4th Quarter Nosedive

North America production is set to take a nosedive in the fourth quarter, as demand in the U.S. stagnates and inventory at some of the bigger manufacturers overflows during the third quarter.

Longer term, the outlook calls for production to pick up only slightly in 2007.

The revised Ward's 2006 forecast includes more pessimistic predictions for General Motors Corp. and Ford Motor Co. and moderate reductions for other auto makers that are expected to pull back on the reins as market optimism begins to wane late in the year.

Still, overall demand will increase over year-ago in the fourth-quarter, but only because last year saw inventories decimated by the huge success of summer retail programs that pulled an inordinate amount of sales into the June-August period. Overall, based on recent history, demand at best will be tepid for the period.

With some exceptions due to below-expected performances in recent months, GM and Ford generally will continue their restraint on incentives, compared with the last five years.

DaimlerChrysler AG (Chrysler, Freightliner and Mercedes) likely will use some heavy incentives to clear out excess '06-model inventory following big sales declines in recent months that revealed how dependent the auto maker had been on fleet deliveries to prop up its first-quarter retail performance.

After its third-quarter inventory shakeout, look for DC to follow GM and Ford's lead and increase its focus on controlling vehicle stocks more through production restraint.

Industry wide, fourth-quarter output, including medium- and heavy-duty trucks, is pegged at 3.62 million units, 10.7% below October-December 2005's 4.06 million. If the forecast holds firm, it will be the lowest total for the period since 3.30 million in 1992.

July-September production is projected at 3.63 million vehicles, 6.4% below year-ago.

Production for entire-2006 is predicted to end at 15.80 million, compared with 16.32 million in 2005.

Output will improve only a little in 2007, to 16.0 million, according to the Ward's forecast, in part because total demand is expected to be flat and GM and Ford still will be rationalizing their capacity. Both also will be hurt by a decline in sales to commercial fleets that will dampen truck production.

If the Big Three stick to their guns on the pricing front, they'll be more loath than in the past to overproduce vehicles and begin the vicious cycle that leads to bloated inventories and increasing pressure to crank up incentives.

Highlighting the quarter will be GM's changeovers to its new GMT900 pickup trucks. That will play a part in the auto maker's forecast 21% cut in production from year-ago levels, but GM also will have eliminated shifts at three plants and closed two others compared with like-2005 as part of its capacity-reduction moves.

Offsetting that slightly will be the third-quarter start of production at its new plant in Delta Township, MI, near Lansing. Output of the new Midsize Crossover (formerly Lambda-platform) products there will undergo a slow acceleration, and the plant will not be up to speed until spring.

Furthermore, demand for GM's new GMT900-based large SUVs is expected to remain solid, just not enough to have the three plants assembling those vehicles to match the hefty overtime schedules of recent years.

Upside caveats to the GM forecast: The GMT900 pickup changeover could go faster than anticipated; demand for the large SUVs could be stronger than predicted; and/or GM could overbuild by overestimating demand.

If any of those scenarios comes true, GM's fourth-quarter output easily could be higher than forecast — and total 2006 industry production will be closer to the 16 million mark.