Car Sales Finally Signal Economic Recovery: Auto Companies Could Post Record Profits

US domestic vehicle sales reached a a 27-year low in 2009 when only 10.4 million units were sold. The figure for 2005 was 16.94 million, a period of unusual prosperity. In other words, the car industry is a relatively reliable indicator of overall economic health.

The recovery of car sales in 2010 was modest. Many consumers were over-leveraged from the housing and credit boom in 2005 and 2006. Unemployment last year remained persistently high. US vehicle sales only rebounded to 11.4 million.

January was an unusually good month for domestic light vehicles sales and sets a pace for close to 14 million cars to be sold in America this year. The break even point for most large manufacturers has been brought down substantially so the largest car companies could post near record earnings if the January trend continues

Sales for GM (NYSE: GM) were up an extraordinary 21.8% to 178,896. GM claims that the improvement was due to new models. Better consumer sentiment in the US deserves at least as much of the credit. GM’s market cap is now the same as Ford’s (NYSE: F) When GM entered Chapter 11, that was unimaginable.

Ford kept up its string of strong results, that pushed its 2010 profits to a decade long high. Ford’s January sales rose 13.2% to 127,317, which must have been a disappointment given the gains by its major competitors. Perhaps the best litmus test of the real improvement in consumer spending on cars were the results of beleaguered Toyota (NYSE: TM), the world’s largest car company. Its US sales were up 17.3% to 115,856.  A little less than a year ago, it had trouble giving its products away.

Even sales of Chrysler, a company which is still practically dead financially, were up 23% to 77,018 in January. Chrysler must still contend with Nissan, Honda (NYSE: HMC), VW, and Hyundai, each of which continues to jockey for 10% or better of the market to have enough presence in the industry to not be entirely overshadowed by larger companies.

The car industry may be tempted to add capacity or workers again to keep up with demand. Unemployment is still nearly 10% in the US and gas prices are moving higher. Collapsing to the pressure to increase costs into what still could be a headwind would be a grave error.

Douglas A. McIntyre