GM Economist Upbeat Even as Auto Sales Sag, Inventories Grow

May 05, 2017 by Ryan ZumMallen, @Zoomy575M

After two years of record sales, car companies may have encountered peak auto.

Through the first four months of this year, U.S. auto sales are running 2.4 percent lower than the same period last year.

Inventory levels are also ballooning. Automotive News reports that U.S. new-vehicle inventory hit 4.19 million vehicles on April 1, the most to begin a month since 2004. GM said its inventory level rose to 100 days of supply at the end of April versus around 70 days at the end of 2016.

Most analysts believe auto sales will fall below the record 17.5 million annual pace of the last two years.

So why was Mustafa Mohatarem, GM’s chief economist, smiling so broadly when he sat down recently to discuss the state of the U.S. auto market with

Has the industry hit a plateau?

Remember, we’re at a record high. So if we hit a plateau at a record high level, I’m quite happy with that outcome. The fundamentals of the economy remain very, very strong. If the fundamentals are strong, I’m very comfortable with where we are in the marketplace right now.

Eventually the cycle will slow down. No question about it. But right now, the job market is so strong. Instead of hearing about lack of jobs, all of a sudden it is a lack of employees. That’s why consumer confidence is so strong, because people are feeling very secure in their jobs. That’s why small business confidence is very high. People forget that about a third of the vehicles are purchased by fleets.

Now, we’re still facing challenges. We’ve got a brand new Cruze, a brand new Malibu out there, and customers aren’t rushing to buy those like they are rushing to buy the smaller crossovers.

Credit is tightening, inventories are growing. Aren’t those negative signs?

As [GM president, North America] Alan Beatty explained, we’re getting ready to redo the big full-size pickup trucks later in the year, so we’re going to have a lot of down time. In the down time, we have to build up inventories. Our goal still is to end the year where we started, at roughly 70 days’ supply of vehicles, so you’ll see our truck inventory rise just because we’re stocking up in anticipation that we’ll have plants down.

Is temporarily shutting down some plants part of the re-tooling plan?

Yes. It’s happened throughout the year. We’re coming out with the new Equinox and Terrain, so we have to build up inventory in the old Equinox and Terrain while we ramp up production. Later on, we’ll do the same with bigger crossovers, the Enclave and Traverse. It’s going to be staggered through, you don’t want to do everything at the same time. Then it will be the full-size pickups. It’s a completely new generation of trucks.

If sales continue to decline will GM cut production to ensure profitability?

Yeah, and we’ve done that already. We’ve taken out some shifts in the car plants, where we’re still struggling to add production of the crossovers.

Looking at the prices of automaker stock, investors are more nervous than you are. Why?

It’s one of those interesting things throughout this recovery. Investors haven’t bought into this recovery like they should have. But as [GM chief executive] Mary Barra says, we have to demonstrate through the cycle that we can be very profitable. Until investors see that, there will always be that concern that the market is softening and therefore the profitability will erode rapidly.

I go back to [economist] Milton Friedman. I was lucky enough to take the last class he taught out at Chicago. Somebody asked him about the stock market and his response was, “Show me an economist trying to explain the stock market and I’ll show you a quack.” There’s nothing in my toolbox that says how potential investors will react to news. All we can do is continue to deliver solid results as we’ve been doing.

Is the popularity of crossovers, SUVs and trucks a boon to GM because they’re so profitable?

Absolutely. What you’re beginning to see is people are taking out capacity for cars and adding capacity for crossovers. In our industry with its long lead times, it takes a while for that type of transition to take place. It’s much easier in a place like China, where the market is growing so rapidly that all the new growth can be absorbed by crossovers without negatively impacting cars. In our market, which is plateauing at a very high level, if something goes up then something else has to come down.

Related: GM North America President Batey Talks Trucks and Trump

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