(FORTUNE Magazine) – For industry movers and shakers, the New York City auto show is usually a big yawn. It occurs late in the vehicle introduction season and in a city that basically hates all cars that aren't stretch limos or taxis. This year, though, the show drew the industry's reigning miracle man, General Motors' product czar, Bob Lutz, and raised the curtain on the most new design ideas in years. Two of the more newsworthy: Ford's nostalgically named Five Hundred, a high-roof sedan aimed at older buyers, and Honda's edgy Element, a boxy van designed for kids who travel with their surfboards.

Just as the New York City show violates conventional wisdom, so have unusually frisky auto sales. After strong years in 2000 and 2001, they were expected to slump along with the economy. Instead they have been running far ahead of predictions, confounding veteran observers like Ford Motor sales analyst George Pipas. He had been projecting sales of 15.2 million cars and light trucks this year but has jacked up his forecast twice and now figures that the final number will be 16.2 million (see chart, next page). Why the surprising spurt? The answer appears to be extraordinary levels of incentive spending by automakers. CNW Marketing/Research says that new-car discounts available to customers now amount to more than $3,900 per vehicle. That kind of money is bringing buyers back into the market sooner than usual, as well as attracting new ones. Says Pipas: "This is an excellent time to buy cars and trucks, and consumers don't need me to tell them that--they have figured it out for themselves." According to Detroit's Comerica Bank, the affordability of cars--as measured by the amount of median family income it takes to buy them--is higher than it has been in 23 years.

Also sparking demand is the proliferation of new models. In the red-hot luxury segment, analyst Susan Jacobs expects 192 new designs to be introduced by 2006, of which no fewer than 107 will be coming to market for the first time. Mercedes, BMW, Porsche, Lexus, and Infiniti, for instance, are all launching sport utilities. Manufacturers are so bullish that they are testing previously unexplored price levels. Next year Mercedes is rolling out its $300,000 Maybach, while BMW will counter with a new Rolls-Royce that will sell for a similarly stratospheric amount.

Not to be discounted is the growth of car-hungry demographic groups like new families and empty-nesters. Add them up and it signals a higher level of carbuying activity for the rest of the decade. Scott Hill of Sanford C. Bernstein figures that Americans will be buying about 16.6 million cars and trucks a year through 2008--nearly a million units higher than the consensus estimate of 15.7 million.

Unfortunately for automakers, discounts are a lousy prescription for greater profits. "Unless overcapacity goes away, which is sort of never, or until the dollar gets weaker, margins will be under a lot of pressure," says W. Van Bussmann of J.D. Power. Worse, the swing to foreign cars continues. In just the first three months of this year, domestic brands lost three points of market share to their import competitors, and there is no sign of the slide abating. In fact, the biggest auto news in April came not from New York but from Alabama, where South Korea's Hyundai plans to build its first U.S. assembly plant.