Production Cuts, Strong Sales Whittling Down U.S. Inventory

U.S. light-vehicle inventory ended October a smidgeon above same-month 2016, but with recent stronger sales volumes combined with slower production schedules, dealer stocks should drop below year-ago in November for the first time since May 2015.

Although the highest total ever for the month, October inventory of 3.85 million units was less than 1% above the prior year’s 3.84 million, easily the narrowest year-over-year gap in 2017.

The decline is seen as a positive because prior to October inventory levels were running 10% to 15% above what was necessary for underlying demand. October’s total is roughly 5% above the optimum level for underlying demand. But given the vagaries and nuances of inventory data, a number within 5% is relatively good in terms of being in balance with demand.

That gap should narrow further by the end of the year, as manufacturers continue to pull back on production along with sales expected to continue above a 17 million-unit seasonally adjusted annual rate over the final two months. As the year-end holiday season approaches, along with the typical sales promotions, manufacturers still are expected to push some extra volume out the door through the end of December.

Automakers likely will still want to get rid of some old ’17-model inventory, as well as make pushes to shore up market shares for the year. That will continue the above-trend surge started in September when sales picked up due to replacement volume from hurricane-damaged vehicles largely in Texas and Florida, as well as increased market inducements to cull excess inventory.

With sales expected to remain strong – though not at the 18 million-plus SAAR of the previous two months – in November-December, inventory should be in relatively good shape heading into January. At that point, sales likely will resume the 16.8 million-unit annual pace, or lower, 2017 was tracking at through August until the results of the two previous months lifted the year-end trajectory to 17 million.

Another positive is that, on the whole, production should start to stabilize with manufacturers not having to make as many cuts based on whether inventory is too high for certain vehicles. However, demand is expected to continue declining next year, thus, year-over-year production declines will continue for several vehicles, especially cars.

Oct. 31 days’ supply was 71, a healthy total for this time of year, and below like-2016’s 73.

Inventory of domestically made vehicles totaled 3.07 million units, 1.4% below same-month 2016, and the first month since December 2015 inventory of North American-built LVs dropped below the year-ago total. Oct. 31 days’ supply was 73, down from 75 in like-2016.

Import stocks ended October at 781,384 units, 7.1% above year-ago. Days’ supply increased to 65 from 64 a year ago, and was somewhat above the low-60s range considered healthy heading into November.

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