Inventories: No Relief

Excess inventories and a stubborn economy likely will keep fourth-quarter U.S. light-vehicle sales flat with year-ago, while the pressure to keep strong incentives will remain high.

Sales are forecast at a 16.8 million seasonally adjusted annual rate (SAAR) for the fourth quarter, the same as prior year's. Including a Ward's estimate for September of 17.2 million units, that would leave the year at 16.7 million, compared with 16.6 million in 2003.

It likely is too late for the economy to boost sales in the final months of 2004. Even if September sales surprise on the high side — topping the Ward's forecast — they should be offset by a bigger downturn in October.

The fourth quarter calls for a slowdown in October and November, with an end-of-year spurt in December. Unless sales are unexpectedly high, fourth-quarter production cuts are likely.

December has one extra official selling day compared with last year, and the entire first weekend in January will count in the month's final tally. So expect a noticeable upward movement in raw volume in December from November and same-month 2003, irrespective of the SAAR.

That should alleviate some of the excess inventory that will begin to appear out of control in October and November.

Nevertheless, assuming sales in first-quarter 2005 are similar to January-March 2004's 16.5 million SAAR, inventory could be close to a half-million units higher than what Ward's estimates to be the optimum level for the end of the quarter.

It should be clarified that for several reasons an acceptable, or healthy, industry inventory level could be 5% above or below what Ward's judges to be optimum.

But to achieve that range by January, the industry would have to run between a 17.5-million and 18-million SAAR in the fourth quarter.

Thus, if manufacturers keep production in the first quarter of next year close to year-ago, and bring in roughly the same amount of imports, inventories will continue hitting monthly highs throughout early 2005.

Based on current production schedules and estimated imports, the outlook for Dec. 31 inventory is 3.88 million units, 3.7% above like-2003's 3.74 million, which was the highest ever for the month. In fact, when 2004 is concluded, each month this year will have attained an all-time high.

Nearly all segments contribute to the inventory glut. Even popular cross/utility vehicles soon will outpace demand. High inventories of large pickups and SUVs make it likely at least one month in the fourth quarter will see light trucks take 60% of the market for the first time.

A more specific battleground to eye in the fourth quarter is large pickups. At the end of August, the segment's inventory was equal to 20% of the light-vehicle total.

Inventories of large pickups, 36.7% above year-ago, have never before been this high at this time of year and are a large part of the inventory overhang. Sales are up only 4.7% from like-2003.

Record stocks at each of the Big Three, plus the Nissan Titan — which was not on sale a year ago — all are contributing to a segment crunch.

Based on market share, the fourth quarter usually is the segment's best sales period. Depending on how generous auto makers are willing to make incentives, excess inventory on large pickups could act as a catalyst to push sales volume in the fourth quarter above the Ward's forecast.

Large pickups also could cannibalize sales in the small-pickup segment, which may be occurring to a great extent already as potential buyers move up to the larger sizes, thanks to price discounting.

Ironically, there is a possibility that redesigns coming this fall to several small pickups — the Dodge Dakota, Nissan Frontier and Toyota Tacoma — in addition to GM's relatively new small pickups, could serve to enhance sales of larger pickups.

The newer vehicles may create more dealer traffic, while heavier incentives on the large pickups might lure more buyers to the bigger models.