Supply Glitches Are Stalling U.S. Car Sales...

Judging by the latest motor-vehicle sales numbers, the rise in interest rates is dampening what until recently appeared to be a booming U.S. market. Car and light-truck sales sank in July to a 13.9 million-unit annual rate, from 14.8 million in June and 15.6 million in the first quarter. And third-quarter production schedules have been scaled back.

Nonetheless, a number of industry observers believe the slowdown is primarily the result of supply-side problems. "Auto sales are being held back by supply constraints, not by weak demand," says economist Diane C. Swonk of First National Bank of Chicago.

Swonk notes that new-car-buying plans in the Conference Board's July survey hit their highest level in several years (chart), as did plans to buy used cars. At the same time, interest rates on new-car loans have risen less than half a percentage point since February. Prices of domestically produced new cars are up only 31/2% or so over the past year, compared with as much as 10% for imports. And used-car prices, which affect new-car sales via trade-in values, have been rising at a double-digit clip.

Meanwhile, the Big Three auto makers have had persistent problems implementing the largest number of major model changeovers in the industry's history. General Motors Corp. is having difficulties converting unused auto capacity to light-truck capacity, as workers at idled plants refuse to relocate. Chrysler Corp. has slowed production lines to improve quality and deferred the addition of third production shifts.

The upshot has been inadequate vehicle supplies. The Federal Reserve Bank of Chicago, for example, estimates that a lack of inventories sliced about 400,000 vehicles from seasonally adjusted selling rates in May and June. And auto analyst Jack Kirnan of Salomon Brothers Inc. counts 40 models of cars and light trucks that had less than 50 days' supply at the end of June. "It's no coincidence that almost all of these models suffered sales drops in July," he says, noting that fleet sales to auto-rental companies have also been unusually depressed.

If Swonk and Kirnan are right, new-car sales should accelerate sharply by the fourth quarter as supply problems are finally ironed out. And auto output, which will make no contribution to economic growth this quarter, should help catalyze the economy again.

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