Auto sales: hangover awaits after "clunker" party

Mon Aug 24, 2009 10:49pm EDT
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By Soyoung Kim and David Bailey - Analysis

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.   Continued...