Industry's record run still has legs

Big discounts and high inventories, a toxic combination for the auto industry in the past, pose less danger today because a healthy economy is keeping U.S. sales at a near-record pace, analysts say.

February was a virtual repeat of January for the industry, as increasing consumer confidence and a long stretch of gains in the stock markets helped the annualized selling rate stay at 17.57 million for a second consecutive month.

There are signs of headwinds approaching, including rising loan delinquencies, interest rates and gasoline prices. Inventories for many brands are at their highest point since the dark days of 2009. But in the near term, automakers and dealers have plenty of reasons to remain bullish.

"When you look at overall sentiment from a macro perspective, the numbers certainly support strong performance related to sales," said Alec Gutierrez, Kelley Blue Book's senior market analyst of automotive insights.

Some forecasters, including LMC Automotive, say there's a good chance U.S. sales will set an annual record for a third consecutive year, beating the 17.54 million vehicles sold in 2016. Even if that doesn't happen, no one sees a steep drop-off in demand on the horizon.

"Tax cuts, new fiscal stimulus and improved "animal spirits' could strengthen consumer spending and extend the auto cycle," Brian Johnson, an analyst with Barclays Capital, wrote in a report last week. "But perhaps more importantly, in an otherwise flat market, [automakers] have shown greater willingness to use incentives to drive growth from share gains."

ALG said incentive spending by automakers averaged $3,443 per vehicle in February, up 14 percent from a year ago and down 0.8 percent from January 2017.

In some cases, inventory surpluses have left automakers little choice but to amp up their discounts. General Motors ended February with close to 900,000 vehicles in stock, the most in nine years. GM, which also is cutting production at several car plants this month, said a "truck month" promotion and other deals it offered paid for themselves through higher volumes and transaction prices.

Across the industry, inventories are 9 percent higher than a year ago, according to Edmunds, while sales were down 1.1 percent in February.

"Inventory is starting to swell, which is concerning considering that we're still months away from the peak summer selling season," said Jessica Caldwell, executive director of industry analysis at Edmunds. "The automakers are in a tricky spot: Aggressive incentives are already starting to eat into profits and residuals, but it takes discipline to pull back the production reins in what's still a fairly strong market."

Among the biggest challenges for automakers is finding ways to build more of the big SUVs and pickups that consumers are clamoring for and to keep sedans from piling up in dealerships' overflow lots.

Light trucks accounted for 64 percent of industry sales in February, up from 59 percent a year ago. Sales rose 10 percent for pickups, 9.7 percent for crossovers and 8.2 percent for SUVs.

Meanwhile, car sales fell 13 percent, including a 19 percent plunge for midsize sedans. Thus, the biggest worries are for automakers that are too dependent on car segments rather than for the industry as a whole, amid a number of promising economic indicators.

The Conference Board's survey of consumer confidence reached a 15-year high in February, driven by the most robust job market since before the Great Recession and an unemployment rate of less than 5 percent. That's in addition to the Dow Jones Industrial Average topping 21,000 for the first time ever last week. Federal Reserve Chairman Janet Yellen and other Fed officials said last week that the economy's fundamentals appear strong enough to justify more interest rate hikes this year, starting as soon as this month.

In recent months, as auto loan delinquencies have inched higher, lenders have responded by focusing more on customers with better credit. That could make it tougher in the months ahead for dealerships to close sales with some overextended shoppers, but with the benefit of keeping defaults from starting to drag down the market.

"Delinquencies are always an important indicator of the overall health of the automotive lending market, but it's equally important to watch how lenders react when they see a rise," Melinda Zabritski, Experian's senior director of automotive finance, said in a statement last week. "The shift to a higher percentage of prime ... customers is a natural consequence of the slight growth in delinquencies. Overall, we are still looking at a very healthy lending market."

Hannah Lutz and Michael Wayland contributed to this report.