March Car Sales rise as U.S. industry turns to incentive 'drugs'

Auto sales gained strength in early March as automakers offered big incentives and melting February snows made it easier for buyers to reach showrooms.

Edmunds.com Inc. forecasts a seasonally adjusted annualized sales rate of 13.2 million for the month. Except for a 13.7 million spike in August 2009 during cash for clunkers, that would be the highest monthly SAAR since August 2008.

J.D. Power and Associates predicts a 12.1 million SAAR in March, with 1,092,000 vehicles sold. That would be 27 percent higher than March 2009.

“The industry has been recharged by incentive offers from Toyota and other automakers,” said Edmunds.com analyst Jessica Caldwell. “There’s a lot of money in the marketplace right now, and people are responding.”

Edmunds.com projects industry spending on spiffs this month will approach $3,000 per vehicle. That’s close to the industry’s record of $3,165 set in March 2009.

When that record was set, manufacturers were reeling from a February that included the lowest SAAR in decades and record high U.S. inventory levels.

What about Toyota?

“There is some risk that the incentives offered by Toyota could spark an incentive war,” Power’s forecaster Jeff Schuster warned. “While that may lead to a temporary increase in sales momentum, it could also potentially slow the pace of long-term recovery.”

Schuster is keeping his 2010 full-year forecast unchanged at 11.7 million units, with retail sales accounting for 9.6 million of that. U.S. sales totaled 10.4 million in 2009 after topping 16 million annually this decade through 2007.

A key question is how long Toyota will continue its high incentives.

Analyst Himanshu Patel of J.P. Morgan Securities thinks most other manufacturers “will feel the need to match Toyota aggressively,” without speculating how long the higher spiffs would last.

Addiction continues

George Magliano, director of North American auto research for IHS Global Insight, says the industry “is back on drugs” until the general U.S. economy starts a general recovery, which he considers unlikely before the second half of the year.

Patel noted that March sales are helped by better weather. Heavy snow in much of country slowed retail traffic in February.

Edmunds.com CEO Jeremy Anwyl thinks the sales flurry will begin to moderate later this month.

“We shouldn’t view this as a sign that the economy is recovering. This sales bounce is driven by incentives,” he said. “Take away the incentives and the sales will slow dramatically.”