3.3 million units, 8.9%, or some 300,000 units below like-2004.

Inventory of domestically produced vehicles is forecast at 2.8 million, 5.9% below September 2004.

The two market leaders, General Motors Corp. and Ford Motor Co., both are forecast to continue their long-time sales and market share slides in the third quarter.

GM has the leverage to pump up its sales, and the overall industry volume, with large-scale increases in incentives. But it is doubtful whether it could boost incentives enough in the third quarter to improve its market share over like-2004 levels.

Although still too high, GM's inventory is forecast to end June 17% below year-ago. Its inventory situation is not the factor it has been the last three years, when dramatic incentives were needed in the summer to make way for new models.

GM's excess inventory is on the truck side. It is trying to push aged SUVs, many of which will be redesigned and on sale in early 2006. Incentives would have to be hefty to move the current models. GM car inventory is at historic lows (down 24.1% from year-ago at the end of May) and even with huge incentives, the auto maker wouldn't be able to generate significantly larger sales volumes.

Ford, in a similar boat, has been relying more on production cuts than increased spiffs to control inventory, so it is less likely to escalate incentive spending significantly.

The rest of the Big Six companies are forecast for gains.

DaimlerChrysler AG will continue to ride on a combination of hot products and incentives to extend its sales streak.

The Toyota Motor Sales Inc. juggernaut will not stop in the third quarter, although a possible inventory squeeze could limit gains to single digits.

American Honda Motor Co. Inc.'s long-in-the-tooth car lineup and lack of a traditional body-on-frame truck caused it to uncharacteristically record 11 sales declines over the last 20 months. Its third-quarter deliveries will have the advantage of comparing to weak 2004 results.

Nissan still is riding the tide of relatively new large SUVs and pickups in segments it has entered in the last two years.

Haig Stoddard is manager of industry analysis for Ward's Communications.