The Road Looks Rougher for Motown--and the Economy

As consumer confidence dips, robust sales may melt away

Don't tell car dealer Jon J. Agresta that the fate of the economy rests partly on his shoulders. After rebates sparked three months of unexpectedly strong sales for the six General Motors Corp. brands he markets at his two central New Jersey dealerships, business plummeted 30% in April. "Our sales were dismal," gripes Agresta.

He isn't alone. Although U.S. auto sales held up far better than expected in the first quarter, the market is finally starting to crack. Vehicle sales for the month of April fell 10% from a year earlier. On a seasonally adjusted basis, that means that the U.S. auto market is now chugging along on pace to sell just 16.6 million vehicles this year--a 4% drop from the 17.3 million pace set in the first quarter. Worse, the Big Three have been hardest hit. While their sales fell 16% from one year ago, foreign rivals' sales grew 3%, and profits have tumbled at all three. In sum, it makes for some pretty bleak prospects for Detroit these days.

QUICK REFLEXES. Still, give credit where credit is due: Today's weakening performance stems in part from the great job Detroit did reacting to the economy's downturn in recent months. As inventories piled up on lots late last year, carmakers reacted far more swiftly than in the past to slash production and offer up discounts to move the metal. That fueled stronger-than-expected sales in the first quarter. The result: The industry took just three months to work off an inventory bulge that had threatened to dampen the economy for much longer.

That's good news for the economy overall. The first quarter production cutbacks took a big toll. Overall, the slowdown in the auto sector shaved 0.7% off of growth in gross domestic product in the first quarter. But with inventories depleted, Motown is ramping up again with modest production increases. As troubles continue in every sector from tech to retail, the timing couldn't be better: Economists now predict that the auto sector will help boost second-quarter GDP anywhere between 0.5% to 1.25%. Crows Bank One Corp. economist Diane C. Swonk: "This ain't a downturn."

So why isn't anyone around Detroit breaking out the champagne? With a number of factors working to curb domestic car sales, the second-quarter gains could be short-lived. Gas prices are high, unemployment is up, and though record level incentives helped for a while, they're no longer spurring sales.

The reason: The slowing economy finally seem to be taking its toll on consumer confidence, a key factor for auto sales. In April, consumer attitudes fell 3.4% from March and 19% from year-ago levels, according to the University of Michigan's recent index of consumer sentiment. Worse, the largest decline in attitudes was for autos. "If people are really worried about the future, it doesn't matter if they can get a good deal on a $20,000 car," says Merrill Lynch & Co. analyst John A. Casesa.

JAPANESE GAINS. Moreover, those who are buying are opting more often for foreign rivals; Japanese and Korean automakers grabbed 4 percentage points of share in April to take almost 31% of the U.S. market. With new models in the lucrative sport-utility and minivan segments, both Honda Motor Co. and Toyota Motor Corp. are gaining ground in the segments where the Big Three make most of their profits. And though they have historically relied less on incentives, Asian makers have lately gotten more aggressive. Toyota and Honda have each added at least $600 in incentives on the bread-and-butter Camry and Accord sedans, respectively. With the yen now flirting with a 12-month low, there's no reason to believe they won't stoke up rebates further. Says Chrysler Group CEO Dieter Zetsche: "The Japanese always have gone for market share."

That's one more reason why many economists expect Detroit's boost to GDP to be short-lived. Standard & Poor's Corp. chief economist David A. Wyss says that the auto industry will shave one-quarter of one percent off of third-quarter GDP and, at best, will be a wash in the fourth quarter. The auto industry "will be a drag on the economy for the year," he says. So enjoy the second-quarter blip while it lasts.

By David Welch in Detroit, with Joann Muller and Rich Miller in Washington, D.C.

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