Why the Market Isn't Sweating the Decline in U.S. Auto Sales

(Bloomberg) -- The U.S. auto industry may be closing out the first annual decline since the year GM and Chrysler went bankrupt, but it’s a long ways from carmageddon.

Investors are shrugging off the drop in demand that General Motors Co., Fiat Chrysler Automobiles NV and Ford Motor Co. have seen in their home market this year, and aren’t sweating that another industrywide decline is likely in 2018.

Here are a few of the reasons why.

Big Picture

While sales have slipped in 2017, they’re down only about 1.5 percent through the first 11 months of the year. That’s a far cry from the plunge seen during the recession, when financing froze up and consumer confidence tanked.

Industrywide, November sales ran at an annualized rate of more than 17.5 million units, outpacing analyst estimates, data from researcher Autodata Corp. show. That includes Nissan Motor Co.’s 18 percent gain, which was reported Monday after an IT system outage delayed results.

The average estimate among 11 analysts and economists surveyed by Bloomberg News is that sales will slide to 16.7 million cars and light trucks in 2018. The industry is on pace to sell almost 17.3 million vehicles this year.

“Every dealer in America, myself included, would be thrilled” with annual sales of more than 16 million, Mark Scarpelli, the chairman of the National Automobile Dealers Association, said last week. “Demand is still healthy.”

Crossing Over

The decline in the U.S. auto market can be chalked up to passenger-car models falling out of favor. Instead of buying sedans, coupes and convertibles, consumers are switching to sport utility vehicles and trucks that are more lucrative for automakers.

While manufacturers have been spending more on incentives to boost deliveries, the average selling price of their vehicles continues to rise. And while the SUV market is getting crowded, profits on many of these models remain strong.

“There’s still room in CUVs,” Bob Carter, Toyota Motor Corp.’s top sales executive for North America, said in an interview at the Los Angeles Auto Show, referring to smaller compact utility vehicles.

Top Dollar

The shift in demand to SUVs and trucks also isn’t the only factor leading to consumers shelling out more money for new vehicles. Data from Kelley Blue Book show that prices are rising across many segments as buyers opt for costlier tech, safety and fuel-efficient features.

“People are taking those incentives and buying content,” said Jeff Schuster, senior vice president of forecasting for LMC Automotive.

Consumers have been able to keep monthly payments manageable thanks to low interest rates, attractive lease offers and longer-term loans. While the tailwinds from these financing-related factors are starting to wane, they aren’t a major concern for the next year or so, Schuster said.

Hurricanes Came

A big worry heading into 2017 was record-high inventory that signaled automakers would either have to slash production or dramatically discount their vehicles.

But a ferocious hurricane season -- with Harvey soaking Texas in August and Irma blowing through Florida in September -- damaged as many as 1 million vehicles. Consumers purchased about 600,000 cars and trucks to replace those that were ruined, according to Jonathan Smoke, chief economist for Cox Automotive. About two thirds of those were new vehicles, and all that buying helped to clear dealer lots.

Automakers also got their inventory back to more manageable levels by trimming output mainly at car plants. “GM has had no hesitation in scaling back car production to not let the inventories get totally out of control,” said Michelle Krebs, an analyst at car-shopping website Autotrader.

Real Consumers

Detroit automakers got themselves in trouble in the past by dumping discounted vehicles to rental-car companies to paper over weak demand from regular Americans.

Bulk shipments to fleet customers diluted brands like Chrysler and GM’s Chevrolet. When these cars were done being beat up by rental drivers, they flooded used-vehicle lots and depressed prices.

Fiat Chrysler, in particular, has made significant strides in knocking this habit of late. The company reduced fleet sales by 25 percent in November, its 15th-straight monthly drop. The last time industry demand was falling, almost half of the automaker’s total deliveries were to fleet customers. Last month? Just 16 percent.

--With assistance from Gabrielle Coppola

To contact the reporter on this story: Jamie Butters in Southfield, Michigan, at jbutters@bloomberg.net.

To contact the editors responsible for this story: Craig Trudell at ctrudell1@bloomberg.net, Anne Riley Moffat

©2017 Bloomberg L.P.