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Car sales and consumer spending up, but experts not convinced of trend

By Thomas Heath
Washington Post Staff Writer
Monday, August 30, 2010; 9:48 PM

At first blush, a government report released Monday appeared to offer hope to the nation's struggling auto industry: New-car sales in July fueled an uptick in consumer spending, which had been wheezing for three straight months.

But a closer look at those car sales raises questions about whether the auto market - and consumer spending as a whole - are indeed on an upward arc or whether they are just treading water.

The Commerce Department said Monday that consumer spending rose 0.4 percent in July, boosted by new-car sales, which sold at an annual rate of 11.6 million, compared with 11.2 million in June.

But auto industry experts and Washington area dealers interviewed said that a variety of factors, including a rise in fleet sales and unusually low financing rates, may have dressed up July's car sales.

Uncertainty over the strength of consumer spending left investors in a grim mood Monday. The Dow Jones industrial average lost 1.4 percent, while the broader Standard & Poor's 500-stock index fell nearly 1.5 percent.

Consumer spending makes up 70 percent of U.S. economic activity and is, therefore, a closely watched indicator of the economy's health. Car sales trends often reveal whether ordinary Americans are opening their wallets to make big purchases. Auto sales for August are expected to be released Wednesday.

A big chunk of July's auto sales were due to fleet sales to corporations and to car-rental companies such as Hertz and Avis, analysts said. Fleet sales are often far less profitable than cars sold in showrooms and are not a barometer of consumer sentiment.

Edmunds.com chief executive Jeremy Anwyl called the summer selling season "disappointing" in a blog entry. "After all, this is the year-end clearance season and the deals have been getting better. But apparently they are not good enough to entice recession weary consumers into showrooms."

Anwyl also noted that Chrysler's fleet sales in February exceeded 55 percent of the company's total sales, several times what is normal for an auto manufacturer.

"What we've seen in the first half of the year is fueled more on the rental fleet and commercial fleet sales," said Mike Wall, an auto analyst with IHS Automotive, a consulting firm that provides vehicle forecasting and market research. "On the new-car retail side, I think you are still seeing consumers largely hunkered down. They are still in the mode of trying to pay debt and trying to save. They are not engaged in the market yet."

Jack Fitzgerald of Fitzgerald Automotive Group, based in the Washington area, said auto buyers are careful and unemotional compared with a year ago, when the "cash for clunkers" government program caused a big spike in sales.

"I think you are seeing 'need' buyers," he said. "The average car on the road is 10 years old. You are seeing people are buying cars who need them. They might have traded sooner because they wanted something, but people are more cautious right now."

But Tammy Darvish, vice president of Silver Spring-based Darcars, one of the largest auto dealership chains in the country, said consumer interest has heightened since last year, mostly because of the availability of cheap financing.

"If you recall a year ago, credit was so tight and it was so difficult for people to get car loans," said Darvish, adding that almost no one is offering rebates and other profit-destroying incentives. "If you had a credit score under 600, [you] couldn't even stop into a dealership. Whereas now, there are many opportunities for those consumers to be financed."

Used-car prices are climbing as well, selling for the highest average price in at least seven years, according to Edmunds.com, a signal that consumers may be turning to cheaper alternatives to new cars. Yet Fitzgerald said he thinks September and the fall sales season will be stronger this year, mostly because the "clunkers" program last August left a new-car sales hangover that lasted for several months.

"You will see September significantly better than a year ago, I think, I hope," he said. "If not, then maybe we will have some concern."

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