Car Sales Tumble As Automakers Slash Discounts For The First Time In 5 Years

For years, some more skeptical analysts had been stumped by the relentless US consumer demand US for new cars, despite rising household debt levels, stagnant real wages, and concerns about record subprime exposure. Today, we may have found the dynamo that drove purchases to a plateau of between 17 and 18 million units over the past three years: pervasive dealer discounts and incentives.

Almost all major manufacturers reported a sharp drop in U.S. deliveries for July, led by a 15% plunge at Nissan Motor. The reason: for the first time in 55 months, the auto industry - perhaps due to concerns about the impact of auto tariffs - cut back spending on incentives, snapping a streak of monthly consecutive increases that began 4 1/2 years ago, according to J.D. Power.

While General Motors stopped reporting its monthly numbers earlier this year, Bloomberg reports that its sales fell 3.3% last month, the same drop as Ford.

Fiat Chrysler, which recently lost its CEO Sergio Marchionne, was the rare bright spot in July, driven largely by a surge in Jeep SUV sales fueling the Italian-American company’s 5.9% jump.

However, as we reported previously, both automakers could have used some positive headlines. GM lowered its profit expectations last week largely because of rising commodity prices, which have jumped since President Donald Trump put tariffs on steel and aluminum; meanwhile Jeep’s surprisingly weak performance in China - where subsidies for new auto purchases recently ended - was a major reason Fiat Chrysler dropped its forecasts for the year.

As a result of underwhelming numbers from Nissan, Ford and Honda (and GM), the annualized industry sales rate slowed to just 16.8 million, from 17.2 million in June, and just barely above last year's selling rate.

Fiat shares declined 2.2%, while GM fell 2% and Ford dropped 1.4% in New York trading.

* * *

While generally expected, the drop in sales caps a rough month for the auto industry during which Detroit’s carmakers all revised their earnings guidance lower and Ford embarked on a five-year restructuring plan.

Additionally, as Bloomberg adds, the sales month "will underscore investor fears that auto sales have peaked and that, without ever-higher sales incentives to keep consumers interested, demand will continue to soften."

“The incentives we’re seeing are more targeted,” in part because inventories are lean, said Michelle Krebs, executive analyst for Autotrader. “They’re not just slathered on.”

The auto industry's reliance on incentives is troubling for several reasons: not only are they a profit "race to the bottom" as OEMs scramble to preserve and gain market share, but they may also indicate that without at least the impression that they are getting a good deal, many cash-strapped US consumers will be reluctant to purchase autos. Meanwhile, as the tariff picture remains murky at best, changing one day to the next depending on what Trump tweets at any given moment, auto makers will be reluctant to offer the same generous discount that drove sales for the past 5 years.

One possible explanation is that carmakers may have done their discounting early this summer and decided that enough was enough, even as July's results show some payback for promotions that fueled a better-than-expected close to the first half, according to Bloomberg.

Not everyone agrees: "an incentive pullback is rare for this time of year", said Mark LaNeve, head of U.S. sales for Ford, which was hurt by steep drops for the Escape crossover and Fusion sedan.

“I don’t ever remember a de-escalation from June to July, as you go into the traditional summer sell-down season,” LaNeve said on a call with analysts. “June received much more benefit than July in terms of the Fourth of July business.”

However, one clear reason for the pullback is that as a result of rising rates, it’s getting prohibitively expensive to offer incentives that are tied to loans. A series of rate hikes have pushed interest rates to levels not seen in a decade, which makes subsidized interest rates more expensive to offer.

“The summer is usually a time for manufacturers to roll out the deals and clear out the inventory,” said Edmunds analyst Jeremy Acevedo. “But interest rates are peaking right now. It’s getting more expensive to offer these deals.”

Charlie Chesbrough, senior economist for Cox Automotive, pointed out another possible issue: that while automakers are pulling back on new-vehicle incentives, there are great deals on used-car lots. Returns of vehicles that have been leased are on the rise, and that added supply gives consumers more choice of lower-priced alternatives to new models.

“There is such tremendous competition from the used-car market,” Chesbrough told Bloomberg. “We have so many off-lease vehicles coming back to market and they are cheaper than new cars."

Finally, there is the most likely reason: US consumers, dramatic upward revisions to the personal savings rate if only on paper notwithstanding, simply can not afford the extra dollars at a time when the prices of staples and other discretionary purchases are rising sharply. This, of course, is the worst case scenario because it means that even with record auto loans outstanding, many of which have crossed into subprime territory, Americans no longer feel confident enough in their financial future to make a long-term commitment.

Which incidentally is precisely what the latest UMichigan consumer sentiment survey revealed last week, when it showed that vehicle buying conditions have collapsed to the lowest level in five years. WARD's Automotive reported a 16.68mm US auto sales SAAR for July - the weakest July sales since 2014 and set to go notably lower based on car-buying-sentiment.

