U.S. Car Sales Expected to Keep Falling

U.S. auto sales have been slipping as domestic automakers have struggled to boost sales amid high gas prices this year - a trend that will continue into next year, industry executives and analysts said.

Industry-wide sales are down more than 4 percent this year as U.S. automakers such as General Motors Corp. and Ford Motor Co. struggle with high labor costs, loss of market share to foreign rivals, and weakening sales of trucks and sport utility vehicles - typically their largest profit generators.

Both GM and Ford are trying to stem billions of dollars in losses while losing market share to Asian rivals such as Toyota Motor Corp. and Honda Motor Co. Ltd.

Analysts and experts say a softening economy will likely lead to a further decline in vehicle sales in 2007.

I do have some real concerns about 2007, billionaire investor Wilbur Ross told reporters at the Reuters Autos Summit in Detroit. It seems to me that the negative dynamics that were present in 2006 will be present for the most part in 2007.

Pickup trucks correlate historically pretty well to construction trends, Ross said. So the problem that the home builders are having now very likely will have some impact on that area.

Slowing housing starts can mean slower pickup truck sales, since the vehicles are often driven by construction crews. The auto industry benefited in recent years from the boom in housing refinancing at lower interest rates, but U.S. sales of pickup trucks have fallen nearly 14 percent so far this year. Overall sales at U.S. automakers are down about 11 percent.

We'll see some more softening in the second half of the year, Erich Merkle of research firm IRN Inc. told Reuters, adding he expects a further decline next year.

Merkle estimates U.S. light vehicle market sales on a seasonally adjusted, annualized basis of about 16.3 million vehicles in 2007, down from an estimated 16.6 million units in 2006.

To get the right context, I'm not just comparing this year's numbers to 2005, I'm also looking at 2004, Merkle said. 2005 was quite a mess because of volatility created by employee discounts, he said, referring to a massive incentive program spearheaded by GM last summer.

GM sales analyst Paul Ballew in earlier this month said he expected a moderate falloff in industry sales in 2006, after the world's largest automaker reported flat August sales compared with a year earlier.

Recent sales declines had been blamed on problems specific to the U.S. Big Three, who rely on trucks for almost 60 percent of their sales. But in August, analysts also cited economic factors like rising interest rates and a slowing housing market - raising the specter of a deeper, industry-wide slump in the months ahead.

PRODUCTION CUTS

Ford in August slashed fourth-quarter production by 21 percent, while GM more recently cut output for the same quarter by 12 percent, in efforts to align production with demand.

We don't expect any major uptick from current run rates, Keith Wandell, president and chief executive of auto parts supplier Johnson Controls, said at the Reuters summit.

Clearly as Ford and GM and others announce these production cutbacks, if there's some major inventory adjustments that take place, there may be some pipeline fill back up, Wandell said.

Earl Hesterberg, president and chief executive of dealership chain Group 1 Automotive Inc., said he expects a decline in sales this year, but there is a possibility they may flatten out in 2007.

I have no reason to believe they will be any better or significantly worse, Hesterberg said at the summit. We are settling into a range here. There is some hope that interest rates will stabilize or go down a little bit but no one expects them to drop significantly.

Argus Research analyst Kevin Tynan said he expects overall production in the industry to remain relatively stable, but added that U.S. automakers will likely sell less as Japanese and Korean makers cannibalize their sales.

With high gas prices, people on the fringe will keep moving toward more car-type vehicles, Tynan said. As that shift happens, the import brands are really there with a much more balanced portfolio of products.