DETROIT (Reuters) - For a few frenzied weeks this summer, the U.S. auto industry has been partying like the good old days of 2007 -- before demand dropped off a cliff.
Now comes the $3 billion question: with the government "cash for clunkers" incentives exhausted, how bad will the hangover be?
The U.S. auto industry's long history of driving sales with steep cash and financing incentives suggests that the more than 600,000 "clunkers" deals may have robbed future demand.
But the future may not be as painful as it has been after previous incentive efforts sparked big volume sales because major automakers have become far more cautious about managing inventories and production during a wrenching four-year sales decline, analysts say.
Take 2001 and 2005 as examples. General Motors Co launched zero-percent financing in 2001 following the attacks of September 11 under a "Keep America Rolling" promotion and in 2005, it gave consumers the same discounts it gave employees.
Both offers sparked very short-term surges in sales.
GM's zero-percent promotion in 2001 sent industry sales surging to 21.7 million units on an annualized basis in October 2001, but the sales rate fell by 4 million units the following month.
And in July 2005, industry sales spiked to 20.6 million units on an annualized basis, supported by GM's employee pricing promotion, but fell back to a 16 million unit rate in the following months.
"We are expecting things to slow down quite considerably after the whole cash for clunkers business is over," said Aaron Bragman, an analyst at auto industry forecasting firm IHS Global Insight.
Others agree, while holding out hope that the industry has still seen the worst of the sales downturn.
"I think clearly sales will drop. It was such a rapid acceleration so you always have some fall-off," National Automobile Dealers Association Chairman John McEleney said.
"But I don't think it will drop down to levels of the 9 or 9.5 million units range where we were before the clunkers program because we started to see some demand recovery prior to the program and the program demonstrates there is pent-up demand," McEleney told Reuters.
The incentives, offering up to $4,500 for people who trade in old gas guzzlers for fuel-efficient vehicles, boosted July U.S. auto sales to the highest level of 2009, and likely drove August sales even higher, according to analysts' forecasts.
As of Monday, the program's last day, auto dealers had submitted claims for nearly 625,000 vehicles totaling $2.58 billion, according to the Department of Transportation.
U.S. auto sales are projected to rise to 12.2 million units on the annualized rate in August, up from 11 million units last month and the best monthly rate of 2009, according to auto industry forecasting firm J.D. Power & Associates.
That would still be an 8 percent decline in sales from a year earlier, but a big improvement from declines of about 35 percent in the first half of 2009.
But J.D. Power also lowered its forecast for 2010 light vehicle sales by about 100,000 units to 11.5 million units.
Shares of Ford Motor Co, the only publicly traded U.S. automaker, have surged as much as 30 percent since the clunkers program started on July 24, hitting their highest level in nearly two years on August 3. The stock has retreated since and is up about 7 percent from the program's launch date.
The sudden surge of demand for fuel-efficient cars, led by Toyota Motor Corp's Corolla sedan and the Ford Focus, has also led to the shortage of some models in dealer lots, prompting automakers to raise production in recent weeks.
As of August 1, GM's inventory declined to 64 days of supply, down from 82 days a month earlier. Ford's inventory was reduced to 48 days of supply from 57 days over the same period.
That could set the stage for lower incentives, and higher prices for vehicles that are most in demand, analysts said. The end of the program also comes as automakers ready new model-year vehicles that generally carry reduced incentives.
"There is risk that the expected pullback in sales as the clunkers program ends could be magnified if manufacturers reduce incentive levels," J.D. Power forecaster Jeff Schuster said.
Jeremy Anwyl, chief executive of industry forecaster Edmunds.com, said the key now is what happens to the U.S. economy heading into 2010.
"The program is not a cure-all for auto sales," he said. "Only a return of consumer confidence can trigger the fundamental sales increases the industry desperately needs."
Additional reporting by John Crawley in Washington, editing by Leslie Gevirtz