Economists and other industry watchers predict U.S. auto sales will decline next year. Just as they predicted last year, for 2000.
They were incredibly wrong about 2000 sales. But this time, they insist, the wolf really is at the door.
Sales forecasts for 2001 from nine analysts interviewed for this report averaged 16.2 million light vehicles, down 6.9 percent from an estimated record of 17.4 million this year.
Although that would be a decline of 1.2 million units, no one is sounding the alarm.
'That's still a great number,' said Ellen Hughes-Cromwick, Ford Motor Co. manager of corporate economics. Ford expects 2001 light-vehicle sales of 16 million to 16.5 million units, she said.
Although some slowing is likely, the U.S. economy is expected to stay strong in 2001, growing about 3 percent. And Federal Reserve Chairman Alan Greenspan signaled Dec. 5 that the central bank is inclined toward easier interest rates, remarks that jolted Wall Street back to life.
'I see no red lights,' said Van Bussmann, DaimlerChrysler corporate economist.
Many forecasters have predicted a so-called 'soft landing' for auto sales and the economy in general for six straight years. But the stock market, the dot-com economy and the automakers themselves made mincemeat of those conservative forecasts.
This year U.S. light-vehicle sales will set a record for the second straight year: an estimated 17.4 million units, vs. 16.6 million in 1999. It took 13 years to beat the old record of 16 million, set in 1986.
By the end of 2000, customers will have bought almost 80 million light vehicles in a five-year stretch - an average of 16 million a year - vs. about 68 million in the five years up to and including 1986.
'People have bought an awful lot of cars. I don't think there are that many people left,' said Cynthia Latta, chief U.S. economist for Standard & Poor's DRI in Lexington, Mass.
DRI has done better than most in predicting sales the past two years, but even its forecasts fell short of actual sales. DRI's 2001 forecast is 16.1 million light vehicles.
'What we have is a less exuberant stock market than we had before,' Latta said. Oil prices are relatively high now, but they are expected to moderate in the spring. DRI also expects the Federal Reserve to cut interest rates next year to stimulate the U.S. economy.
The automakers helped negate their own predictions for 2000 by tearing up their sticker prices.
'This was the year of the great price wars,' said Diane Swonk, chief economist for Chicago-based Bank One Corp. The bank expects 2001 light-vehicle sales of 16.5 million.
'The reason I think sales will be slow, but remain at a heightened level, is that Main Street is in very good shape, even though Wall Street took it on the chin this year,' she said.
Incentives have grown from an average of around $800 per vehicle in 1996 to an estimated $2,600 this year, based on a year-to-date, sales-weighted average for the traditional Big 3 brands, according to Bussmann at DaimlerChrysler.
Bussmann said DaimlerChrysler is spending $2,650 per vehicle on incentives, vs. an estimated $2,525 per unit at GM and $2,596 for Ford.
That points to the obvious. While incentives have sparked demand, said Swonk, they have cost the industry a lot of money.
'That's how you get record vehicle sales, yet automakers are being hammered (on profits),' she said. 'Zero down and zero percent financing in an environment when interest rates are rising is pretty expensive stuff.'
Jim Meil, chief economist for Cleveland-based Eaton Corp., says two powerful forces are at work in the marketplace.
'The (automakers) say they can't increase incentives because they have to make money. The customer says, `We've got them built into our pricing parameters,' ' he said.
'To increase incentives, even in the face of a declining market, might sound attractive to the marketers, but I think the word in Detroit now is to preserve profits,' he said.
Eaton's 2001 forecast of 16.2 million light vehicles depends on a moderation in oil prices; a cut in interest rates next year; and continued price restraint.
'But for 2001 there are two or three factors that have to change to keep the sales decline to just 5 percent. You're going to have to have a reversal of factors that right now are hurting the market. And that's not a for-sure thing by any means,' he said.
Less to give
What will stop automakers from cranking up incentives even higher in 2001? Fundamentally, they are earning less money, so they have less to give away. They will have still less, if volume declines.
'When volume is declining, you can't cut costs fast enough. Profits always go down substantially more than units,' said Scott Merlis,, auto industry analyst for Wasserstein Perella Securities Inc. in New York.
'We're looking for the soft landing in sales, and a somewhat hard landing on profits. One problem is that labor is quasi-fixed; it's hard to cut. It's hard to accelerate other cost reductions.'
Merlis said automakers can't maintain profits by cutting costs during a market correction because cost adjustments take too long to work through to the bottom line.
'When you get a 1-million-unit decline in the industry, you just can't move fast enough' to maintain profits, Merlis said.
DaimlerChrysler already is in trouble. Precisely because of high incentives and lower volumes, the former Chrysler Corp. brands posted an operating loss of $512 million for the third quarter, vs. a year-earlier operating profit of $1 billion.
Worldwide, earnings fell 78 percent to $289 million in the third quarter, not counting one-time gains and losses.
At the same time, cash on hand had fallen to $4 billion on Sept. 30, from $9.1 billion on Dec. 31, 1999. Burning up that much cash was one reason Moody's Investors Service downgraded DaimlerChrysler's long-term debt rating on Dec. 1. That action could raise DaimlerChrysler's cost of borrowing money.
Meanwhile, Ford Motor Co. third-quarter net income fell 7.4 percent to $888 million. Ford said higher U.S. interest rates made it more expensive to offer lease incentives and cut-rate loans.
Ford said its third-quarter earnings would have been a record if not for the Firestone recall.
GM's third-quarter earnings fell 5.5 percent to $829 million. Paul Ballew, General Motors general director of global market and industry analysis, said GM has been reining in incentives, despite offering some zero-down and zero-interest deals.
A dip, not a plunge
Ballew said he expects incentives to stop escalating, but he does not predict a sharp drop.
'It's pretty hard to see a dramatic pullback on incentives (in 2001). GM, for instance, has sacrificed some share this year, where if we wanted to push incentives or fleet sales, we could have done so,' he said.
Bussmann said automakers don't even want sales to increase, if higher incentives are the only way it can be done.
'I don't see the industry going from an average $3,000 incentive this year, to an average $5,000 incentive next year,' he said. Not only are incentives more expensive; they seem to be getting less effective, he said.
'What produced all the impact this year was not so much the level of incentives, but the fact that they increased so much,' Bussmann said.
Last year at this time, Bussmann said he did not expect incentives to escalate in 2000. But in the third quarter of 1999, the situation was different. The old Chrysler Corp. brands were making an average operating profit of $1,425 per vehicle, on the basis of U.S. operating results divided by the number of units sold in the United States.
In the third quarter of 2000, using the same measure, the Chrysler brands had an operating loss of $822 per vehicle.
'I hope the industry would act fairly rationally in allowing industry sales to come down,' Bussmann said. 'Which is, after all, what they want to happen.'