The pace of sales slowed down this month, but low gas prices and incentives rolled out by automakers continue to drive the sales of trucks and SUVs in February.
The auto industry’s sales fell 1.1% this month with only 1.33 million vehicles leaving lots this month compared to January. While sales have remained healthy, they may have hit a plateau according to economists.
“Our population growth is slowing and given the constraint of one person unlikely to own more than one vehicle, that’s really what’s going to drive the working age population’s demand for vehicles,” said Russell Price, senior economist at Ameriprise Financial, Inc.
The performance of truck and SUV sales rose this year, with January sales up 58.2% during the same period a year ago. This month saw a percentage change of 6.4% YTD from 2016 in light-duty truck sales.
“In general, trucks and SUVS have really been rising again because of the consumer income and the fall in gasoline prices,” Price said.
But in order for automakers to see more profits, they will first have to begin by widening margins.
“It seems as though the car companies are hitting on the limits of what they can sell right now, “said Peter Morici, an economist at the University of Maryland. “There’s two things that are going on, one is that they’re having trouble increasing vehicle sales, and they’re doing a lot of discounts.”
High incentives and high inventory have put pressure on the sector. Small car inventory is at a surplus and with car manufacturers looking for ways to cut labor and plant maintenance costs, they’re still betting on trucks and SUVs.
“The cars themselves became much more gas efficient, much more fuel efficient, the penalty of owning a SUV and crossover vs a car on the same platform went down,” Morici said. “You don’t pay as much of a penalty now; you don’t pay as much of a mileage penalty per driving a highlander as you do as oppose to a Camry now.”
Automakers’ gamble on light trucks and new cars has them spending on average more on incentives than in paying workers to build vehicles according to Autodata.
On average, automakers offered between $2000 to $4000 incentives per vehicle in 2016, versus an average of $1000 to $2500 per vehicle in labor costs, according to estimates based on the Center for Automotive Research.
This month, General Motors Co., Nissan Motor Co. and Honda Motor Co., saw an increase in sales, while Ford Motor Co., and Fiat Chrysler Automobiles saw declines, the latter being two of the Big Three that have seen a continuous struggle between upping discounts or maintaining plant doors open, both of which could result in losses.
Automakers went full speed in marketing SUVs and trucks to buyers this month, with multiple ads popping up on television screens pushing incentives.
For now, economists will have to wait and see if automakers’ gamble on trucks and SUVs will pay off in next month’s annualized sales. February’s annualized pace of 17.58 million decreased from 17.61 million in January.