May's auto sales drop still feels like a win

U.S. sales of cars and light trucks fell 0.3 percent in May, but the month still felt like a winner for many industry participants as a big Memorial Day weekend erased fears of a much steeper drop after a slow start to the year.

If May results turn the tables on market pessimism, that could put some wind in the sails for the second half, barring a major disruption from auto tariffs the Trump administration is threatening against Mexico in particular and most of the world in general, analysts said.

Retail customers appeared to be holding back before the month's sales rallied to 1.59 million by the end of the holiday weekend.

"As each week progressed, the month was actually headed in the wrong direction," said Jeff Schuster, president of vehicle forecasts for LMC Automotive. "It was a big, blowout Memorial weekend. Holidays tend to be, but it has been usually more July 4 that gets the big boost than Memorial."

Final figures on incentives and fleet sales were still being analyzed last week, but Schuster and other analysts said that taken as a whole, the industry didn't appear to pull too many tricks to push product in May, aside from some late-month incentives.

"This appears to be a retail story for the month, and that appears to be where the boost came from, not necessarily on the fleet side," said Schuster, putting fleet sales at essentially flat compared with May 2018. "I have to believe that incentives are up," he added, based on the breakout holiday weekend and pickup sales.

ALG estimated that fleet sales would be lower by about 1 percent at 314,116 units compared with a year ago, and industry incentives would be lower by 10 percent on average at $3,359 per vehicle. Deutsche Bank put fleet sales up 11 percent in May compared with a year ago and incentives mostly flat.

The seasonally adjusted, annualized rate of sales in May came in at 17.4 million, well above the average 16.9 million forecast. That is up from 17.3 million in May 2018 and April's 16.4 million pace. The SAAR has slipped below 17 million three months this year, an early sign that the U.S. market continues to cool after four straight years of sales above 17 million light vehicles.

Edmunds noted that interest rates for new vehicles dipped to their lowest level this year in May at 6.1 percent on average, compared with 6.3 percent in April. That was partly attributable to a bump in 0 percent financing deals from automakers in May.

The no-interest deals covered about 5.7 percent of financed transactions compared with just 3.2 percent in April.

May sales are considered a harbinger for the rest of the year due to traditional strength heading into summer. In May 2018, the industry chalked up a 4.7 percent gain before finishing the year in the plus column: up 0.6 percent.

"If there's a month certainly in the first half of the year where I want the industry to perform well, it's May, no question," said Tyson Jominy, managing director of the Power Information Network at J.D. Power. "It still doesn't mean we're going to be up for the year, but at least it kind of breaks the malaise we've been in all year."

Some analysts said it's possible that last month could have matched or beat the year-ago results, based on the need to estimate some sales results.

"I'd say primarily it's more of the same, but we did have an up month, which is nice because we didn't have one of those in a while," said Karl Brauer, executive publisher of Autotrader and Kelley Blue Book. "Technically, we don't know what Ford and GM did, so sales are possibly flat or slightly down, but what we do know is the month was good in perspective with the last six months."

Brauer was cautious about May fleet sales, however, noting that Honda was down sharply, perhaps because it does not participate in fleet sales.

Rival Toyota, on the other hand, saw a jump in fleet and overall sales, as did Fiat Chrysler. Ford, with a smaller estimated fleet boost, and General Motors with a projected fleet decrease, saw overall sales fall last month.

"Having strong sales numbers is great, but if it's less retail and more fleet than in years past, then automakers are pulling the fleet lever," which could lead to lower profits, Brauer said. Subaru, on the other hand, surprised again with lower fleet sales, lower incentives and overall sales gains, flexing its brand image.

Any optimism gleaned from May's results could fade if Mexican exports to the U.S. are hit with a tariff beginning this week — starting at 5 percent and potentially escalating to 25 percent in the following months — along with the continuing fallout from the Trump administration's trade battle with China and threatened tariffs on all auto imports. "I don't think we've ever had a year with more massive variables," said Brauer.

"If these come into play, that's going to have all kinds of implications for the year."

Jominy thinks the fallout could be limited in the short term, since automakers could absorb some of the tariff cost by cutting back on incentives and spreading increased import cost of around $300 a vehicle across their entire lineups. But if tariffs of 25 percent are applied to a swath of nations, the outlook would be far more problematic.

Barring a broader trade war, and given the auto industry's relative incentive and inventory discipline compared with the last downturn a decade ago, Jominy remains pretty positive. "Even if we go down 2 percent for the year, we would still be at extraordinarily high levels of industry volume."