GM car inventories are as high as they have been since November 2008. Ideal inventory levels are 60 days but 8 models have over 110 day’s of inventory.
As a result, GM is idling five plants for one to three weeks.
Please consider General Motors Will Idle 5 U.S. Factories Next Month.
General Motors will idle five of its U.S. factories for one to three weeks each in January, as it confronts high inventories that have drawn concern from analysts.
As first reported by Automotive News, GM will idle factories in Michigan, Ohio, Kansas, and Kentucky to reduce inventories. GM had an 86-day supply of new vehicles in the U.S. as of Dec. 1, up from 70 days’ worth a year ago.
A GM spokesperson told Automotive News that the company is aiming to get supplies back down to about 70 days’ worth. For most car models, about 60 days’ supply is generally considered ideal.
GM’s inventories as of Dec. 1 were the highest they’d been in eight years — since November of 2008, in the midst of the economic crisis. The huge inventory was despite generous incentives: GM’s spending on incentives in November was almost $4,900 per vehicle, up about 35% from a year ago. (The overall industry average was up about 19% year over year.)
Negative Equity
As incentives increase, residual values of used cars dive.
Zerohedge noted last month that a Record 25% Of Used Car Trade-Ins Are Underwater.
Zerohedge accurately commented “since most people simply roll their negative equity into their new loans, many used car buyers are likely sitting on loans where ~15-20% of their outstanding balance simply reflects their negative equity from their previous car.”
Lovely.
And with increased incentives (with even bigger incentives coming), the value of those new cars people just bought are sure to increase that negative equity.
About Those Supply Numbers
By the way, all those day’s supply numbers assume sales will keep up at the current pace.
Why should they? And if they don’t, GM will have to idle plants longer, provide even greater incentives, or both.
Fed Going to Hike Three Times?
Retail sales, led by autos, was point number five in my December 17 article Five Reasons Fed Won’t Hike Even Twice in 2017.
Mike “Mish” Shedlock
They are off for 1 week for the holidays anyway. The dealers are open, but I’ll bet they are trying to figure out what to do with all those cars coming off lease. Prices are going to drop and I hear that they are trying to figure out a way to lease used vehicles. They are way out beyond their customer base now and God knows how long that is going to last.
It isn’t a suprise that GM, Chrysler/Fiat are building up inventory. Reliability with these brands is low in general. Consumers can not afford down time and tend to look to more reliable models.
Agree that auto sales (new and used) are really weak… but think the link to Fed funds rate is very weak.
Auto loans are either kept on the car manufacturers balance sheet (maybe in their financing division) — where they are heavily subsidized… or else they are put into ABS deals, where the interest rate reflects market rates and default estimates. In either case, banks do not finance car loans (except temporary warehousing of loans as they go into an ABS deal). GMAC or Ally Bank or whatever it is called this week will continue to issue ABS debt at market rates, because they have to.
The Fed doesn’t lend to consumers (no matter what the interest rate). Uncle Sam already pays ~2.5% for 10yrs, consumers with negative equity in their cars are going to pay much much more — regardless of what grandma Yellen thinks.
Obama’s “cash for clunkers” program had a big price — the bill is just coming due now. Next comes the bill for “free” Obamacare, which will bankrupt consumers and Uncle Sam alike.
which automakers have their own financing divisions? GMAC was sold off years ago.
GMAC is now called Ally Bank, it still exists and it advertises on TV/radio.
Ford Motor Credit still exists.
Honda Motor Credit still exists.
Toyota Motor Credit still exists.
BMW has a north american finance arm.
Daimler Benz North America Credit Corporation has an office down the street from me.
…All the car companies have financing divisions. Some have changed their name.
PS — GMAC was not “sold off” as you claim.
it went bankrupt. As part of the most recent taxpayer bailout of GM (there have been many since GM first went bankrupt in the 1970s) — federal agencies seized GMAC and Ditech mortgage. GMAC and Ditech were recapitalized (eg taxpayers took massive losses) and then merged to be Ally Bank…
And in the “GM will never learn” department:
http://www.cbsnews.com/news/general-motors-to-buy-ally-financial-assets-for-425b/
GM bought the their financing arm back, ready to lose money and get another taxpayer bailout during the next recession.
Government Motors makes its money off taxpayer bailouts now, not cars
Why do so many people buy new cars while still paying off the previous one resulting in negative equity ??
I’ve bought and paid off three new cars in my life. All three were paid off in 3 to 4 years. The first one I drove for 12 years. The second one I drove for 11 years and the third one I have driven 11 years and still driving.
They lack the ability to postpone gratification.
They have a warped sense of gratification.
My gratification is driving a debt-free car, living in a debt-free home, living a debt-free life and increasing my nest egg…. not broke from trying to gratify my inner child with the newest toy.
