U.S. Q3 Could Play Big Part in Cutting Bloated Inventory, Final 2017 Sales

The second half of 2017 will be one of the more interesting periods in some time for the U.S. market, as the industry continues to wrestle with declining sales and rising inventory, especially of cars.

Heading into the final six months, several automakers, including top dogs General Motors, Ford, Honda and Toyota, have far too many cars to sell. And even some pockets in the strong truck sector are tipping the balance the wrong way between demand and inventory, including some CUVs, Small Pickups and Large Vans.

Despite production cuts in the second quarter, and some bigger reductions on tap in Q3, the inventory outlook worsened in June when light-vehicle sales slid to a long-time low 16.4 million-unit seasonally adjusted annual rate.

U.S. dealers entered July with 4.15 million units in stock, 8.4% above last year, and nearly matching the previous June high of 4.16 million in 2004. With a total in the low 60s considered healthy for this time of year, June’s LV days’ supply of 74 was well above year-ago’s 66, and the highest for the month since 75 in 1989.

With June inventory estimated to be 20% higher than necessary, the third quarter presents an opportune time to carve a huge chunk from the excess through a combination of incentives and production cuts.

First, the industry typically primes the pump with incentives anyway during July-September to whittle down current model-year inventory in time for the new models in October. Second, production already slows during the period for vacation downtime, and manufacturers easily can extend some of those shutdowns, which is happening already in many cases.

With six months remaining in the year, Q3 also is a particularly good time to flush out excess car inventory, because Q4 typically is ruled by trucks, especially SUVs and Large Pickups. The fourth quarter is the slowest period of the year for small and midsize cars – though luxury sedans usually record their highest penetration in Q4.

June 30 car inventory totaled 1.51 million units, 1.5% above same-month 2016. Cars account for 60% of the estimated LV excess. In actuality, the percentage is slightly higher because some of the truck overload is due to stock buildups prior to production slowdowns later this year for tooling to new products.

Thus, if there is a big summer blowout, expect an inordinate amount from cars.

Light-truck inventory ended June at 2.65 million units, 12.8% above year-ago. Days’ supply was 73, up from 67 in like-2016. Although truck days’ supply has tracked lower in recent years as manufacturers tried to keep up with rising sales, a total in the high 60s usually represents a good balance with demand in June.

An incentive-led sales boom likely will enhance CUV volume most among truck segments. CUV sales remain in a growth mode, but there are models in the Small, Middle and Large CUV segments with inventory that could use trimming.

Along with some generally moderate production slowdowns, the seasonal shift in Q4 to a higher mix of large pickups and SUVs should take care of excess in those sectors. GM dealers are carrying high totals for large pickups, but the automaker has scheduled a production slowdown later this summer, which should alleviate much of the excess.

The occurrence of a Q3 sales surge would indicate the industry will repeat the pattern of the past two years, which is why WardsAuto is sticking with a 2017 LV outlook of 17.1 million units. Volume in the latter half of each of the previous two years topped the first six months as incentives increased. Historically, in years when demand is flat or in decline, second-half volume is weaker.

Repeating that pattern this year could be tougher, however, because there are more downward forces on demand with bloated stocks being the offsetting factor. Without a fire sale sometime this year, deliveries could finish as low as 16.8 million units.

The first-half 2017 SAAR totaled 16.8 million units, and will have to post a 17.3 million total in the latter half for the entire year to end at 17.1 million.

Because each has an additional selling day compared with last year, August and September largely will be the months that determine whether sales in 2017 finish above or below 17 million units. The combined raw volume in those two months will have to top same-period 2016’s totals. They also would have to combine for a SAAR above 17 million units, which has not happened since February.

With one fewer selling day from 2016, July would have to top an 18 million-unit SAAR for raw volume to increase year-over-year.

Initial modeling indicates July should post a 16.9 million-unit SAAR. However, sales in the past several months have finished below the first look. Thus, if demand meets that total, or higher, it’s likely a sign heavier discounting is beginning.

Not all the excess needs to be quashed by October, so a summer incentive-fest does not mean demand must hit monthly records, or even top 18 million-unit SAARs. Any leftover could be taken care of through more production slowdowns and another round of goosed incentives at the end of the year.

A downside to artificially creating more demand this year to pare inventory is a greater pull-ahead of volume from 2018.

Conversely, automakers also have the option of keeping production relatively strong and avoiding huge incentives, thereby continuing with hefty dealer stocks into 2018.

Either way, WardsAuto expects demand to decline in 2018, as the industry continues the cyclical downturn that began in 2016.

hstoddard@wardsauto.com