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The auto rebound is a myth

By Chris Isidore, senior writer

NEW YORK (CNNMoney.com) -- The auto industry appears to be turning the corner. But the American consumer has yet to come along for the ride.

Overall U.S. auto sales have rebounded nicely, up 17% through the first five months of the year. Auto companies will announce their sales for June on Thursday and analysts expect another increase from a year ago.

Even though auto sales are up this year, it's mostly due to businesses buying cars. Consumers still aren't flocking to dealerships.

But much of the improvement has been due to a 38% jump in fleet sales to businesses, such as rental car companies. Retail sales are up a far more modest 12%.

"Consumer confidence is far from repaired," said Jesse Toprak, vice president of industry trends at TrueCar.com. "They can't pull the trigger on big ticket purchases. We don't see that changing any time soon."

In fact, the current sales pace isn't even keeping up with the rate of vehicles being scrapped because they've reached the end of their useful lives.

With 12 million vehicles a year being scrapped and with 1 million to 2 million new drivers being added to the roads every year, sales of anything under 13 million to 14 million vehicles indicates weak consumer demand. But the year-to-date sales pace has averaged just 11.3 million vehicles. That's yet another sign of how fragile the economy is.

"With high unemployment and the need to cut debt, consumer spending is still logically restrained. The industry is years away from normal levels," said Paul Ballew, senior vice president at insurance company Nationwide Financial.

Ballew said the drop in demand for new vehicles in recent years was unlike anything since the 1982 recession. It took five or six years for demand to fully come back after that He expects it will take a similar amount of time for demand to return to more "normal" levels, which he estimates at about 16 million vehicles annually.

Toprak said tight credit remains a major drag on sales too. He said many consumers who would normally be considered good credit risks are having trouble getting car loans.

"Maybe they were too loose with credit in the past, but underwriters went from one extreme to another," he said.

The fact that housing prices remain depressed continues to be a significant problem as well, said George Pipas, director of sales analysis for Ford Motor (F, Fortune 500). Recent declines in the stock market also can slow demand for auto sales.

"There was such destruction of wealth that occurred in the Great Recession that even though technically the recovery is underway, for many consumers it'll be at least 12 months before they feel like we're out of a recession," Pipas said.

The good news for the industry though is that automakers can be profitable even with sharply lower sales because they made deep cuts in overhead costs and capacity during the downturn.

Ford is completing its fourth straight profitable quarter, and General Motors returned to the black in the first quarter, putting it in position to again sell shares to the public later this year or early next year.

Demand is strong enough to keep GM assembly lines churning out cars through what would normally be the scheduled summer shutdown. Toyota Motor (TM) just resumed construction of a Mississippi plant that has been on hold for two years.

But with increasing signs that the pace of U.S. economic growth is slowing down, auto sales are likely to continue to tread water, at best.

"This was supposed to be the start of a robust sales recovery, but it now seems like it's not going to be the case," said Toprak. To top of page

Index Last Change % Change
Dow 17,050.75 138.46 0.82%
Nasdaq 4,810.79 19.64 0.41%
S&P 500 2,013.43 17.60 0.88%
Treasuries 2.11 0.05 2.23%
Data as of 7:02am ET
Company Price Change % Change
Bank of America Corp... 15.75 0.00 0.00%
EMC Corp 27.18 1.22 4.70%
Apple Inc 109.50 -1.28 -1.16%
Freeport-McMoRan Inc... 13.46 0.45 3.46%
General Electric Co 28.03 0.26 0.94%
Data as of Oct 8


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