Wednesday, August 04, 2004

Much of the big fall in US consumer spending in June was due to extremely poor auto sales. The industry reports today that July was much better (how could it not be?), but be sure to read the headline carefully: Bargains Help Auto Industry Recover in July.
Ward's AutoInfoBank estimated that July's seasonally adjusted selling rate was 17.24 million units, a sharp increase from the 15.4 million-unit rate in June, the lowest in six years.

. . . some in the industry are starting to believe that incentives are having less of an effect on consumers. "Zero-percent interest has become standard equipment on vehicles, like windshield wipers," said George Pipas, chief sales analyst for the Ford Motor Company. "Raising incentive levels more is throwing good money after bad."

. . . sport utilities now carry some of the highest incentives of any vehicle, making it difficult for automakers who resist them.
More cars and light trucks sold, but only thanks to more incentives offered. The fact that 0% financing is now considered by many consumers to be "standard equipment" is very telling.

In nominal terms, seasonally adjusted new car prices in the US are down 5.3% since their 1997 peak. In real terms, new car prices have fallen 20.2% since March 1997! The story for new trucks is similar, but their fall more rapid and recent: -4.7% in nominal terms since their May 2000 peak, -13.9% in real terms.

The only way automakers can unload all this excess production is through incentives. It looks like 0% financing really is standard equipment, for some time to come.

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