Detroit Spies A Caution Sign

Although U.S. car and light truck sales perked up somewhat in May, auto makers are still worried and trimming production schedules. A particular source of concern to some--and hope to others--is this year's unusually hefty surge in used-car prices. At last count in May, they were running 14.4% over May of 1994 (chart), even as new-car prices and sales stayed sluggish.

Ordinarily, strong used-car prices bolster new-car sales because they raise trade-in values and thus make a new set of wheels more affordable. Indeed, auto analyst Ronald A. Glantz of Dean Witter Reynolds Inc. insists "new-car sales will rebound again once people realize how high trade-in values are."

But some industry observers think this year's unusually sharp price hikes signify a basic adverse shift in buying patterns. Economists at the Federal Reserve Bank of Chicago warn that the rapid growth of single-parent households, combined with sluggish income gains, have been gradually eroding underlying demand for new cars (BW--Feb.13). Jack V. Kirnan of Salomon Brothers Inc. thinks even middle-class shoppers now opt for "nearly new" cars over pricier really new cars.

Several developments seem to be reinforcing this trend. Quality improvements mean cars and trucks last longer than ever. As millions of two- and three-year-old vehicles come off of leases each year, carmakers increasingly resell them with factory warranties. And now late-model used cars are equipped with dual air bags and other goodies that were once available only on new cars. Noting that used cars are being scrapped at an ever slower rate, economist Van Bussmann of Chrysler Corp. reports that he recently lowered his long-term projection of demand growth from 0.7% a year to 0.5%. High used-car prices, he says, are no guarantee that new-car demand will take off.

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