While bad news for automaker sales and profits, this is even worse news for the economy, as it confirms that the latest 4.1% GDP print is merely product of some overzealous excel jockey at the BLS who was told to goalseek a 4%+ number at any cost.

Comments

ElTerco Stuck on Zero Thu, 08/02/2018 - 00:07 Permalink

Recently I've been thinking that if I had 10 billion dollars I would start a conglomerate that creates machines that are (1) all mechanical, (2) designed to last as long as possible, and (3) designed to be as easy to repair as possible, especially the parts that are most likely to break or need maintenance, also providing on-line videos for the five minute or less process needed for the part replacements/repairs.

You make money as follows: (1) you charge a 30% premium on the initial sale because the thing really is designed not to break for at least twenty years, (2) make the factory maintenance parts expensive, because they also are designed to last another twenty years once installed, (3) essentially everyone on the planet will want to buy one of your products over any other viable competitor because your products really will last close to twenty years without breaking (Steve Jobs motto of "quality sells").

This applies to washing machines, automobiles, refrigerators, you name it. As few non-mechanical parts as possible, even if it means running 5% less efficiently overall.

In reply to by Stuck on Zero

navy62802 rockstone Wed, 08/01/2018 - 20:33 Permalink

Average used-car price is over $15k. American consumers are under full assault. If you want a semi-reliable vehicle, you're paying at least $15,000. Not many people in today's USA have that kind of moneys unless they're working something that is less than legal.

And that's not to mention the astronomical prices they're also paying for mandatory medical procedures, et cetera. The American citizen is nothing more than a debt slave. A slave to medical debts, vehicle/transportation debts, educational debts. You name the critical element of existence, and I'll name you the major slavor debt.

In reply to by rockstone

shizzledizzle navy62802 Wed, 08/01/2018 - 21:12 Permalink

Whoa now... I remember seeing a chart on here today that said "car" prices haven't inflated over 2% since 96. I can go find it if need be. I'd also point out that is "AVERAGE" and we are talking cars. Go look at heavy duty trucks (I.E. 3/4 - 1 Ton) 40k is entry level for a gasser 2500. I guess according to the BIS nobody needs a truck or to hual anything. Unless it's those hedonic adjustments that say you can get a shit box sedan from Korea rather than a camry or entry level lexus. I mean, they are the same right?!

In reply to by navy62802

Wild tree Wed, 08/01/2018 - 20:17 Permalink

The beginning tsunami that will further erode the middle class until the dollar defaults. Then the civil war will really begin as long pork subs for Subway.

MusicIsYou Wed, 08/01/2018 - 20:23 Permalink

If people don't buy cars, then as usual the gov will pick winners and losers and the automakers will get bailouts, and the middle class will pay for a new car, only they won't get the car, just the cost of it in some form.

jeffglobal Wed, 08/01/2018 - 20:28 Permalink

Car manufacturers know: IF so many people are living in their cars, they'll need new cars!  Any flaws with that thought process, affirmative action management?

Grandad Grumps Wed, 08/01/2018 - 20:46 Permalink

Excess car inventory. Excess MEAT inventory. Excess OIL inventory. I see this as an overproduction issue, not a demand issue. People still want vehicles, gas to run them and meat.

AnngeloJamaica Wed, 08/01/2018 - 20:57 Permalink

I looked at a new truck, instead of buying it I paid of my mortgage, and bought a 2001 SUV with 43000 miles on it and paid cash for it.

Now I live happily ever after.  a 40k truck you can kiss my a..sss.  

SantaClaws Wed, 08/01/2018 - 21:14 Permalink

I wonder what former Ford CEO Alan Mulalley is thinking these days about Ford's decision to discontinue most of its sedans and about the auto industry generally.  He seemed to be a very rare bright light in the (traditional) auto industry.  One that may never be seen again.

Herdee Wed, 08/01/2018 - 21:28 Permalink

GDP numbers are a very poor measure of how an economy is doing. The Fed uses these numbers in their con game. Very similat to unemployment numbers. Everybody know they're full of B.S.

MuffDiver69 Wed, 08/01/2018 - 21:29 Permalink

 

The tallies were in line with analysts’ forecasts of a soft July.

 

Sales through June had been surprisingly strong – up 1.9 percent.

 

But with most estimates pointing to total U.S. sales finishing below 17 million after a historic three-year run above that mark, something was due to give.

Automakers -- motivated by leaner inventories and strong light-truck demand -- also tempered incentive outlays in July, snapping a streak of monthly consecutive increases in average discounts that began nearly five years ago.

The Bureau of Economic Analysis on Wednesday revised seasonal factors used to calculate the SAAR in recent years. The SAAR was 17.32 million in June and 16.79 million in July 2017, and topped 17 million every month this year until July.

 

SAE6065 Wed, 08/01/2018 - 21:31 Permalink

Time for a Cash For Clunkers Program  by our Benevolent Govt.  This will stimulate the Economy by golly.  Hahahahahaha.  Trumpet could ask OBUMMER for his input on how to implement this but I'm sure he won't.