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Buying & Leasing a Car

Auto Sales Digging Out of a Deep Hole

Full recovery for the carmaking industry is still far down the road.

Although the worst sales slump in decades is over for the U.S. automobile industry, it will be years before annual sales can hope to match the 16 million or so vehicles sold in 2007 -- before the market swooned -- let alone the record 17.3 million set nearly a decade ago.

Still-shaky consumer confidence and tight credit will hold sales to around 12 million new cars, sport-utility vehicles and pickup trucks this year. But that’s about 15% better than in 2009, when dealers sold just 10.4 million vehicles -- and that with a strong assist from Uncle Sam’s cash-for-clunkers program. The $2.9 billion doled out in rebates probably boosted sales by about 750,000 vehicles.

Next year, assuming the economy continues its slow recovery, look for sales to hit about 13.5 million and reach 16.5 million around mid-decade. As pent-up demand is unleashed and consumer confidence increases, based on a recovering job market, auto sales will have a shot at exceeding the 2001 record by 2016 or thereabouts.

But note that the record sales in 2001, and sales nearly as high in subsequent years, are in the books with an asterisk. They were artificially pumped up by progressively higher cash rebates, which often approached $5,000 per vehicle for the Detroit automakers’ products, plus zero percent financing.

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Chrysler, Ford and General Motors had to offer eye-popping incentives. Each had a large number of older assembly plants that needed to operate at high capacity to be profitable and were bound by labor agreements that made it nearly impossible to shutter plants. When ballooning health care and pension costs were added in, the Detroit automakers’ costs of manufacturing a vehicle were thousands of dollars above their import brand competitors, and the domestics sank into a sea of red ink.

It’s a different ball game now. The three automakers can be profitable with total U.S. sales of around 10 million vehicles, instead of 16 million. GM’s and Chrysler’s bankruptcy reorganizations, and Ford’s voluntary one, have squeezed out billions of dollars of annual operating costs, as the companies downsized assembly plants, labor forces and wages.

Without strong incentives juicing auto sales, their growth will be pegged mainly to demographic and economic trends. “Given the outlook for employment and the economy, about 5% of the driving age population likely will buy a new vehicle this year, following 4.4% who did in 2009, the lowest number in 50 years,” says Rebecca Lindland, automotive group director at IHS Global Insight, an economic consultancy.

The car buying population will expand just a tad more in 2011, Lindland says, since the industry’s earlier blowout sales and easy credit saw “about 1 million people buy new vehicles who normally would not.”