Slowing U.S. Demand Not Helping Bloated Dealer Stocks

Four straight months of sliding demand, including the past two being well below expectations, are keeping U.S. dealers loaded with new-vehicle inventory.

Weighing heavy on the possibility that demand could alleviate the burden – besides the industry generally in a cyclical downturn – is weakness in used-vehicle prices, the prospect that interest rates will rise again and that 2017 will be the worst year for penetration of fresh product since 2011.

Excess new-vehicle inventory combined with a high quantity of off-lease good-quality used vehicles coming available is hurting pricing power in both sectors. Potential interest rate increases, even if small, only will put more pressure on dealer margins.

Demand could rebound temporarily over the summer as savvy consumers hit dealer lots expecting great deals on ’17 models prior to the launch of most ’18s in the fall. Automakers could further goose summer sales by rolling out even bigger incentives, although spiffs already have increased an average 16% year-over-year through the first four months of this year.

Also hurting demand is a lack of fresh product. WardsAuto forecasts 26% of LV sales in 2017 will be comprised of new or redesigned vehicles, the lowest since the same total six years ago.

Thus, despite assuming a summer boost in sales volume due to an increase in incentives above their year-to-date average, WardsAuto is lowering its 2017 LV forecast to 17.1 million units from 17.3 million.

If the revised sales forecast holds firm, more production cuts are likely. Automakers have been paring car output, but additional reductions in truck production are probable. More temporary plant shutdowns and extended summer downtimes than have been scheduled in several years are on tap during the second and third quarters.

Automakers ended April with light-vehicle inventory of 4.140 million units, 6.5% above year-ago, and about 10% higher than WardsAuto’s estimate for what would be optimum for the month.

April days’ supply increased to 76 from 72 the prior month and from 70 in like-2016.

General Motors, Honda, Nissan and Toyota are the main manufacturers with extra stock to burn. How they handle their excess through a combination of production slowdowns and incentive activity largely could determine what the final sales total will be at the end of the year.

Car-segment groups with excess include Small Car, Middle Car and Luxury Car. Although sales have begun to weaken in the past two months, trucks are not as bad across the board. Still, inventory in the Pickup group is getting fat as it is in Small CUV, Small SUV and Large Van segments.

Luxury CUVs and SUVs also are getting somewhat bloated.

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