February was another dismal month for carmakers as every major producer saw sales drop from 35% to 53%.

The sales rate of 9.1 million cars sold was the worst February performance in 40 years as a dismal economy warded nervous consumers away from showrooms. Car sales fell 41% for the month; General Motors (GM) was the biggest loser, with sales falling 53%. Ford Motor (F) also took a big fall, as sales dropped 48%. Toyota's (TM) U.S. sales fell 40% and the company has asked the Japanese government for $2 billion to help its finance arm write car loans.

The news was bad for other Japanese automakers, too. Honda (HMC) sales fell 38% for the month, and Nissan (NSANY) was down 37%.

"Americans are pulling in their horns because they are worried about lost income," said Michael DiGiovanni, executive director of global market analysis for GM. DiGiovanni said that between Americans who are laid off and those who say in a recent Gallup poll that they fear losing their jobs, about 36 million consumers are shying away from the market.

Tight Credit at GMAC

GM's sales drop was the biggest. Even though a big chunk of that was due to falling sales to rental and corporate fleets, which command thin if any profit, GM's retail sales still dropped faster than the market.

GM still suffers from the credit crunch and the fact that its chief lender, GMAC, has lacked funds to make new-car loans. Its former captive finance company, GMAC Commercial Credit, which is now owned more by Cerberus Capital Management and the federal government than by GM, has tightened credit standards and pulled back on leasing. Rival Ford owns Ford Motor Credit and can use the lending arm to cut financing deals and write leases to help move inventory. GM can't.

But there are small signs of relief for GM. Mark LaNeve, vice-president for sales and marketing at GM North America, said GMAC took part in 35% of GM's retail sales. At its peak, GMAC's lending supported nearly 40% of GM's retail sales, and at times when Americans bought twice the number of cars. The company's total market share fell to 18.2% from 22.7% a year ago.

The lender got a $6 billion infusion from the Treasury Dept. in December and has access to funds from the Federal Reserve. LaNeve said GMAC's new liquidity is helping, but it hasn't been a big boost yet.

Battling It Out on Incentives

GM isn't the only company hurting. The market is so bleak that Ford lowered its worst-case scenario for auto sales this year to 10.5 million. That weaker outlook came just before Ford reported a 45% drop in retail sales and a 53% shortfall in fleet sales.

Ford had been holding up better than GM and Chrysler. A surge in sales of pickup trucks in the fourth quarter helped Ford score four straight months of retail market-share gains. But higher incentives, especially from Chrysler, halted Ford's streak.

Automakers on the whole jacked up incentive spending by about $400 last month, according to auto sales information Web site Edmunds.com, while Ford actually reduced its spending by about $800 per vehicle, according to George Pipas, Ford's chief of sales analysis. "At a certain point, just piling on more incentives doesn't bring in more buyers and hurts the vehicles' residual values too much," Pipas says.

Ford continues to reduce head count and pursue other cost-cutting moves to cope with the dramatic fall in demand. It is trying to conserve cash this year in the hopes of not needing to tap a $13 billion U.S. government line of credit. GM and Chrysler are cutting costs and selling assets in order to qualify for billions more in government credit.

Wary Shoppers Stick to Used Cars

Ford is also keeping its production of new cars and trucks at very conservative levels, even though it is predicting a rebound of demand for new vehicles in the second half of the year. Ford's chief economist, Emily Kolinski Morris, says that continuing poor economic data makes it difficult to predict where the bottom of the auto market will be and for how long it will remain. "There's no anchor on the economic horizon to make that call."

Chrysler sales fell 44%, which wasn't bad if GM and Ford are the barometer. But Chrysler was laying plenty of money on the hood with employee pricing plus thousands in rebates and 0% financing all available as a package. Still, says Edmunds.com analyst Jesse Toprak, "Chrysler's incentives certainly helped."

But it appears that incentives are having less effect on the market. Despite bigger rebates and sweeter deals being offered all month, 27% of shoppers ended up buying used cars, Toprak says. The good news is that this means consumers haven't given up on cars. The bad: "Carmakers are spending money to sell new cars, but consumers are buying used," he says. Given the fear among consumers, dealers will be wrangling with bargain hunters for quite a while.

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