Mike Colias and
The U.S. auto industry suffered its first annual sales decline since the financial crisis eight years ago, but a streak of strong profits is expected to overshadow a slowdown in dealership traffic.
Though sales fell 1.8% last year as pent-up demand declined and interest faded in sedans and compact cars, auto makers still sold 17.2 million vehicles in 2017, the first time the industry has cleared the 17-million mark three consecutive years, according to IHS Markit. Buyers took advantage of low gasoline prices and loan rates, flocking to pickups and sport utilities—a trend that delivers much higher margins to Detroit and its foreign rivals.
Vehicles now routinely sell for above $32,000, even with average incentives of $4,000 factored in, according to J.D. Power. That is 10% higher than what car buyers were dishing out when the industry’s rally began in 2010.
The domestic car business is far healthier than the last time volumes slipped. A decade ago, General Motors, Ford and Chrysler were saddled with high labor costs and a glut of unpopular models, making it more difficult to effectively manage even a modest downturn. GM and Chrysler eventually shed much of their fixed labor and health-care costs through stays in bankruptcy court.
Still, industry executives remain concerned that last year’s decline could prove more than a modest blip.
Rising interest rates, less pent-up demand and a potential decline in the value of used cars—which buyers often trade in when buying a new vehicle—could further pressure sales. That could prompt car makers to scale back production even more and ratchet up discounts and rebates.
IHS expects sales to slip to 16.9 million vehicles this year, which is still historically strong for an industry long exposed to far more volatile boom-and-bust cycles.
“If you launched someone from another planet and landed them in America, you’d have to say some pretty optimistic things looking at the car business,” Scott Keogh, Audi AG’s U.S. sales chief, said Wednesday. However, he said competitors could get burned if the softer market leads to an aggressive price war.
Executives have reasons for optimism as employment gains are leading to wage growth in certain pockets of the U.S. The federal tax cuts and a robust stock market could provide more spending power for people in the mood for a new vehicle. “Many consumers will see their take-home pay rise because of tax reform,” said General Motors Co.’s chief economist, Mustafa Mohatarem. “That will keep the broad economy growing, and help keep sales at very healthy levels even as the Fed increases interest rates.”
Toyota Motor Corp. , issuing a relatively rosy outlook on the U.S. market, said sales could top 17 million this year. “We’re really bullish on 2018 and, as with anything, the economy is going to keep fluctuating,” said Toyota’s U.S. general manager, Jack Hollis.
Still, vehicle makers are reducing North American production, including a broad pullback in the U.S., in anticipation of a softer market. North American output is expected to fall 2.3% in the first quarter, according to WardsAuto.com, a move aimed at trimming dealer inventories and lowering the supply of sedans and compact cars that are unpopular amid low fuel prices.
Because revenue is booked as cars leave the factory, auto executives need to exercise restraint on production to maintain profitability levels as the car market slows. Ford Motor Co. and GM are expected to outline their financial outlooks for 2018 later in January.
December sales fell 5.2%, according to Autodata Corp., as the makers had one fewer selling day and faced a stiff comparison to December 2016. The seasonally adjusted annual selling rate hit 17.9 million vehicles last month, the latest in a string of relatively robust monthly SAARs after a sluggish start to 2017.
GM’s sales for the month slipped 3.3% compared with the same period a year earlier, but the company posted solid gains in pickup trucks and crossover sport-utility vehicles. Ford reported a 1.3% increase in December, including a 2% rise in sales of the company’s F-series pickups—the nation’s top-selling model—and an 8% increase in SUVs sales.
GM and Ford, the two largest sellers in the U.S., are trying to manage a balancing act of maintaining strong margins while slowing production and spending big to offer bargains. GM, for instance, is offsetting incentive costs by selling a higher concentration of more-expensive models. The average price paid for a GM vehicle in December exceeded $38,000, a record for any month, the company said.
Fiat Chrysler Automobiles NV sales fell 11% to 171,946 vehicles in December, because of a planned reduction in fleet sales, down 42% from a year earlier. Sales declined across most of the maker’s brands for the month. Japanese auto makers posted lower sales, with Toyota declining 8.3%; Honda Motor Co. falling 7%; and Nissan Motor Co. sliding 9.5%.
Each of the Japanese companies were hurt by a continuing consumer shift away from sedans, which make up a larger proportion of their lineups compared with Detroit.
Among the chief concerns for industry competitors is a potential bump in interest rates this year, which would likely make car loans more expensive. Automotive executives played down the effect on vehicle demand, saying monthly loan terms should remain manageable for most buyers, helped by the tax cut and other factors.
“It’s a headwind, but a very minor one,” Ford chief economist Emily Kolinski Morris said.
The average interest rate on a five-year loan is expected to rise to 4.85% by the end of 2018, from 4.43% at the close of last year, according to a survey of banks by Bankrate.com. That would be the highest level since early 2012. The estimate is only for commercial-bank loans to consumers and doesn’t include subsidized rates offered by dealers or auto makers, which often go below 3%.
Write to Mike Colias at Mike.Colias@wsj.com and Adrienne Roberts at Adrienne.Roberts@wsj.com
Corrections & Amplifications
Nissan Motor Co.’s sales slid 9.5% in December to 138,226 vehicles. An earlier version of this article incorrectly gave Nissan’s December sales total as 121,847 vehicles. (Jan. 3, 2018)