U.S. Sales Forecast Lowered for 2017 Despite Need to Cut Inventory

WardsAuto is lowering its U.S. light-vehicle sales outlook for entire-2017 to 16.9 million units from 17.1 million.

The previous forecast hinged on stronger volume, especially in Q3, from automakers unloading extra inventory into the market. However, though still possible, a huge bargain-basement sale does not appear to be on their horizon.

Manufacturers mostly appear to be maintaining relatively good control over the impulse to jack up incentives – thereby unloading price-discounted volume into the market at the expense of future sales – and are using production slowdowns more than expected get inventory back in line with demand.

But excess inventory does remain an issue, and production slowdowns and high incentive spending are in the cards for the remainder of the year.

Despite an August push on the retail end by market-leader General Motors to pare some excess ’17-model stocks, the rest of the industry for the most part did not follow suit and dealer inventory heading into September remains an estimated 15% to 20% too high for current demand.

U.S. light-vehicle inventory ended August at 3.85 million units, 7.6% above same-month 2016. Dealers ended August with a 70 days’ supply, up from July’s 69 and year-ago’s 62. A level in the high 50s typically is optimum for August.

Although Toyota has been doing something similar since June, it was bellwether GM goosing sales in August to put a dent in its bloated stock levels that caused the industry’s year-over-year gap, after rising to a 3-year high 9.5% in July, to drop to its lowest (7.6%) since February.

Mostly because other automakers, as they have in the past, did not increase their own incentives to match GM and, to a lesser extent, Toyota, sales fell to a long-time-low seasonally adjusted annual rate of 16.0 million units in August. Thus, industry inventory did not decline as much as it might have if automakers had clung to previous patterns.

Even accounting for Hurricane Harvey, which blasted the Gulf Coast at the end of last month and reduced August’s SAAR by an estimated 200,000 units, total sales volume was disappointing. One silver lining is that without Harvey, the retail mix in August, based on initial estimates, would have been roughly flat with year-ago. Fleet deliveries fell year-over-year for the sixth month this year.

The dampening effects of Harvey still will be felt in September as the Houston area, which is a major market, continues to recover from flooding that certainly put a dent in traditionally high holiday-sales volumes over the Labor Day weekend.

Based on similar past events, such as Hurricanes Katrina and Sandy in 2005 and 2012, respectively, it will probably be late October or November before significant makeup volume begins due to the lost sales from Harvey. Most of the lost volume should be recovered by the end of 2017.

Early September losses due to the storm, and the fact sales in general have continued to disappoint throughout the year, put a cloud over the prospects of a major rebound this month. Previously, September’s volume was expected to increase year-over-year due to the month having one more weekend than usual in its selling period and because of the force of heavy inventory levels.

For September’s volume to finish above like-2016’s 1.43 million units, the SAAR will have to total 17.4 million units, a level not reached since last December’s 18.1 million.

An increase could happen, but probably only if GM continues to increase incentives and if the rest of the industry also ratchets up discounts.

Because GM’s largely uncontested retail push in August pulled volume from its competitors, the rest of the industry has even more impetus to prime the pump in September to cut inventory of ’17 models before the majority of ’18 models begin deliveries in October.

Although GM took out a big chunk of its excess in August, its dealers still headed into September with total inventory 23% above a year ago. GM also is cutting production quite heavily in the near-term to help alleviate excess stocks, which means it does not necessarily need to continue strongly raising incentives as part of its inventory control strategy.

Toyota, which has topped Ford for the No.2 slot in U.S. sales volume each of the past two months, has been both cutting production and raising incentives all summer to trim excess inventory. Toyota’s August inventory was 10.2% above like-2016, but that gap was well below the 24.3% year-over-year increase it posted in May.

With some exceptions, other manufacturers saw their inventory picture worsen in August. Among the major players, FCA US, Ford and Nissan posted higher days’ supplies in August from July, when normally each remains flat or declines.

Nissan was the most noticeable. Most years its July-to-August days’ supply remains relatively even, but this year it increased to 86 from 66.

Other automakers with atypical upward movements in their August inventory totals included Hyundai, Kia and Mazda.

There also is the potential for fleet volume to help September post a sales-volume gain, but that likely would depend on commercial business. Fleet declines this year were caused by a deliberate pullback by several automakers in their rental business.

Fleet volume began to noticeably weaken in the latter half of 2016, meaning year-over-year comparisons over the last four months of this year might be better than in the first eight months. That could help push sales above forecast. But it will take some extra incentive spending to really push volume higher. Production cuts this year probably are a better option. More price cutting would pull ahead volume for 2018, which is expected to decline from 2017 either way.

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