BofA Says 1995 Outlook For U.S. Auto Sales is Mixed.

SAN FRANCISCO--(BUSINESS WIRE)--Feb. 6, 1995--During the first six months of 1995, U.S. automobile sales, which include both passenger cars and light trucks, are expected to be strong, but then the pace will slow in the second half of the year, according to Jeanette Garretty, vice president and director of Industrial Economics at Bank of America.

For all of 1995, Garretty is forecasting that total U.S. auto sales will increase by only 4 percent to 15.8 million units, which is less than half the growth rate of 1994, and that light trucks sales will continue to grow faster than those of passenger cars.

In other predictions, Garretty says that in 1995:

-- U.S. passenger car sales, including both domestic and import models, should grow to 9.4 million units, a change of 3.2 percent compared to 1994 totals. Sales of domestic passenger car models in the United States are expected to represent 7.4 million units of that total, an increase of 4.2 percent over 1994 figures.

-- U.S. light truck sales are expected to be 6.4 million units, a change of almost 5 percent over 1994 totals.

"One of the most significant underlying assumptions in this outlook is that the light truck market currently is siphoning buyers away from the passenger car market, especially potential buyers of luxury car buyers, and that this trend will continue," said Garretty.

"Although there always has been a concern about the overpopulation of models in the luxury car marketplace, it is unlikely that many in the industry expected sport-utility vehicles to be the cause of the downsizing of luxury car production. Nevertheless, at least a few auto manufacturers are expected to explore ways of reducing luxury car production and increasing light truck production in 1995," Garretty added.

"Given the lemming-like nature of both car design and strategic vision, it seems only a matter of time before the proliferation of light truck models runs into market resistance. But, in good economic times, such as we are now experiencing, the auto industry is overwhelmingly product-driven -- and sport-utility vehicles, minivans, and other light trucks are clearly the products of this auto cycle," Garretty pointed out.

The other key assumptions of the 1995 auto outlook, said Garretty, are for slowing economic growth and rising interest rates over the course of the year, limiting the improvement in consumer pocketbooks and attitudes, and making the auto market more and more of a buyer's market toward the end of the year.

At the moment, consumer confidence is quite high, buoyed by rising incomes and falling unemployment. The results of the November 1994 elections also appear to have boosted consumer spirits, especially in light of the fact that much of the discussion coming from Congress and the White House, thus far, has been about such popular items as tax cuts and government reform.

Sooner or later, however, the realities of rising interest rates, slow or less-than-anticipated tax relief, and rising costs for a number of goods and services are expected to catch up with the consumer. Against this backdrop, consumer confidence is likely to fall back somewhat, and consumer spending growth will slow, said Garretty.

In particular, if wage and salary growth does not rise as the economic expansion continues across 1995, consumers can be expected to return to some of the pessimism, and price sensitivity, of 1993 and early 1994.

According to Garretty, forecasting that total U.S. auto sales will reach 15.8 million units in 1995 is based on the view that auto manufacturers will manage their pricing strategies in order to obtain some growth in unit sales, as well as an improvement in profits. There is a strong likelihood of new, but modest, price increases in the spring, while at the same time a number of rebates may be available. If the auto industry opts instead for a series of sharp price increases over the year, unit sales are likely to be well below this forecast, perhaps enough below it to damage industry profitability.

By contrast, if stronger unit sales are achieved through such tactics as the indiscriminate use of rebates that result in a "rebate war," or by a return to subvention financing in the second half of the year, some manufacturers would also face profit problems in 1995 -- and business problems in 1996, Garretty noted.

CONTACT: Bank of America

Jack Houseman, 415/622-5324