Auto Incentives to Remain High All Summer

Automakers offered record levels of discounts on new cars and trucks last month, lifting sales above most forecasts, and consumers are likely to find even better deals on some models in the next month or so, industry observers say.

On average, consumer incentives rose 11.8 percent in May from a year ago to $3,046 a vehicle, though May's discounts were up only slightly from April, according to Autodata Corp (search).

In a research report Friday, Credit Suisse First Boston (search) analyst Chris Ceraso said he was surprised by the modest 1.7 percent rise in incentive spending from April to May, especially given all the promotions in the past month.

Still, U.S. sales rose 3.4 percent last month, buoyed largely by demand for big trucks and sport utility vehicles and lessening concerns that high gas prices would scare off buyers.

Ceraso said heavy fleet deliveries helped explain some of the upside surprise, as did a surge in incentive spending by Asian manufacturers, who saw sales rise nearly 10 percent, according to Autodata figures. Detroit automakers saw sales rise less than 1 percent.

"The economy was also generally stronger in May than April, particularly for businesses, which contributed to the strength in fleet sales, we expect," Ceraso said.

General Motors Corp.'s (GM) average incentive in May was $4,325, a 2.3 percent increase from April. GM's sales rose 2.8 percent last month.

Ford's (F) average outlay was $3,515 a vehicle, roughly flat from April, and sales fell 2.8 percent. At DaimlerChrysler AG's (DCX) Chrysler Group, the average incentive declined 1.6 percent from April to $3,966, while sales rose 1.3 percent, Autodata figures show.

Asian manufacturers boosted incentives on average to $1,529 a vehicle last month, 8.7 percent higher than April. European brands spent an average of $2,643 on discounts last month, up 16.6 percent from April. Still, sales fell 3.2 percent.

Despite the minimal overall spending increase from April to May, Merrill Lynch analyst John Casesa said the average industry incentive last month was the highest ever. And because vehicle inventories remain higher than automakers would prefer — the result of sluggish business to start the year — Casesa said cash and financing deals are likely to be around for the foreseeable future.

GM and Ford both enhanced their incentive programs earlier this week even before May's sales results were announced. GM customers can qualify for as much as $5,000 in cash on the purchase of most new vehicles.

The two automakers also announced slight production cuts planned for the third quarter.

"Based on recent announcements ... it appears that (manufacturers) are sticking with what works to keep sales up during June and continue to narrow the inventory gap," Casesa said in a research note.