Production flattens as economy starts to slow

Jesse Snyder

Automotive News

— August 30, 2010 – 12:01 am ET

After a year of big gains, a new forecast shows North American production flattening in the fourth quarter. Meanwhile, August sales numbers, due this week, are expected to be lackluster.

So is the rebound in the auto industry fizzling?

It’s true that retail sales of new vehicles have not snapped back nearly as much as in four previous recessions dating back to 1969. Sales and production remain on an upward track — but just barely. Growth is slowing, and analysts say a double-dip recession looks increasingly possible.

“The retail business has been improving, but at a much slower pace than we’d like to see,” said Toyota Division head Bob Carter.

Making year-on-year comparisons these days is dicey. Cash for clunkers inflated August 2009 sales, and fourth-quarter 2009 production was swelled by a rush to rebuild inventories. August’s seasonally adjusted annual sales rate — projected at 11.8 million by IHS Automotive and Edmunds.com — would be the second-highest this year, topped only by May’s 11.9 million.

Should be better

But things were supposed to have been better than this.

“Normally, the stronger the downturn, the sharper the rebound the next year,” said Jeremy Anwyl, CEO of Edmunds.com.

“This time things aren’t going to repeat themselves.”

Forecasters, never particularly optimistic about this year after 2009’s 10.4 million sales, are adjusting downward. This month both IHS Automotive and Power lowered 2010 forecasts a notch to 11.5 million.

Jeff Schuster, J.D. Power’s head of forecasting, reduced his August SAAR prediction to 11.7 million last week, from 11.8 million, because of “unexpected softness” in retail sales.

“Dealer sales normally build toward the end of the month, but not this August,” he said. “They stayed flat.”

IHS Automotive forecasts a modest climb in production of 3 percent in the fourth quarter after rising 25 percent in the third quarter and 74 percent in the second quarter.

Obviously, the first two quarters of dramatic production improvement were increases from depressed levels a year ago. And the third quarter last year included cash for clunkers, which depleted the low stocks, so production increased.

But retail demand hasn’t perked up. Consumers won’t buy until companies hire, and companies won’t hire until sales improve, said Kim Korth, CEO of consultants IRN Inc., of Grand Rapids, Mich.

“If people think things are still negative, they are likely to remain extremely cautious in their spending and hiring practices, significantly slowing what should be a much stronger recovery,” she wrote in a blog posted Thursday, Aug. 26, on the IHS Web site.

Anwyl sees little to drive demand higher this fall, with no government stimulus and manufacturers backing off on incentives.

Edmunds.com calculates that August incentives dropped $84 a vehicle from July. Power, which tracks incentives by a different method, puts the August spiff decline at $150 or 6 percent.

‘We’re headed up’

Still, forecasters see slow but continued improvement in both sales and output this year and next. George Magliano, head of North American sales forecasting for IHS Automotive, sees U.S. auto volume trending upward to 11.5 million units this year and 13.2 million in 2011.

“We’re headed up,” he said. “It’s a slow pull upward.”

North American output will rise 37 percent to 11.8 million this year, assisted by a surge in exports to markets outside North America, said Mike Jackson, IHS Automotive’s head of production forecasting.

“There’s no softness on the production side,” he said.

Magliano sees U.S. fleet sales fading in the second half but expects retail demand to pick up slightly in the fall.

“The economic factors look crappy in the third quarter, but they’ll pick up in the fourth quarter,” he said.

Automakers, which have slashed overhead to operate profitably at lower volume, are maintaining discipline, said Schuster.

‘A good test’

“August was a good test,” he said. “The year-over-year sales comparison is ugly. That nobody boosted incentives in August to offset unflattering numbers suggests we probably won’t see it this year.”

Last week, Ford President of the Americas Mark Fields downplayed prospects that the economy could slip back into recession.

“At this point, we don’t see a double-dip recession,” he told reporters near Ford’s headquarters in Dearborn, Mich.

Others see more risk. Schuster doesn’t expect a double dip but added that recent events have increased the risk to 30 percent.

“A double dip recession is still unlikely,” said Korth, writing on IRN’s Web site. “But the next few quarters of auto sales are likely to remain relatively flat and relatively lumpy.”

James B. Treece contributed to this report

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