Please ensure Javascript is enabled for purposes of website accessibility

Why the Weak Retail Report Is Putting Pressure on Ford and General Motors

By John Rosevear – Aug 17, 2021 at 4:02PM

Key Points

  • High consumer demand for new vehicles helped Ford and GM to strong Q2 results despite the chip shortage.

Motley Fool Issues Rare “All In” Buy Alert

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

If there's a shortage of new cars, does a small slip in demand really matter? Yes.

What happened

Shares of Detroit auto giants Ford Motor Company (F 0.36%) and General Motors (GM 0.87%) were both trading lower on Tuesday afternoon after the U.S. government reported that retail sales, including auto sales, were down in July as American consumers appeared to shift spending toward services. 

As of 2:30 p.m. EDT, Ford's shares were down about 3.5%, and GM's were down about 5.1% from Monday's closing prices. 

So what

In a preliminary edition of its monthly retail report for July, the U.S. Census Bureau said that retail sales -- meaning purchases at brick-and-mortar stores, at restaurants, and at online retailers -- fell 1.1% in July versus June. 

A big component of that decline was spending on new vehicles, which fell 3.9% month over month in July. While U.S. auto sales have been held back for several months because of tight inventories amid a global semiconductor shortage, the sequential decline in spending suggests that consumers may be curtailing their spending on big-ticket goods, possibly on growing concerns about the rapidly rising number of U.S. COVID-19 cases. 

That's not bullish for automakers' profits, and that's probably why the stocks were down on Tuesday afternoon. 

A red 2021 Ford F-150, a full-size pickup truck parked in an outdoor setting.

Ford has been selling all the F-150s it can make, at exceptionally strong prices. That pricing helped Ford's profit beat expectations in the second quarter. Image source: Ford Motor Company.

Now what

If supplies of new vehicles are still tight, why would a small slip in demand matter? Here's why: While both Ford and GM have had to cut production of key models amid the chip shortage, there has been exceptionally high demand for the vehicles they have been able to deliver to dealers. That demand has bolstered their pricing and largely eliminated the need for incentives.

Meanwhile, high demand for used vehicles -- a side effect of the shortage of new ones -- helped both automakers' financing subsidiaries get more money for off-lease vehicles. Both factors helped Ford and GM generate strong profit margins in the second quarter.

If demand is slipping, auto investors will have to reset their expectations for Q3 accordingly. That outcome seems likely, but we won't know for sure for a few more weeks. 

John Rosevear owns shares of Ford and General Motors. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Ford Stock Quote
Ford
F
$14.08 (0.36%) $0.05
General Motors Stock Quote
General Motors
GM
$40.46 (0.87%) $0.35

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
360%
 
S&P 500 Returns
118%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/26/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.