Car Sales Hit Frenzied Pace : Purchases Seen Plunging When Cheap Loans End

With low-rate financing providing the fuel, domestic car sales in early September rocketed to the second-highest level Detroit has ever recorded, domestic auto makers reported Monday.

Prompted by interest rates on car loans that hit bottom at zero percent, Americans went on a frenzied car-buying binge during the first 10 days of the month, snapping up Detroit’s remaining 1986 models at roughly double the normal sales rate. In fact, if that pace kept up, Detroit would sell an outlandish 17 million cars a year, compared to the 8-million level normally posted in recent years.

But economists warned that domestic car sales are likely to plunge again in October, as soon as the discount financing programs offered by the auto makers expire. At the same time, they cautioned that this month’s dramatic surge in auto sales will not significantly improve the sluggishness of the overall economy, which is floundering under a flood of imports of manufactured goods.

“They (auto sales) sure were good, but, as a matter of fact, it’s not going to make much difference,” said John Hammond, an analyst with Data Resources, an economic forecasting firm.

Rather than attracting new customers who otherwise would not have bought a car in the near future, Hammond and other analysts noted, the low rates are simply enticing consumers already planning to buy into the market earlier than expected. Sales are also being buoyed by consumers mindful that the tax overhaul bill will phase out the sales tax deduction on new car purchases after this year.

As a result, sales may fall later this year by nearly as much as they are rising now, because those customers who bought ahead of schedule will no longer be in the market.

“We’re getting set up for a big right hook in October, when the sales rate for the month will be about a third of what it was in this period,” Hammond said.

Plenty of Takers

Still, the early September sales figures, the first to fully reflect the impact of the discount financing incentives introduced by the domestic companies in late August, were impressive by almost any measure. Even though many consumers have complained in recent days that they have not found many bargains in domestic cars, the dealers have evidently found plenty of takers.

The seven domestic producers (the importers do not report sales until the end of the month) said their 46,084 average sales per day skyrocketed by 36.9% over the earlier record for the period, set in 1985. It was also the second-highest 10-day sales ever recorded for any time of the year, surpassed only by the late September sales boom of 1972.

The domestic manufacturers said they sold 368,674 cars during the Sept. 1-10 period, compared to 235,680 last year, when Detroit offered discount financing but with less attractive interest rates.

General Motors started the discount financing blitz in late August with 2.9% financing on three-year loans in an effort to reduce its bloated inventory of unsold cars, and it posted the biggest gain of any of Detroit’s major companies.

GM Sales Up 53%

GM said it sold 232,252 cars during the 10 days, up 53.4% from last year, and its combined car and light truck sales of 313,522 set a record for any 10-day selling period in GM history.

“This program . . . has become the most effective market-stimulation activity in auto sales history,” James G. Vorhes, GM’s vice president for sales, said. “The program is effectively accomplishing its goal of reducing dealer inventories of 1986 models.”

Ford sales rose just 5.1%, Chrysler posted a 39.1% gain, and Honda--which hasn’t offered low-rate financing on its U.S.-built cars--reported a 53.4% increase in the sales of its U.S-built Accords. (Ford said its 5.1% increase was due to a higher than normal share of sales a year ago and a lower supply of cars for sale this year.)

Struggling American Motors, desperate to stop the free-fall in its sales, responded to GM’s 2.9% program by offering interest-free two-year loans on its Renault cars and Jeep utility vehicles, but it still reported only a 5.7% sales gain for the period. Volkswagen’s sales of American-built Golf subcompacts rose 2%, but Nissan’s sales of U.S.-built Sentra subcompacts fell 52.9%. Nissan is not offering incentives.

More Sales Incentives

Economists agreed that the sales surge should reduce inventories of unsold 1986 domestic cars, making room for Detroit’s auto makers to go ahead with their aggressive 1987 model production schedules in the fourth quarter. But, with sales expected to plunge again in October, when incentives expire and higher prices on 1987 models go into effect, those inventories could balloon again by Christmas. That could force the domestic companies to introduce another round of sales incentives to move their products.

In fact, industry sources say GM already has new incentive plans in the works. The company reportedly plans to start a new, more modest round of incentives two to four weeks after the current programs expire, particularly if sales erode badly in the interim.

“We think sales will be so poor in October that they will have to come back with some incentives,” Hammond said.

Generally, the impact on the national economy from the sales boom is expected to be short-lived as well. Industrial production is not likely to increase as a result of the sales boom, because the incentives cover only cars already built and cluttering up dealer lots. And, although total consumer spending is likely to be up in September, some economists believe consumers who buy new cars will spend less at the nation’s department stores and other retail outlets over the next few weeks.

“Its impact on the economy in the third quarter will probably be a wash,” said Tom Megan, an economist with Evans Economics in Washington.

Consumer debt will also soar as car buyers take on new long-term loans, pushing back spending on other big-ticket items, Bruce Steinberg, a senior economist with Merrill Lynch Economics, warned.

“The pay-back will come not just in auto sales later in the year but on other consumer spending as well,” Steinberg said. “After September, overall consumer spending may be depressed right through the fourth quarter.”

Auto Sales Percentage changes in auto sales for the first 10 days of September are based on daily rates rather than total sales volume. There were eight selling days in the current period and seven selling days in the year-ago period.

Sept. 1-10 Sept. 1-10 % 10-day 1986 1985 change GM 232,252 132,514 +53.4 Ford 76,499 63,674 +5.1 Chrysler 47,096 29,622 +39.1 AMC* 3,980 3,300 +5.7 VWA U.S. 1,234 1,057 +2.0 Honda U.S. 6,709 3,831 +53.4 Nissan U.S. 904 1,682 -52.9 Total 368,674 235,680 +36.9

*Estimate