July auto sales to start recovery

By Clare Baldwin

DETROIT (Reuters) - July auto sales should show an improvement from the past two months as the industry recovers from supply chain disruptions in Japan, but it could be a long time before the industry is fully back on track.

A March earthquake, tsunami and nuclear crisis in Japan disrupted the supply of key auto parts and forced automakers to idle plants and cut output. That resulted in fewer incentives and higher prices for consumers, who failed to buy as many cars in May and June as economists predicted.

Two years after the end of the U.S. recession that saw GM and Chrysler Group LLC seek bankruptcy protection and government bailouts, the economy remains in turmoil. Unemployment is above 9 percent, manufacturing output stalled in June and U.S. consumer confidence hit a near 2-1/2 year low earlier this month.

Now, as Japanese factories come back online and inventories recover, executives and analysts said that will change, albeit slowly.

"We think we're probably going to be into late August, early September before we get back on trend," General Motors Co's U.S. sales chief Don Johnson said in an interview last week.

Auto sales are an early indicator each month of U.S. consumer demand. The final tally for U.S. sales in July is scheduled to be reported on August 2. GM is also due to report second-quarter earnings on August 4.

July sales, expected to hit an annual rate of about 12 million vehicles, should mark the beginning of a recovery from a bottom in June, they said. That is still less than the 13 million-plus pace from earlier in the year.

Consumer confidence is being hit by uncertainty over the government's ability to meet its debt obligations, Johnson said. While he expects a last-minute debt deal, he said the uncertainty is bad for business.

GM and rival Ford Motor Co have forecast sales for the year at the low end of 13 million to 13.5 million vehicles. That includes medium and heavy trucks that make up about 300,000 vehicles.

Not everyone is as cautiously optimistic. TrueCar.com forecasts light vehicle sales in July to finish at an annual rate of 11.4 million vehicles, which would be slightly worse than June's 11.45 million.

And Hyundai Motor America <005380.KS> Chief Executive John Krafcik expressed concern about jobs and housing earlier this month, saying he didn't share the optimism of GM and Ford.

However, many see this month's sales rate closer to 12 million. A group with estimates ranging from 11.9 million to 12.3 million includes JPMorgan, Jefferies, Citi and Edmunds.com, and the average forecast of 12 economists surveyed by Reuters was 11.8 million vehicles.

Even if July sales show a recovery, how the rebound is perceived will carry more weight, Citi analyst Itay Michaeli said.

"It's not just about 'having a recovery'; it's about the pace of the recovery and whether that pace is meeting the expectations of the young consumers enough that they buy that second vehicle or, of course, the first vehicle," he said.

"If they don't, it becomes a pretty difficult situation mathematically to get back to a 14- or 15-million" annual sales rate, Michaeli added.

Industry experts said there is significant pent-up demand from individuals and businesses driving increasingly aging vehicles. That, paired with deals, could help drive sales in the second half.

"There are still a lot of vehicles that have 0 percent or close to 0 percent financing available," said Iowa-based GM and Toyota <7203.T> dealer John McEleney. "People know that's not going to go on indefinitely."

But, McEleney said, the deals are less generous and available on fewer models than in the past.

Shortages following the Japan crises caused automakers to cut their incentives, driving up prices, a result that analysts said played a key role in May and June's disappointing sales. Japanese automakers were the worst hit, but the price hikes spanned the industry, TrueCar's Jesse Toprak said.

"There's a real impact in terms of the lack of inventory. That's still lingering," he said. "Incentive spending declined dramatically so consumer deals are not as attractive."

TrueCar estimates average July incentives at $2,418, more than 15 percent behind where they were a year ago.

(Reporting by Clare Baldwin; Additional reporting by Ben Klayman and Deepa Seetharaman; Editing by Richard Chang)