PhotoGeneral Motors announced last week that it would temporarily close a production facility because of rising inventories. Some took that as a sign that the auto industry is finally slowing down.

But it might not be the case. The plant in question turned out mostly smaller, fuel-efficient sedans, cars that are out of favor in an era of low gasoline prices.

This week there was evidence suggesting car sales aren't slowing, and if they are, not by much.

A joint forecast by J.D. Power and LMC Automotive predicts a strong close to the year, with December car sales boosting total sales for the year to 17.5 million, slightly beating last year's record tally.

"This year will be remembered for strong retail sales and record transaction prices,” said Deirdre Borrego, senior vice president and general manager of automotive data and analytics at J.D. Power.

Record incentives

But carmakers had to spend money to make money this year. In November, manufacturers spent an average of $4,000 per unit on incentives for the first time ever. Since carmakers normally have to increase their incentives in December to clear out end-of-the-year inventory, the forecasters expect this month's incentive spending to be even higher.

All of this points to some stiff headwinds for the industry in 2017, Borrego says.

“Going forward, automakers must maintain production and pricing discipline to achieve profitability, which is easier said than done," she said.

Advantage, consumer

Of course, stiff headwinds for automakers could be a benefit for new car shoppers. While dealers will resist incentives where possible, they will likely have to slow flexibility to keep inventories from backing up.

Kelley Blue Book (KBB) also predicts December will be 2016's biggest sales month, even though it may fall slightly short of last December. KBB analyst Tim Fleming agrees carmakers face issues in 2017 that could be to consumers' advantage.

“An increasing supply of used cars, especially off-lease units, is already putting pressure on residual values, which could impact the sustainability of today’s high levels of leasing,” Fleming said. “We are looking for manufacturers to cut production in the new year to better match slowing consumer demand and alleviate the need for elevated incentives.”

The J.D. Power report also makes clear that carmakers had to rely more on fleet sales in 2016 to keep up their record pace. The forecast predicts fleet sales will total 271,700 units in December, which would be a 4.8% increase on a selling-day adjusted basis from December 2015.

Fleet volume could make up 16.9% of total light-vehicle sales, up slightly from 16.4% in December 2015.


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