Surprisingly strong sales in Feb. means stay the course

The pace of new-vehicle sales improved in February compared with a year ago as previously sidelined demand — including that from fleet customers — kept transaction prices high and incentives low, even as inventory shortages eased.

Yet, as the industry continues to bounce along as it has for months with strong fundamentals that should portend continued high profitability, the first signs of a slight reversion to more historically normal conditions are appearing, analysts said.

Results were split in February among automakers reporting their sales, with Ford Motor Co. and Hyundai-Kia posting double-digit gains, led by Ford's 22 percent jump. Meanwhile Mazda North America, Subaru of America and Volvo Car USA also posted sales increases last month, while sales fell 2.4 percent at Toyota Motor North America, despite the first year-over-year increase at Lexus since January 2022.

Data firm Motor Intelligence estimated February's seasonally adjusted, annualized sales rate at 15.19 million, up from 13.96 million a year ago. January's rate was 16.21 million. LMC Automotive said industrywide February sales rose 9.5 percent over a year ago to 1.14 million vehicles, including automakers that won't report sales until the end of the quarter. February's showing, along with continued demand from fleet customers, convinced LMC to raise its outlook for U.S. sales in 2023 to 15 million, up from 14.9 million.

"There was a bit of a surprise on the upside; the industry did a little better than expected," said Jeff Schuster, executive vice president for automotive at GlobalData, parent of LMC Automotive. "Still, a 15 million SAAR isn't lighting the world on fire."

The supplier disruptions that so vexed the industry last year "are still there, but they're down considerably from where they were," Schuster said. He also noted that strong fleet demand is more than making up for any softening consumer demand at the retail level.

"As we saw in January, things are still gaining steam and we're seeing availability increasing"as inventory levels recover, said Tyson Jominy, vice president of data and analytics at J.D. Power.

"Demand remains very strong. Transaction prices set a record for February — up another 5 percent to over $46,000," Jominy said.

Dealers are still able to maintain their pricing power, he added, albeit in a modestly reduced form. He noted that in February about 31 percent of retail sales were above sticker price, indicating that strong consumer demand continues to outpace supply. However, that figure is about half of what it was over the summer, he said. "Automakers aren't going to start incentivizing sales until that number gets a lot closer to zero, or at least in single digits. So things are going the right way, but they're still not there."

Indeed, J.D. Power put February's average incentive per new vehicle at $1,335 in February, up from $1,275 a year earlier, while incentive spending as a percentage of average sticker was nearly flat year-over-year at 2.8 percent, down 0.1 percentage point. TrueCar estimates incentives fell by $135 from February 2022 to $1,522 last month but rose 9 percent from January's $1,396 level.

Schuster said he expects incentives to rise slowly this year as manufacturers walk a fine line trying to balance their factory utilization rates while avoiding overloading dealers with inventory.

"I think we will start to see incentives creep back in, but it may take a few months," Schuster said. "We're going to see a little more balancing from automakers and the discipline holding to not overbuild. But that balancing means that the manufacturers are likely to start enticing consumers to come back in; I don't think it's tomorrow, but certainly within the next six months."

The industry in North America is running at about a 65 percent factory utilization rate based on current sales levels, which means factories are not running as efficiently as they can, Schuster said. Automakers may feel pressure to "open the valves on production" to maximize profits while demand for both retail and fleet is still high and pricing is holding. The problem for automakers is that North American factory capacity is 23.4 million, including some necessary redundancy caused by the ongoing transition to battery-electric vehicles, while the market — at least at its most profitable level — is about 15 million, Schuster said.

"It appears, at least as of now, that everyone is willing to accept a smaller overall [new-vehicle] market" to keep profits strong for as long as possible, Schuster said. "It suggests that the automotive world is different now. Some of the trends that were accelerated by the pandemic have validated the model that you can be really profitable on lower volumes, and that's OK."