Auto boom more like bubble

DETROIT — This decade already has seen burst bubbles in tech stocks, homes and credit. Now, it seems, another segment has fallen victim to irrational exuberance: the U.S. auto market.

Like investors who sent dot-com stocks or house prices to unsustainable levels, auto manufacturers in the U.S. have pushed their sales volumes to new peaks over the past decade. They invited customers to buy cars at employee prices, extended no-interest loans for up to six years and sold unprecedented numbers of vehicles to rental fleets — all strategies that some analysts say drove U.S. auto sales to artificial highs.

Through most of the 1990s, auto makers sold a little more than 15 million cars and light trucks a year in the U.S. market. That changed in the late 1990s: With gasoline prices low and many U.S. consumers feeling flush from the tech-stock boom, auto sales surged. Sales peaked at 17.4 million in 2000 and remained near 17 million for another five years. Heads of General Motors Corp. and Toyota said the U.S. was entering a golden age of the automobile. In 2003, Toyota's head of North American sales predicted the industry would soon be selling 20 million vehicles a year.

They were wrong. Sales started falling in 2006 and this year are expected to be right back where they were in the 1990s, at just more than 15 million. Last week, market researcher Global Insight Inc. lowered its 2008 forecast for U.S. vehicle sales to below 15 million. Global Insight now thinks sales won't reach previous highs again until 2012, a year later than it previously had thought.

"Going forward, 16 million is a good year," says Ron Harbour, whose Harbour Consulting tracks auto production.

The industry's miscalculations hold broader consequences for the U.S. economy. The auto industry is the nation's largest manufacturing sector, accounting for almost 4 percent of U.S. gross domestic product.

Because auto makers have to project their model lineups and manufacturing requirements about three years in advance, a company that misjudges future demand can rack up big losses. The slump in auto sales already is complicating the turnaround efforts of the Big Three — GM, Ford Motor Co. and Chrysler LLC — and pinching the earnings of foreign automakers, including Toyota Motor Corp. and Nissan Motor Co.

A bubble occurs when market participants push prices of assets higher than their intrinsic values would appear to merit. While the auto-industry doesn't fit the classic formula of an asset bubble, a similar degree of mania apparently was at work: Makers thought they could sell vehicles in much greater numbers than the market ultimately would bear.

GM spokesman Tony Cervone said the company didn't overestimate demand and blamed the current sales slump on the U.S. economy's slowdown.

The seeds for the boom were planted in 1999, when the stock market was roaring and Americans headed to showrooms to splurge on new wheels, often trucks. Gas at the time was cheap, about $1.15 a gallon.

A year later, the tech-stock bubble burst and the economy began to cool. After the attacks of Sept. 11, 2001, stunned consumers stopped shopping. Dealerships were empty. Hoping to help jump-start the U.S. economy, GM started a "Keep America Rolling" sale, offering 0 percent financing for 60 months.

Sales took off again. By late 2002, many GM rivals were complaining the discounting was destroying profits for all players.

The incentives race continued. By 2005, Big Three makers were offering as much as $8,000 discounts on some trucks. That summer, Big Three makers rolled out "employee pricing" — allowing regular customers to buy cars at the same prices the Big Three offered their workers.

One critic of these practices was Michael J. Jackson, chief executive of AutoNation Inc., the country's largest dealership chain. He argued that heavy incentives and rental sales were unsustainable.

From one perspective, auto sales during the go-go years of 1999 to 2005 don't appear inflated. Volumes remained steady, rather than spiking dramatically. But a closer look reveals an oddity: The economy slumped in 2001-02. "We had an economic downturn and vehicle sales stayed near record highs," says Ford economist Emily Kolinsky Morris. "It was a very different industry dynamic."