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Can U.S. Auto Sales Recover in the Second Half of 2017?

U.S. auto sales declined for the fourth successive month in June, coming in below most analysts' estimates. Substantial discounts and easier loans failed to entice a greater number of consumers. This stretch of declines has lead to speculation that sales in 2017 will be unable to match up to last year’s record showing.

But shares of automobile companies gained on Monday since consumer retail sales continued to sport stability. Additionally, General Motors Company GM stated that the auto sector would end the year on a positive note. In this context, it is important to identify the factors dragging sales lower and the odds of a rebound in the months to come.

Consumers Prefer SUVs Over Cars

According to industry data provider Autodata, sales for June declined 3% to a seasonally adjusted level of 16.51 million units. Sales declined 2.1% during the first half of 2017 from the same period last year. The figure is significantly below the level of 17 million achieved in 2015 and 2016. Additionally, it is the lowest level experienced since Feb 2015 and represents a 2% year-over-year decline.

June’s data also revealed that U.S. retail consumers are preferring to purchase larger vehicles such as SUVs, crossovers and pickup trucks. In the process, passenger car sales have been affected. Meanwhile, the average length of a car loan hit a peak level of 69.3 months in June. This increases the financial risk for car buyers.

Falling Rental Sales Cause Overall Decline

Another reason for the decline in car sales was a significant change in industry leaders’ approach to their operations. During 2016, when sales hit a record level of 17.55 million, automakers had used easier loan terms and hefty discounts to lure customers. But with companies from the sector now focusing on lifting profit margins, low margin sales such as those related to car rental agencies are no longer a priority. In fact, the likes of GM have moved to cut back on such sales.

As a result, GM’s sales declined by 4.8% from the same period last year. But the auto major emphasized that the industry would experience a pickup in sales during the second half of the year. A 13.9% drop in sales to businesses, government agencies and rental firms led to a 5% decline for Ford Motor Company’s F June sales number.

Sales of Fiat Chrysler Automobiles N.V. FCAU dropped 7.4% year over year. Japanese automakers, Toyota Motor Corporation TM, Nissan Motor Co., Ltd. NSANY and Honda Motor Co., Ltd. HMC experienced year-over-year increases of 2.1%, 2% and 0.8%, respectively. Each of these carmakers carries a Zacks Rank #3 (Hold). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

Economic Strength, Low Gas prices to Lift Sales

According to GM’s Chief Economist Mustafa Mohatarem, a fall in rental agency sales has led to a decline in the overall sales number for the auto industry. However, economic strength remains intact, which is why Mohatarem thinks sales trends will remain strong in the immediate future.

Overall, industry insiders as well as analysts think total U.S. auto sales for the year will lag the figure logged in 2016 by around 500,000 to a million units. Auto companies are preparing to deal with the fall in demand by reducing production, headcount and incentivizing sale of unsold vehicles.  But given the health of the economy and cheap fuel prices, a considerable decline is unlikely to take place in the second half of 2017.

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