Vehicle Production Expected to Rebound in '07

North American vehicle production will start an upward trend in first-quarter 2007 after hitting a trough in fourth-quarter 2006, but it will not reach the historically high levels averaged for most of this decade until the latter part of next year.

Ward's forecasts quarterly seasonally adjusted annual rates (SAARs) will not return to the 16.5 million averaged from 2002 through first-half 2006 until third-quarter 2007.

Third-quarter 2007 also will be the first quarter since this April-June to see an improvement over year-ago, when it is forecast to reach a 16.5 million SAAR, compared with Ward's third-quarter 2006 estimate of 15.5 million.

Production is forecast to hit bottom in fourth-quarter 2006, with a 15.1 million SAAR, followed by 2007's first-quarter 15.3 million rate and second-quarter's 15.6 million.

Capacity utilization for the industry — based on what auto makers can build over a 52-week work year — will drop to 69.4% in fourth-quarter 2006, from 80.7% in like-2005.

The cause for the drop is sluggish economic growth, which is weakening demand for new vehicles, compounded by higher energy prices eating into consumer spending.

Worse still, all this comes at a time when North America's top three producers — General Motors Corp., Ford Motor Co. and DaimlerChrysler AG — are implementing strategies to wean themselves from customer rebates in order to improve profit margins on vehicle sales and gain more pricing power.

The result: less overall product demand, resulting in a major inventory adjustment in the third and fourth quarters.

U.S. auto makers must see at least one strong month in the fourth quarter to achieve a 17.5 million total vehicle sales SAAR and stave off further inventory adjustments in early 2007.