Coming soon: the big auto sell-off
To unload inventory, US auto companies are rolling out deals. It could pinch the economy.
NEW YORK — Car buyers: get ready for deals.
Coming soon are price cuts, an expansion of who is eligible for low-interest financing, and any other way your local car dealer can entice you into the showroom.
Yes, US auto companies are expected to roll out new efforts this week to help unload their inventory, which includes a huge fleet of 2006 vehicles. But if you're not ready in November, don't worry: The deals are likely to be around through February, since the large inventories carried by Ford, General Motors, and Chrysler could take months to scale down.
The sell-off will be felt far and wide. It will sink Detroit's hopes for a quick return to profitability, pinch the economy in the nation's heartland, and shrink orders for componentmakers around the country. As a result, economic growth will be lower than expected late this year and early next year, economists believe.
"The auto industry will contribute to a slowing economy," says Peter Morici, an economics professor at the University of Maryland in College Park. "Slower auto sales will compound the negative affects of the housing slowdown and drag down growth."
Last week, the effect of the housing slowdown became apparent when the Commerce Department said the nation's gross domestic product had slowed to a 1.6 percent growth rate in the third quarter, down from 2.6 percent in the prior quarter. The weak housing market subtracted 1.1 percentage points off the third quarter's results, according to the government's report.
The auto industry's problems selling cars were not reflected in the GDP report because unsold vehicles, that is inventory, is actually considered a positive. But if lower production rates follow, that will be a drag on the growth rates of future quarters. "The next two quarters are most at risk from the auto industry," says Mark Zandi, chief economist at Moody's Economy.com.
Mr. Morici estimates the auto industry could put a drag of about 0.5 percent in real terms on the nation's GDP early next year. "We're talking $25 billion to $50 billion that it will cost the economy," he says.
Last year, the auto industry sold close to 17 million cars and light trucks nationally. This year, it's on pace for 16.5 million, says Mr. Zandi. "They have to make sure they don't fall below the 16 million unit pace. That is the absolute lowest level they can live with and not fall into bankruptcy."
As of the end of September, it would have taken Chrysler 79 days to sell down its inventory, 76 days for General Motors, and 75 days for Ford, reports Autodata Corp. "Back in the old days, there was talk that 60 days' supply was normal," says Ron Pinelli, president of the Woodcliff Lake, N.J., company. "But that's outmoded. What matters now is how many cars are in stock because the sales rate varies tremendously."
Last year, General Motors came up with the idea of selling cars at "employee pricing," or the amount it would sell the car to its own workers. The company dramatically increased its selling rate, and inventories shrank.
But this summer, as fuel prices spiked, consumers shied away from buying big SUVs. Even though gasoline prices have come down, consumers are skeptical. "People think the price of gasoline is going to go up again after the election," says Scott Brown, chief economist at Raymond James & Associates in St. Petersburg, Fla. "So they are staying away from big SUVs."
Automobile analysts are anticipating deeper discounts to help reduce inventories of cars and trucks that are not selling well. Today, according to Automotive News, cash-back incentives range from $500 for a Dodge Durango to $6,000 on some Chevrolet Suburban and Tahoe models. Most of the companies have some form of 0 percent interest-rate plan.
Starting next month, those discounts are likely to improve, especially for the 2006 models, says Jack Nerad, executive editorial director at Kelley Blue Book in Irvine, Calif. "They will also offer lower interest rates to a much broader group of consumers than previously qualified, and offer longer loan terms," he says.
Chrysler may have some of the best deals since it has the largest inventory.
"They kept the production spigot on and didn't care that sales were slowing down," says Mr. Nerad. "I would expect them to do something serious and pretty soon."
Dealers, of course, will be happy to move cars off their lots. Grant Law of Newton Chevrolet in Chattanooga, Tenn., says showroom traffic has been a little slower than he would like. He thinks it might be related to the tight political race in the state between Rep. Harold Ford (D) and Republican Bob Corker, a former mayor of Chattanooga. "It's consuming a lot of folks' minds," he says.
Deeper rebates from Detroit will especially help buyers without a lot of cash, says Mr. Law. "But we find the lower interest rates bring in the higher-quality customer," he adds.
While domestic manufacturers are struggling, dealerships that sell imports are thriving. For example, in Huntsville, Ala., Bill Penney Toyota's biggest problem is getting enough cars. Jerre Penney, president of the dealership, says he is operating on a 10-day inventory. Camry hybrids are the most difficult car for him to come by. "I have sold five of them that I am now trying to obtain," he says.
But even the domestic car manufacturers have some "hot models." For example, Chuck Van Stone of Shepherdstown, W.Va., is in the market to buy a 2007 Dodge Caliber, which looks like a station wagon but has all-wheel drive. It sells for $22,000. "When you make an exciting car and it captures a buyer's imagination, you don't need to discount it," says Mr. Van Stone. "Right now, there is no discount for that car."