A FLASHING YELLOW FOR CAR SALES
By JOSEPH SPIERS CHIEF ECONOMIST Todd May Jr. SENIOR ECONOMIST Vivian Brownstein STAFF ECONOMIST Joseph Spiers RESEARCH ASSOCIATES Lenore Schiff and Lorraine Carson FORTUNE's forecast is produced by this magazine's economists using our own economic model.

(FORTUNE Magazine) – Here comes the auto recovery. But vro-ooo-om! vroom! is more likely to be putt-putt. Car sales are out of reverse and into first, but they can't seem to shift into second gear. At Pryority Motors, a Chrysler dealership in Pryor, Oklahoma, July was one of the best months in recent years; then August fell back into the slow lane. Same story at Fairfield Ford in Midlothian, Illinois: After a strong July, mid-August was off 30% from a year earlier. Sales are up across the nation from the totally abysmal levels of last winter and early spring, but still down from a year ago. And they will keep running into potholes like sluggish growth in personal income, heavy consumer debt, and, to some extent, tightfisted credit policies at banks and other lenders. Carmakers are also discouraging buyers with price rises averaging $540 per car on the 1992 models, many due out this month. None of these obstacles will disappear soon. But FORTUNE believes the economic recovery will gather strength, giving business a reason to rebuild payrolls, which will provide would-be car buyers with the cash and confidence to deal and wheel. Moreover, manufacturers will offer consumers enough in the way of rebates and specials on leases to jack up 1992 unit sales of cars and light trucks -- such as minivans and pickups -- to 14.5 million, vs. this year's dismal 12.7 million. To get there from here requires owners to start trading in vehicles that first hit the road in the mid-1980s. Those were the halcyon years when sales peaked at 16 million in 1986. Says Vince Domino, who owns Fairfield Ford: ''Cars bought between 1986 and 1988 now have 50,000 to 60,000 miles on them, and as a rule of thumb, people trade in cars with that kind of mileage.'' Count on some additional trade-ins from buyers of even older vehicles who were spooked by recession into clinging to their chariots. DEMAND will also get a boost from the junking of cars made in the 1970s. If your job is shaky, you'll nurse that semi-reliable 1977 Ford LTD or Dodge Diplomat another year, even if the gas mileage is lousy. In the recessions of 1974 and 1982, cars scrapped as a percent of all those in service fell sharply, and then shot up in the following couple of years as the economy improved. The estimated drop this year should push the average age of the U.S. fleet to nearly eight years, from 7.6 during the second half of the 1980s. Even a modest uptick in scrappage next year, consistent with the economic recovery, will lift sales as antediluvian models are replaced. For sure, credit restraint will stifle some demand. Says James Willingham of Boulevard Buick in Long Beach, California: ''GMAC and the banks are tough on credit -- they won't take risks we feel they should, and we're losing sales.'' Auto loans outstanding have declined by an unprecedented $15 billion in the past year, in part reflecting lenders' closer scrutiny of marginal borrowers. Some consumers will also feel daunted by those 1992-model price increases. But with a dearth of customers, announced price rises are not likely to stick. Manufacturers have already announced rebates on some 1992 models. Susan Jacobs, an auto consultant in Little Falls, New Jersey, reckons the discounting will start in earnest by year-end, slicing the price increases by half. Leasing is the other big enticement for consumers. As customers realize they can drive away in a new car without making a big up-front payment, major dealers around the country report that leasing has become a significant part of their business. ''We work hard to train our salespeople, so that leasing is now 25% of our sales and will go to 35% or 40% down the pike,'' says Rudy Luther, a Pontiac dealer in Minneapolis. From the dealer's -- and statistician's -- standpoint, a lease is a sale because ownership is usually transferred to the finance company, like GMAC or GE Capital, that underwrites the lease. Another reason dealers like leases is that they typically run from two to four years, vs. 4 1/2 years for the average car loan. So the lessee is back in the showroom sooner than the buyer, who may keep driving the car for years after the loan is paid off. Manufacturers often subsidize leasing deals just as they underwrite rebates or cut-rate dealer financing. But making deal after deal does not produce plump profits. Together GM, Ford, and Chrysler lost $1 billion in 1990 and will likely drop another $4 billion this year. The Big Three can expect to make at least $2 billion in 1992, not much on $230 billion in revenue. A continuing problem: loss of market share to the Japanese, despite big strides in manufacturing quality. David Littmann, senior economist at Manufacturers National Bank in Detroit, notes that American makers' new-found confidence in quality shows up in the extended warranties they offer. Alas for market share, public perception of U.S. auto quality is something else. A study by the Brookings Institution in Washington concludes that the Big Three will pay dearly during the 1990s for sins of the past. Conversely, the Japanese will reap the benefits of consumer preferences built up over a long time. A Toyota Camry bought is a Chevrolet Lumina not bought. But this is not a total loss for the U.S. economy. Even though Camry profits go home to Japan, the more units sold in the U.S., the more jobs at the plant in Georgetown, Kentucky, that makes the model. Indeed, auto production in the U.S. -- including both American and Japanese factories -- is rising in the third quarter from the second. Because inventories are so lean, even the modest sales increase FORTUNE foresees will prompt automakers to lift their limp fourth-quarter manufacturing projections. That will give the economy some gas, which in turn will keep the auto recovery from stalling out before it can shift into third next year.

BOX: OVERVIEW

-- The auto recovery will speed up, but not much. -- More junking of aged cars will lift demand in 1992. -- Automakers will spur sales through rebates and subsidized lease deals.

CHART: NOT AVAILABLE CREDIT: FORTUNE CHART CAPTION: DEALS ON WHEELS WILL BOOST SALES As the economy perks up, consumers will head for the showrooms. But they'll need prodding like the Recession Beater from Johnny's Chrysler-Plymouth in Oaklyn, New Jersey: prices $50 over invoice. Even so, 1992 sales nationwide will be a modest 14.5 million units.

CHART: NOT AVAILABLE CREDIT: FORTUNE CHART CAPTION: Fewer owners junk their cars . . . . . . and autos get older Though Americans tend to scrap their cars in good times and hang on to them in bad, the overall trend is clear: Cars keep getting older.