Don't let it get away!
Keep track of the stocks that matter to you.
Help yourself with the Fool's FREE and easy new watchlist service today.
Auto sales, and auto manufacturing, are closely watched numbers that are often considered early warning signs for the American economy. The idea is pretty simple: As consumers and businesses start to feel strapped, big-ticket purchases like cars and trucks are among the first things to get postponed. A drop in sales can foretell larger drops to come.
So what do we make of the current decline in auto sales?
Several recent forecasts suggest that U.S. auto sales are about to register a sharp drop. But why? While data released last week by the federal government showed that U.S. auto production was down 9% in April, that was easy to attribute to parts shortages in the wake of the Japanese disaster. That translates to fewer cars at dealers now, and that means fewer cars going home with new buyers -- but as the Japanese automakers and major industrial firms like Sony (NYSE: SNE ) and Panasonic (NYSE: PC ) continue to recover, that should be no big deal, right?
If it were just a matter of waiting for Japanese producers to get back up to speed, this wouldn't be a big deal. But there's more going on here than meets the eye, and economy-watchers should take note.
Are sales in May going away?
The near-term projections are ugly: Industry-watchers TrueCar.com said on Wednesday that they expect May sales to be down 3.7% from last year's numbers and down more than 8% over April's. That translates into an SAAR -- the "seasonally adjusted annualized rate," a widely used measure of the rate of auto sales -- of 11.85 million, down significantly from the 13 million or so seen earlier this year
An SAAR that low is grim news, folks. On the other hand, it does come with a (small) caveat aside from the Japanese crisis: May is a particularly difficult month for auto-sales forecasters, because lots of buyers wait for the big sales that tend to happen during Memorial Day weekend. That in turn means that sales trends seen earlier in the month sometimes don't offer much insight into what things will look like at month's end. Things may look different when the automakers release sales totals next week.
Still, with Japanese heavyweights Toyota (NYSE: TM ) and Honda (NYSE: HMC ) continuing to see shortages of some popular models in the wake of the earthquake and tsunami, and with gas prices up and economic uncertainties starting to reappear, it seems likely that May's auto sales will be on the low side. That's no surprise. But is it the start of a trend?
It's still hard to tell. But there are some reasons to think this could become a trend:
- Incentives are down. Price discipline has been a key focus for the Detroit automakers in recent months. Ford (NYSE: F ) and (more recently) Chrysler and General Motors (NYSE: GM ) have become much more strict about matching production to demand, and that means that the old Detroit practice of resorting to big incentives to clear out bloated inventory is increasingly a thing of the past. And that means that other automakers are now less likely to offer discounts to meet competition, leaving consumers looking for a deal out of luck.
- Prices are up. Simple economics: Supplies of popular Japanese models continue to be constrained, so prices of available vehicles have risen. And not just the Japanese brands: Edmunds noted last week that across-the-board average vehicle transaction prices in the U.S. have risen about $400 since the Japanese quake. That's independent of the effects of lower incentives, and comes on top of earlier price hikes that followed higher commodities costs. Overall, Edmunds says, the average vehicle transaction price has risen about $1,000 in the last year. That means bigger margins for the automakers and dealers, which is one bit of good news -- but whether that increase will be sustained as sales fall is anyone's guess. If prices stay high, more buyers may decide to keep driving the old clunker for a while longer.
- Gas prices having an effect. While gas prices have moderated a bit over the last couple of weeks, they're still up big over levels seen earlier this year. Not surprisingly, sales of big trucks and SUVs appear to be slipping significantly. Truck heavyweights GM and Ford are much better prepared for higher gas prices than they were a few years ago, with strong small-car offerings that let them capture more downsizing buyers, but the impact on overall sales totals could still be significant.
So how is this likely to play out in the marketplace?
A big surge for a surprise challenger
Reading the May tea leaves, TrueCar's prognosticators see big declines for Toyota and Honda (no surprise), smaller drops for Nissan and the Detroit Three (not a big surprise, as we've seen), and --here's the surprise -- a big gain for Hyundai (OTC BB: HYMTF.PK). The Korean automaker, which sells vehicles in the U.S. under the Hyundai and Kia brands, has been on a global roll as of late, with sharply improved products driving big sales gains in markets around the world. In the face of all these declines, TrueCar predicts that Hyundai's U.S. sales will be up a whopping 43.4% over last May's totals.
Meanwhile, sales gains at Ford may have hit a wall, as TrueCar sees the Blue Oval's sales staying essentially flat on a year-over-year basis. That's not awful news for Ford shareholders, as Ford's per-vehicle profits are up. But those hoping to see Ford post big gains in the wake of the Japanese crisis may be disappointed.
And the economy?
If gas prices ease off and vehicle transaction prices stay high (but not too high), this dip may turn out to be just a bump on the long slow road to economic recovery. But it bears close watching: Continued weakness in autos as Japan recovers could be an early sign of larger problems over the horizon.
Worried about higher energy prices? You're not alone -- but here's the good news: It's not too late to profit. In the new special report,"3 Stocks for $100 Oil," expert Motley Fool analysts name three outstanding companies that should benefit handsomely from rising oil prices. The report is available free of charge for Fool readers -- just click here for instant access.