Big Three sales expected to fall in May.

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Rising interest rates, gas prices cited for keeping customers away from auto showrooms.

Bryce G. Hoffman -The Detroit News - May 27, 2006


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May is shaping up to be another lackluster month for Detroit's automakers, as rising interest rates and gasoline prices turn some shoppers away from dealer lots.

While sales results will not be released until Thursday, some dealers have seen demand decline slightly over the past few weeks.

"It's been a little slow," said Steven Zehnder, sales manager at Zehnder Chevrolet-Buick in Frankenmuth.
Wall Street also is taking a dim view of the month.

Brian Jacoby, an analyst with Goldman Sachs in New York, expects a seasonally adjusted annual selling rate of approximately 16.1 million units in May, down from the 16.7 million pace reported last month and in May 2005.

"Soft retail sales, particularly at the Detroit Three, are the main reason for the decline," Jacoby said. "Sales should continue to look strong at both Toyota and Honda, given their new product launches."

Toyota recently launched the Yaris compact and Camry sedan, while the Honda lineup has expanded with the Fit compact.

Himanshu Patel, who follows the industry for J.P. Morgan in New York, also is expecting a year-over-year decline, predicting that sales will fall to 16.3 million units on an annualized basis.

Analysts expect General Motors Corp. to lead the decline, with a drop of between 10 and 14 percent compared to the same period in 2005. Sales at Ford Motor Co. are expected to fall between 6 and 8 percent for the month, while DaimlerChrysler AG's Chrysler Group sales are expected to be down about 5 percent.

In April, new car and truck demand fell 3.7 percent, and industry sales remain down 0.3 percent for the year.

GM and Ford also are expected to announce revised North American production plans for the third quarter of 2006, providing more signals of how robust both auto giants see demand in coming months.

Analysts predict GM will cut third quarter production by between 6 and 9 percent, largely as a result of decreased demand for sport utility vehicles.

"We expect vehicle mix to remain under pressure as demand for mid- and full-size SUVs continues to fall, driven by higher gasoline prices," Jacoby said.

Opinions are more divided about Ford. While Jacoby expects Ford to cut third-quarter production by 5 percent, Patel said the automaker may actually boost production by 2 percent to keep up with growing demand for its new mid-sized sedans. The Ford Fusion and its siblings, the Mercury Milan and Lincoln Zephyr, were still in ramp-up mode during the third quarter of 2005.

Paul Taylor, chief economist at the National Automobile Dealers Association in Virginia, blamed the softening market on rising interest rates.

"The economy has been extremely strong and incentives are starting to come back," Taylor said. "But there's also some evidence that consumers with less-than-perfect credit scores are starting to run into problems with new car purchases."

Taylor said about half of all American consumers fall into that category, and many are finding that rising interest rates have climbed too high for them. That is starting to cut into consumer demand.

"Interest rates are slowing things down, for sure," said Dan Frasca, sales manager at Jones West Ford in Reno, Nev. "But this is pretty much a normal May."

Taylor projects annualized sales to top-out at 16.8 million in May, keeping 2006 on track to be one of the five strongest sales years ever. Many dealers, he said, are reporting a big increase in their used car sales, as more and more Americans return to work. Taylor said most returning workers who have been out of a job for a while opt for used vehicles because they do not have the work history and ready cash required for new vehicle purchases.

Some analysts warn the weak May sales numbers may hurt Ford and GM's stock, at least in the near term.

"The prospect of softish May sales and potentially weaker-than-expected (third quarter) production from GM could lead to some near-term weakness in the group next week," Patel said. "However, over the medium term, we continue to favor GM over Ford."