Bloomberg News

GM’s Barra Aided by Fed Rates as Congress Blasts Recalls

June 04, 2014

While U.S. lawmakers prepare to grill General Motors Co. (GM:US) Chief Executive Officer Mary Barra again over faulty small cars, the Federal Reserve is helping her company reach the highest monthly sales in six years by keeping its target interest rate at a record low.

GM’s sales rose 13 percent in May, buoyed by the compact Chevrolet Cruze and the redesigned Chevy Silverado pickup and Cadillac Escalade sport-utility vehicle. That was more than double the 6.4 percent rise that analysts had projected. Ford (F:US) Motor Co., Chrysler Group LLC, Toyota Motor Corp., Honda Motor Co. (7267) and Nissan Motor Co. also reported deliveries in May that exceeded analysts’ estimates, with industrywide sales running at the highest annualized pace since before the financial crisis.

Graphic: Auto Sales Surge in May

Car buyers flocked to higher-quality vehicles, encouraged by strong stock and housing markets, rising consumer confidence and decreasing unemployment, said Alec Gutierrez, a senior analyst at Kelley Blue Book.

Leasing has also become attractive, thanks to high prices for used cars and the same low interest rates that have also helped spur home buying. One out of every four cars sold now is leased, Gutierrez said, a 25 percent jump from last year and the highest level since before the recession.

“There’s also an impressive amount of competitive product out there,” Gutierrez said in an interview. “There are great vehicles in every segment and in every category helping drive consumers back into the marketplace.”

Best Month

Last month was GM’s best May in seven years and best month since August 2008, just before Lehman Brothers Holdings Inc. filed for bankruptcy. That may help dispel speculation that consumers would steer clear of the largest U.S. automaker after its recall this year of 2.59 million small cars, produced about a decade earlier, over faulty ignition switches. In all, GM has recalled 14 million vehicles in the U.S. already this year.

Barra, who met with lawmakers in April and May about the ignition-switch recall, will return for hearings after GM completes its internal investigation on the issue, a spokeswoman for Missouri Sen. Claire McCaskill said last month.

Industrywide, U.S. auto sales rose 11 percent to 1.61 million light vehicles in May, researcher Autodata Corp. said, topping the average analyst estimate of 1.54 million. The annualized pace, adjusted for seasonal trends, rose to 16.8 million, the highest since February 2007.

GM rose 0.9 percent to $35.56 at 9:46 a.m. after closing yesterday at a two-month high, narrowing the discount investors pay for its earnings relative to other consumer discretionary (GM:US) companies. Ford slipped 0.3 percent to $16.50.

Optimistic Contractors

Light trucks helped Detroit lead the way, as new pickups by GM, Ford’s SUVs and Chrysler’s Ram and Jeep brands caught a rising market buoyed by improved housing starts.

The pace of U.S. home construction jumped in April to its highest level since November. Housing starts climbed 13.2 percent to a 1.07 million annualized rate following March’s 947,000 pace, the Commerce Department reported on May 16. Permits for future projects increased, a sign activity might accelerate in coming months. All of that promises new income for truck-buying contractors after a lean half-decade.

A slow climb back to early-2008 employment levels has also helped support auto sales, Mark Wakefield, leader of AlixPartners LLP’s automotive practices in the Americas, said yesterday in a telephone interview. The U.S. unemployment rate was 6.3 percent for April, near its lowest level since September 2008.

‘Lot of Headroom’

“There’s still a lot of headroom to grow as there are a still a lot of unemployed out there,” Wakefield said.

Ford’s light-duty vehicle sales rose 3 percent last month, the Dearborn, Michigan-based company said in an e-mailed statement. The automaker’s sales were projected to decline 0.2 percent, the average of 10 analysts surveyed by Bloomberg.

Honda also beat expectations, reporting a 9 percent sales increase, double the 4.5 percent gain that was the average of analysts’ forecasts. Nissan reported sales jumped 19 percent in May, beating estimates for an 11 percent increase. Toyota deliveries gained 17 percent, topping a projected 8.1 percent rise.

Chrysler Cruises

Chrysler’s sales rose 17 percent, the Auburn Hills, Michigan-based company said in a statement. The third-largest U.S. automaker, owned by Fiat SpA (F), was projected to report a gain of 14 percent, the average of eight analyst estimates.

“Our Jeep sport-utility vehicles and Ram pickups continued to do well in May as our dealers reported brisk May sales over five weekends and the Memorial Day holiday,” Reid Bigland, Chrysler Group’s U.S. sales chief, said in a statement. The Jeep brand gained 58 percent while Ram pickup sales rose 17 percent, the company said.

While U.S. auto sales exceeded 16 million from 1999 through 2007, domestic automakers weren’t consistently profitable. Ford reported losses in 2000 and 2001, as well as 2006 through 2008. The old General Motors Corp. lost money (MTLQQ:US) from 2005 until its bankruptcy. Chrysler at the time was part of DaimlerChrysler AG and didn’t report unit results.

New Flexibility

Now, five years after GM and Chrysler filed for bankruptcy and Ford financed its own restructuring, the companies have fewer brands and factories and have more flexibility in labor contracts. Now they can turn profits at lower sales volumes.

The automakers’ margins also reflect the financial impact of increased U.S. energy output, widely available credit and management’s resistance to the heavy discounting car companies long used to prop up sales at the expense of profit.

The result is a lineup of U.S.-made cars and trucks that compare favorably with vehicles made by Toyota, Honda and other foreign manufacturers.

Chrysler’s Jeep, with its updated Grand Cherokee and smaller Cherokee, is outpacing the robust growth of the market for sports-utility vehicles. Grand Cherokee deliveries rose 13 percent in May to 18,068 and Chrysler sold 15,992 of its Cherokee, which debuted last fall. Chrysler’s Town & Country minivan rose 37 percent to 14,799 and the Dodge Grand Caravan, rose 10 percent to 14,232 deliveries in May.

‘Wealth Effect’

Chrysler’s car sales fell 27 percent, hurt by the older version of the 200 and the outgoing Avenger. The 200 is being replaced by a revamped model that began reaching dealers last month. Sales of the compact Dodge Dart rose 16 percent to 8,644.

While there had been concern early this year that interest rates would rise, the persistence of historically low rates amid an improving economy and rising home and stock market values bodes well for auto demand, said Lacey Plache, chief economist for car-shopping website Edmunds.com in Santa Monica, California.

“There’s a real wealth effect going on there. You’ve got people feeling good on the one hand about their ability to save on payments because of interest rates, and at the same time there’s an improvement in the value of their homes,” Plache said. “We’re definitely in a good zone right now.”

To contact the reporters on this story: Mark Clothier in Southfield, Michigan, at mclothier@bloomberg.net; Alan Ohnsman in Los Angeles at aohnsman@bloomberg.net

To contact the editors responsible for this story: Jamie Butters at jbutters@bloomberg.net Jeffrey D Grocott


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  • GM
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  • F
    (Ford Motor Co)
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