Are `Nearly New' Cars Behind The Slump In New Car Sales?

Perhaps the strongest argument against an imminent upturn is the moribund state of the automotive sector. Domestic car sales have been depressed since the year began. Yet home sales, a far heftier purchase for consumers, have begun to perk up. Why the disparity?

Economist Stephen W. Gallagher of Kidder, Peabody & Co. thinks the answer lies in a pickup in used-car sales. He notes that new-car sales held up during the second half of last year after the Persian Gulf crisis erupted because the auto makers began to accelerate fleet sales to rental agencies. The rental companies, in turn, eventually began to unload their "nearly new" vehicles to dealers and the public. But the immediate effect was a substantial rise in used-car inventories followed by a shift toward nearly new car purchases by consumers who would ordinarily opt for a brand-new vehicle.

Fleet sales last fall set the stage for weaker new-car sales this spring. Many cost-conscious consumers are now purchasing nearly new cars, which are coming out of used-car inventories. And because the big auto makers apparently decided that the fleet-sales gambit is self-defeating and are curtailing the practice, total new-car sales are in a temporary slump.

"Once inventories of nearly new cars are run down," says Gallagher, "used-car prices will firm, and consumers will return to the new-car market."

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