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Short-Term Rise in Incentives Expected as Escalating Inventories Mix with Slowing Sales

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SANTA BARBARA, CA--Feb. 12, 2014: As vehicle inventories rise to their highest levels since August 2009, the analysts at ALG, the auto industry benchmark for future vehicle values, are predicting a short-term spike in incentives. ALG's mid- to long-term forecast (up to 36 months) still projects a 15 – 20 percent increase, but the recent escalation in inventory levels and a lack of adjustment in production levels are causing ALG to rethink its short-term forecast, according to Eric Lyman, Vice President of Editorial and Consulting for ALG.

"Rising inventory levels combined with several more waves of bad weather will result in a short-term spike in incentives," said Lyman. "The danger is that this could be the beginning of an escalating arms race for market share."

Days to turn inventory in December 2013 (61 days) and January 2014 (59 days) reached the highest levels since August 2009 when the turn rate was 68 days, on its way down from post-economic meltdown levels. A prolonged period of incentive increases would lead to a downward shift in ALG's residual values, which automakers and finance companies use to set lease prices.

"The availability of low-cost lease deals, especially for mainstream vehicles has been driven by strong residual values," said Lyman. "Those residual values have been predicated on disciplined pricing and incentive levels. We will continue to monitor incentive and inventory to understand whether this current spike is purely a short-term solution to release the pressure of bloated dealer lots or if there are long-term implications."