FORBES:Car Sales Go Zoom!

Dan Ackman, FORBES.COM

In Detroit, the recession can wait.

U.S. auto sales surged to record levels in October, despite the general economic downturn and terror attacks of Sept. 11, as consumers took advantage of zero-interest financing offers and demonstrated faith in a future unseen by the much ballyhooed consumer confidence surveys.

But automakers still took a moment to crow. "'Wow' is the appropriate word,'' said Paul Ballew, General Motors ' director of market analysis.

Sales of cars and light trucks rose 24.4% over October 2000 and hit a seasonally adjusted annual rate of 21.3 million, an all-time record--beating the September 1986 sales of 21.2 million. General Motors said its vehicle sales rose by 31% overall and truck sales climbed 46%. For Ford , vehicle sales were up 36%. For Daimler Chrysler , which offered more limited financing deals, sales were up 5%.

Most foreign automakers also reported an increase in sales, even though many did not offer the same zero-interest financing as the American firms. Honda Motor reported a 19% sales rise though it offered no zero-interest loans. Toyota Motor sales were up 27.5%, even though it offered the low- or zero-rate terms on just a few models.

Hyundai sales were up a stunning 88%. On the other hand, luxury carmakers Mercedes, BMW, Land Rover and Porsche--all of whom represent a small fraction of the overall car market--all saw sales decline.

U.S. makers have gained back market share, reversing a recent trend.

The record sales were spurred by a price "war" that General Motors started after Sept. 11. The competition seems likely to erode profits at the Big Three carmakers, though the effect of last month's sales on the company's bottom lines has not been reported. Some car company analysts say the effect of the sales incentives may be short-lived as consumers are taking advantage of bargains to buy cars now rather than next month or next year.

Of course, that's the whole idea: Detroit is encouraging people to buy cars and it's working in fairly spectacular fashion.

GM has said already it may extend its interest-free financing deals. Chrysler said it would offer a new, seven-year 100,000-mile warranty on its vehicles' engines, transmissions and the rest of their powertrains through the end of the year. But industry analysts fear that the higher sales in the short term will end after the incentive programs expire--as they eventually must.

"'Unsustainable'-- that's the word for it," says Greg Kagay, an auto industry analyst for ABN Amro. He predicts a "tough road ahead," and predicts auto sales in 2002 will fall to 13 million, from a projected 17 million this year.

But Kagay admits that he and many of his colleagues have been flummoxed quite a bit lately. "We were looking for a really strong dip immediately after [Sept. 11] and we were wrong about that." He also says: "Normally at any given time I personally know only one person in the car market." Now he knows several who say the deals are great and they are looking to buy.

Kagay adds that the incentive programs have energized and excited local dealers--who have changed their behavior, keeping showrooms open longer. Even carmakers who have not offered new bargains have benefited from a spillover effect.

For the Big Three carmakers, inventory levels are down--which is good news. But they will not necessarily increase production right away because they, too, don't know how long they can sustain their current pace.

Still, the boom flies in the face of recent a U.S. Commerce Department report yesterday that U.S. consumer spending fell at its fastest pace in more than 14 years in September. The auto industry is just one industry and October is just one month. Carmakers have reported fewer profits--but that may change too, as the recent sales are booked. A new car purchase can almost always be delayed for a few months, or even years--but consumers aren't waiting.

"There's nothing more optimistic than a new car," Kagay says.