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Auto sales may stay strong
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November 28, 2001: 10:24 a.m. ET
Economists expect incentives to boost November sales, but future is unclear.
By Staff Writer Mark Gongloff
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NEW YORK (CNN/Money) - Economists expect automobile sales in the United States to show continued strength in November, though down from October's breakneck pace, but still responding to automakers' generous incentive plans.
Sales of cars and trucks soared to an annual pace of 21 million units in October as many automakers offered zero-percent financing and other incentives.
Economists surveyed by Briefing.com Friday expected sales to fall to an annualized pace of 14.7 million in November, well off the November 2000 pace of 16.3 million.
But recently published reports said economists have revised their expectations dramatically just this week. A Reuters report Monday said economists now expect a sales pace of between 16.5 million and 18.5 million units, while a New York Times report Tuesday said economists expect a pace of 17.5 million to 18.5 million units.
"My view changed dramatically just yesterday," Briefing.com chief economist Tim Rogers said.
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Will this quarter's sales boom lead to a production slowdown next year? | |
Economists are responding to what appear to be healthy post-Thanksgiving retail sales as well as anecdotal reports from the auto industry that its sales have been more robust than expected as the "hangover" from October's sales explosion has been delayed.
"The numbers are starting to suggest we're not going to see a big downward move in November and it will maybe be pushed back to next year," Rogers said.
After October, many economists thought sales would dry up in November, since many purchases consumers had scheduled for later months were made early to take advantage of aggressive incentive packages offered in the wake of the Sept. 11 terrorist attacks.
"Automakers' extremely generous incentives in recent weeks have simply drawn forward industry demand," Lehman Brothers analyst Darren Kimball said in a research note Monday.
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In addition to "stealing sales" from future months, automakers diminished their inventories last month, so there simply won't be as many cars on hand to sell.
That could be good news for the economy, however, since automakers may need to ramp up production to replenish their supply of cars. A Wall Street Journal report Tuesday said Ford Motor Co. (F: down $0.08 to $18.21, Research, Estimates), one of the nation's "Big Three" automakers, plans to increase production in the first quarter of 2002.
Ford has not released any production plans for the first quarter and will not do so until it reports November sales on Dec. 3. But George Pipas, Ford's U.S. auto sales manager, said "decade-low" inventory levels brought on by surprisingly strong October and November sales likely will push Ford to raise its production target.
"We are going to probably produce more cars and trucks in the first quarter than we had planned to before we saw the impact of the zero-percent financing program," Pipas said.
Pipas didn't know whether or not Ford would produce more units in the first quarter than the 1.08 million it produced in the first quarter of 2001, but he did say he thought the level would at least be more stable than a year ago, when falling consumer confidence led Ford to cut production, and then surprisingly strong sales forced it to increase production.
"With these levels of inventories, we probably need to replenish inventories to a level that will support a - for lack of a better term - 'normal' level of sales," Pipas said.
Still, there are several variables that could have an impact on Ford's production next year, Pipas said, including the outlook for the U.S. economy, the war on terrorism and the amount of sales stolen in October and November from future quarters.
"We know the concept of 'pull-ahead' is a valid concept, but the question is, what's the magnitude?" Pipas asked.
Click here for a look at auto stocks.
Increased auto production could lead to more jobs in the industry, helping combat an unemployment rate that drifted to 5.4 percent in October and could move above 6.0 percent even after the broader economy begins to turn around.
The grim employment situation was the key factor motivating the National Bureau of Economic Research's business-cycle dating committee to declare that a recession in the U.S. economy began in March.
Most economists define a recession as two consecutive quarters of shrinking gross domestic product (GDP), the broadest measure of the U.S. economy. GDP shrank in the third quarter, and many economists expect it to shrink again in the fourth quarter.
To keep consumers spending and avoid a recession, the Federal Reserve has cut its target for short-term interest rates a record-tying 10 times this year.
Consumer spending makes up two-thirds of GDP, and auto sales comprise about 22 percent of all retail sales, so strong auto sales could help prop up GDP in the fourth quarter. The dark side of artificially inflated sales that detract from next year's is that they might take away the need for increased production in the future.
"There's the immediate boost GDP gets from consumption, but it's not really growth-enhancing," Brown Brothers Harriman economist Lara Rhame said. "It's not growth that gives us a solid foundation going forward." 
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