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Build Up in Auto Inventories Could Be Troubling For US Economy

Recently, automotive sales tracking firm ALG Inc. warned that auto inventories have reached their highest levels since the depths of the recession in August 2009. The inventory build up has raised concerns over the health and strength of the recovery of Detroit’s big 3 Auto makers and has lowered expectations for future economic growth.


Inventory levels have long been watched as an indicator for Macroeconomic trouble. A rise in inventories occurs when the planned expenditure for the economy is greater the actual expenditure that occurs. Every quarter businesses decide production levels based on the amount of goods they predict they can sell. Inventories rise over time when the quantity of goods the business plans to sell consistently outpaces the actual quantity sold. This phenomena is often caused by decreased consumption levels.

A typical response to decreased consumption would be a corresponding decrease in production; adjusting the supply to meet the quantity demanded. Yet, “none of the auto makers say they plan to reduce production to counter the inventory overhang.” With production levels remaining where they are and inventories rising, there is a growing incentive for auto-makers to cut prices in an attempt to clear their dealership lots. However, the balancing act of cutting prices without committing to a profit killing price war is making investors nervous. Many are concerned the “new discounts will undermine the rising prices that have helped General Motors Co., Ford Motor Company, and Chrysler Group LLC rebuild profits over the past three years.” This slowdown in sales, accompanied by a price decrease triggered by the excess supply, could threaten to end the fragile recovery of the American Auto Makers.

On a larger Macroeconomic level, the decrease in consumption is a cause for concern and has lowered future growth forecasts. The recent decline in consumption and the corresponding decrease in production raise concerns over the health of the recovery because consistent, solid GDP growth will be key in raising confidence in the economy and returning investment spending back to pre-recession levels.

WSJ Online


  1. James dillard James dillard

    Generally speaking, auto sales have been increasing and companies in Detroit seem to be on the up. With inventories rising I understand this will simultaneously engender doubts about future but hopefully these doubts will be quelled, I truly believe. The economy is in a state of disarray with the Fed’s new forecasts on curbing past levels of aid, but Chairman Yellen must be careful considering we are, to quote the old maxim, “skating on thin ice.” The Fed makes mistakes but with housing up, job levels increasing, and the stock market seemingly bullish, car sales generally follow this trend as well.

  2. Are higher inventories a function of slower demand or (optimistic) faster supply? Note there are also model year effects with inventories sometimes higher at the end of a model year to offset a period when production will below prior to new models arriving. Then there’s the weather. So what we’d really like to know is the planned inventory level of the auto companies. Nevertheless, the buildup in inventories is very sharp, and at 100+ days is well above the “healthy” 60 days level. I’m off shortly to see what the current rebates are on Ford Fiesta’s….

    • Visited several dealerships the past few days, they are quite worried about inventories, better weather will help but they don’t see a lot of people looking relative to the number of cars they’ve ordered, and players such as Honda have new capacity and Toyota is already selling more into fleets … I’ve now driven several at Enterprise.

  3. gjeong gjeong

    Although the level of inventories is increasing, I do not think it hit its critical level yet. As we are still recovering from the financial crisis, our consumption level has been rising as well. I think the big 3 have been making profit these days as the demand has been increasing? (I am not sure)
    At the same time, if auto manufacturers predicted this to happen, then why are they keep on building so many cars?

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