Despite October's 6.1% Gain, Slowdown in Housing Sector Is Expected to Cut Demand

Wall Street Journal; By MIKE SPECTOR November 2, 2006

A 6.1% rise in U.S. auto sales last month won't likely help Detroit's ailing auto makers, which could face even tougher going next year amid signs of economic slowness.

The industry's gain was magnified by an unusually weak October in 2005, when sales plunged after the Big Three auto makers stopped offering the same discounts to customers that they had been offering to their employees. Last month, sales of cars and light trucks increased to 1,217,412, from 1,147,063 in October 2005. According to Autodata Corp., the sales total translated into an annual selling rate of 16.2 million cars, which is lower than the rate in eight of the past 12 months.

Paul Ballew, the top sales analyst at General Motors Corp., said October's sales were "somewhat tepid" but added GM still expects sales this year to come in "a shade under 17 million." In recent weeks, lower gasoline prices have helped truck sales, a staple for the Big Three.

Next year may be tougher for auto makers because of the slowing U.S. economy, especially in housing, which damps demand for pickups. In a conference call, Mr. Ballew said the housing slump "is likely to have some impact in the coming quarters." Ford Motor Co., in a separate conference call, said it expects "modestly below-trend growth in the coming year."

During October, GM, Ford and Toyota Motor Corp. each posted gains in vehicles sales and market share, while DaimlerChrysler AG, Honda Motor Co. and most European car makers reported declines. Many European brands were hurt by sales drops in California, Florida and other coastal regions, where the effect of the housing slowdown has been greatest.

GM's vehicle sales rose 17% compared with the year-earlier period, according to Autodata, but the total was down 11% from September and off 13% from October 2004. The company's market share climbed to 24.4% from 22.1%.

Ford's October vehicle sales jumped 8% from a year earlier but were off 9.6% from September. Toyota's U.S. sales rose 9.2% from a year earlier, but that was down 15% from September. The results gave Ford some distance from Toyota for the month. Over the longer term, Toyota is threatening to overtake Ford in U.S. sales.

DaimlerChrysler's sales fell 1.6% from a year earlier on a 3% decline in sales at Chrysler Group. That more than offset a 12% jump in sales for the company's luxury division, Mercedes-Benz.

GM, Ford and Chrysler have suffered declining sales this year as high gas prices cut into sales of trucks and large sport-utility vehicles. All three companies cut production in the third quarter and are lowering output again in the final three months of the year in an effort to clear inventories from dealer lots.

In their conference calls yesterday, GM and Ford said they are comfortable with the level of their vehicle stocks. "We feel like we are finding the right balance in inventory," GM's Mr. Ballew said.

Ford said its current inventory of about 622,000 vehicles is 107,000 less than a year ago, and about 30,000 less than its total at the end of September. Ford plans to cut production in the next three months by 21% and as much as 12% during the first half of next year. George Pipas, Ford's top sales analyst, said in a conference call that the auto maker's production cut "leaves us in a very strong position to focus on 2007 model sales."

As expected, lower gasoline prices contributed to a slight uptick in truck sales: Ford's Expedition and Navigator, were up 41% and 44%, respectively, while sales of its F-Series pickups rose 3%. Overall, light-truck sales -- including pickups and SUVs -- increased 1%.

But consumers are still "skeptical" about fuel prices, said Jesse Toprak, an auto analyst with Edmunds.com. He said gas prices will need to drop to $2 a gallon and remain there for six months before consumers start purchasing larger vehicles in significant numbers.

The slowing U.S. economy, especially the slump in housing, also is presenting "head winds" that could continue to damp auto sales over the next several months, Mr. Ballew of GM said. The housing slump, he said, will "likely have some impact in the coming months."

The housing market is the "key macro risk," said John Casesa, managing partner of Casesa Strategic Advisors LLC, a New York consulting firm. If a further dip crimps demand, U.S. auto makers -- saddled with expensive restructuring costs and higher interest rates for borrowing -- won't be able to respond with costly incentives as they did a year ago, Mr. Casesa said.

Volkswagen AG saw its U.S. sales, including luxury brand Audi, fall 6.4% to 22,613 vehicles, as sales of its two top-selling models, the Jetta and Passat, slumped. At Porsche AG, sales fell 9% to 2,355. BMW AG's sales were down 4.5% to 24,494 cars and trucks. Among Ford's three European nameplates, Jaguar sales fell 22% and Volvo declined 3.6%, while Land Rover saw sales rise 7%. Nissan Motor Co. posted an increase of 3.9%. Honda's sales fell slightly.

 

No surprise the housing bubble bursting is gonna affect the economy as a whole. Might not dip into a recession, but it sure is gonna slow.

 

Plus fuel prices staying relatively close to where they are at now will be convenient to the situation. A good offset anyway. A recession + $3/gal would be bad!

 

I can't say I accept as inevitable that we are going to have a slow-down or recession anytime soon but if we do, that won't be good for the industry...people don't go out a buy new cars if they don't feel confident about their jobs/the economy in general.