Crowded Car Lots Spur Discounts, But Auto Sales Keep Slipping

(Bloomberg) -- Carmakers rolled out big discounts in May aimed at clearing inventory, but Memorial Day promotions probably still failed to stem the tide of a shrinking U.S. auto market.

The seasonally adjusted annualized rate of sales probably slowed to 16.9 million cars and light trucks this month, according to the average estimate in a Bloomberg News survey, from 17.2 million in May 2018. Most major automakers will release results on Monday; General Motors Co. and Ford Motor Co. report results on a quarterly basis.

Key Insights

May will be a bellwether for the severity of the slowdown plaguing the industry now facing a fresh threat of tariffs on Mexican imports. New-vehicle inventory has exceeded 4 million units every month this year, near peak levels reached in Automotive News data going back to 2000
The number of days that trucks and SUVs are lingering on dealer lots is climbing, a bearish sign that likely prompted “blockbuster” discounts in May, according to car-shopping researcher Edmunds
Incentives rose for the first time in months, according to J.D. Power. Nissan Motor Co. and Honda Motor Co. boosted discounts in May, while Ford, GM and Toyota Motor Corp. pared spending, JPMorgan analysts wrote
Pricey trucks and SUVs remain mostly above the fray. Average transaction prices probably rose again in May, in part because demand for cheaper compact cars and sedans has cratered

Analyst Commentary

Evercore ISI (Arndt Ellinghorst): Sees a small downside risk to the Street's estimates and will watch incentives
- Says tariff-related price hikes and lack of specific inventory could hurt the SAAR over next two to three months
- Last month, Evercore trimmed its 2019 U.S. sales forecast to down 1% from flat previously and fears risk to down 2%
TrueCar's ALG (Oliver Strauss): Despite a 50-year low in the unemployment rate and a 15-year high in consumer sentiment, the auto industry continues to face weakening in year-over-year sales
- However, from a historical perspective, 16.9 million SAAR is strong, especially considering a rising average transaction price environment
- RBC (Joseph Spak): Expects GM to sell about 250,000 vehicles, down ~6% y/y, with fleet down slightly more than retail
  - Expects to see outsize passenger car weakness on a percentage basis, with Ford (est. down ~9%) discontinuing the Focus; says Ford is starting to manage inventory on Explorer and Escape ahead of transition to new models
  - In general, inventory might be a little high relative to demand, so if sales don't come through in May, there could be some production cuts in June
  - JPMorgan (Rajat Gupta): Sees potential for latest Mexico trade news to reduce U.S. SAAR
    - If cost increases related to the Mexico tariffs were to be passed on to the consumer, there is the potential for substantial impact on demand