Consumer incentives continue to drive market in August

U.S. auto sales could astound Special Report From August Cole, CBS.MarketWatch.com

CHICAGO (CBS.MW) -- Just as July's consumer spending report on Friday surprised economists because of strong car sales, monthly U.S. auto sales data next week will show that Americans still aren't rattled by a gloomy economy.

For many, it's been hard to sit out the deep discounts on 2002 models. Want free financing on a pickup? Ford and General Motors have it. Need cash back on a Honda Accord? If an '02 model is good enough, you've got it.

Consumers have about as much resolve to turn down a discount at the dealership as college kids have of shying away from free beer on Friday night after a midterm gone bad.

Full numbers on August U.S. car sales are due Tuesday, and many in the industry think all those discounts will add up to good news in the report.

The sales increase seems assured since dealers have been aggressively clearing space for the 2003 models that have already begun trickling in.

Some industry watchers continue to lament the high incentives necessary to keep autos on a growth path. Others, however, are resigned that discounts remain the rule of the game.

"The message has been repeated countless times: If you want sales to fall in the 16 to 17 million range, then you have to keep record incentives," said Dave Littmann, chief economist at Comerica Bank in Detroit.

And that commitment to low prices isn't really going to hurt the automakers. If anything the dedication to big discounts is going to make the Big Three be extra careful with the bottom line, he said.

See last year's August sales coverage.

Wall Street's optimism

The month of August matters to the industry. In 2000, August sales came in among the best months ever. Though August 2001 saw sales decline, the next month saw record results in the wake of incentives spurred by the Sept. 11 terrorist attacks.

The first of those incentives, launched by GM, are part of a well-known saga that captivated analysts and consumers alike with headline-stealing discounts and evaporating profit margins.

August 2002 will be notable for two things.

First, it will tell us if Americans are sated with new cars after the spree of the last 11 months. The smart money says they aren't.

Second, the data will show how well each brand is managing its corner of the market. Has GM made progress with full-size trucks and can Ford defend its turf in the SUV sector? How are Honda, on the cusp of the new Accord's introduction, and Toyota, enjoying the reception of its new Camry, doing in their fight to claim the best-selling sedan sales title?

Even a 10-basis point loss in market share for any brand gets noticed on Wall Street and raises blood pressure in the boardroom. Remember, the U.S. represents what is arguably the most important auto market in the world because of its size and depth.

Ron Tadross, analyst at Bank of America, expects the August annualized sales rate to rise 7 percent from 2001's 17.5 million. The strength will be at the dealerships while sales to corporate and rental customers are expected to fall, he said.

Incentives? Tadross expects they will average about $2,800 per vehicle for the domestic makers when all is said and done. He predicts GM's market share will rise to 28.7 percent from 27.3 percent last year because of strong discounts and good finance deals; Ford should fall by 1 percentage point to 20.1 percent; and Chrysler should rise 0.7 percentage points to 12 percent because last year's sales were so bad.

Littmann also expects an industry monthly sales rate of more than 17 million units, historically a very strong number.

Month to month

But the industry's fundamental issues don't change on a monthly basis.

There's the massive domestic capacity in light-truck production that's been an issue for years. Oversupply means lower prices and it doesn't appear to be getting any better, even as there's a clear trend toward smaller car-based SUVs.

(Industry watcher R.L. Polk said that SUVs are still popular because people think they're the best way to travel; it makes them feel safe, or meets the needs of a self-described "active" lifestyle.)

Look for August's sales to show how that trend plays out. And to set the stage for September, which will be one of the toughest months not only because month-over-month comparisons will be difficult but also because the emotional setting will be especially hard to gauge.

August Cole is spot news editor at CBS.MarketWatch.com in Chicago