I believe that it has become a cultural norm that a person will be in debt for their car, student loans, and possibly mortgage for their entire life. As a result, the debt causes less pain. Really we have been conditioned for a life in debt.
I used to not care, but now that I have a family and understand what is truly important, I’m just trying to make it through this lease so that I can buy something used outright and then just keep it up until I need another one.
According to the classic book, “The Millionaire Next Door”, self-made millionaires tend live modest lives… driving used cars because it makes more economic sense to avoid the initial depreciation which begins when you drive a new car off the lot. They also live in modest homes because they realize that one’s own home [as opposed to rental properties] is a liability, not an asset [Robert Kiyosaki’s “Rich Dad/Poor Dad”]
Some people might ask… what is the benefit of having money if one can’t live in luxury.
Speaking personally, my modest living has enabled me to have the greatest luxury of all… freedom and independence.
Well my wife’s jeep finally died after 18 years. It is no longer feasible to actually drop anymore money into her. So off to the dealers we went. This time she wants a truck. I was like really a truck. She likes mine, can haul all of her friends, sits up higher to see the road. Of course it must be a crew cab four door like mine with the short bed. I look online at inventory and off we go to look for her truck, Used of course.
At every dealer they had program trucks galore. The only problem is they were diesel and it cost more then premium fuel in this state. Sad actually because I prefer diesel trucks. We look at some new ones as well and I was floor a dam truck costs 68k. Of course paying cash for a new vehicle you do not get any of the incentives, cash rebates because they want you to finance the vehicle. Depreciation on trucks is enormous.
She finds her truck a dodge ram 1500 limited and we end up paying 32k for it. 2015 model fully loaded. A year ago it costs 62k. She got her Christmas present. Cash really talks in the used market still.
You can buy new full size pickups for a lot less than $68k. They start at around $25k near me.
$68K is outrageous. $32K or $25K may seem like bargains… but even that is a lot to pay for an item with a limited lifespan. I only paid $35K for my first house in 1988 [a nice 1100 sq ft three bedroom brick.] I paid $135K for the nice 2200 sq ft four bedroom brick I bought in 2001. I paid 17K for the Honda I have been driving for 11 years.
Is this a surprise? We are in a poor economy. The scammy way of reporting car sales by reporting sales to dealers has caught up with them. (There isn’t any more room to park the new cars at dealerships in Oxford, MS. Some has rented parking in empty lots.)
The fact is that cars and trucks are becoming too expensive for the average consumer. Costs have steadily risen for the last eight years but wages are stagnant or declining. My Toyota Tacoma was 25K in 2010. The same vehicle is $35K today. Manufacturers are pricing themselves out of the market. I do not need a talking internet ready, cameras everywhere vehicle to get around.
They don’t have much choice in the matter. Uncle Sam wants 35MPG and rollover safety, backup cameras and airbags galore. Consumers still want merging onto the interstate to be a non-white knuckle experience. So we get turbo chargers and other complexities added to engines, 7-8-9 speed transmissions, loads more steel (check curb weight on most new cars and compare to cars of the 1980s. They’re downright obese), and gadget filled interiors. A basic car like a Dodge Colt or VW Rabbit (Golf) can’t exist.
“By the way, all those day’s supply numbers assume sales will keep up at the current pace.”
…
Excellent point which few (if any) analysts make.
Another point needed to make is that shutting down these end production plants will have a rippling effect … they are hundreds (thousands) of small / midsize / large companies that feed these plants parts.
Is the issue that their sales fell, they turned up their output, or that no one noticed that cars were piling up and they should slow down production, cut overtime, etc.?
With automobiles making up such a large component of the economy, a 2-3 week cut in production should show up in lower GDP for the first quarter of 2017. And in general the first quarter is one of the slowest times in the car sales business. The list of cars shows luxury is taking the biggest hit. This is consistent with a slowing economy. It will be difficult for statisticians to ignore recessionary data.
Maybe somebody needs to tell GM’s dealers that they’re oversupplied.
According to Truecar, there aren’t any real discounts on the vehicles listed. The best deal on a LaCrosse was actually 1% above MSRP.
By contrast, vehicles with real oversupply issues like the Nissan Leaf are about $7k off MSRP.
I did smile six weeks ago when GM announced dumping 110,000 cars on dealers and justifying it by saying that it was in preparation of sales ratcheting up. The car industry and its 5 and 7 year loans is the new sub prime crisis. The only difference with 2008 is scale and the fact these loans have not been diced, spliced and collaterised, or have they? Despite the undoubted increase in car sales up to October, the average age of the car on the road has continued to creep up to a new high.
The new vehicles are all way to pricey compared to wages.Thirty to forty grand for a pickup truck.Insane.