Driven by higher incentive levels and greater trade-in values, consumers marched back into showrooms during the first week of October, with floor traffic up nearly 18 percent vs. September and 3.3 percent vs. the year-ago month. Closing ratios jumped 10.2 percent vs. September and 7.39 percent increase vs. the same month last year, reported F&I and Showroom magazine.

“On the back of higher incentives and greater trade-in value, the new-car industry broke out during the second half of September and the opening days of October look to be carrying that good vibe forward,” wrote CNW’s Art Spinella in his monthly e-newsletter. “October could be the high-water SAAR (Seasonally Adjusted Annual Rate) mark of the year, reaching a 14.2 million delivery rate compared to 12.3 million a year ago.”

Concerns about the economy still persist, however, with CNW’s Jitters Index, which measures consumer sentiment regarding home-centric economic issues, edging up 0.8 percent from last month.

“Consumers continue to be concerned about their homecentric economic outlook,” Spinella wrote.

Confidence among shoppers intending to purchase a vehicle was at 74.29, a level that typically signals a need for more incentives. “Historically, this occurred when the confidence number fell below 75 and that’s the case today,” Spinella added.

The auto finance landscape also continued to show improvement. According to CNW, subprime approvals were up 3.8 percent in the opening days of October vs. September, and 8.4 percent vs. a year ago. This marked the first time in months that approvals for that credit segment climbed on a sequential basis.

Additional, the average FICO score of new-car buyers climbed to 691.8 during the opening days of October, compared to 708 last year and 691.4 in September.

CNW also noted that the used-vehicle market may have hit a low point in terms of inventory levels. According to the market research firm, the used-vehicle days’ supply was down nearly 20 percent vs. a year ago. “It appears the industry has reached the low point in inventory volume, which has been followed by softer prices,” Spinella wrote. “That will continue to be the case over the coming few months at least.”

Spinella also noted what is becoming a troubling trend: The gap between MSRP and transaction price is shrinking. The different between the two prices was down to 84.3 percent. While this is not historically a bad ratio, it does indicate a weakening in demand that is being offset by more incentive spending, which has increased 9 percent since last month. And with 80 percent of new-car intenders saying they expect a major incentive if and when they buy, dealer and manufacturer profits could feel the pain in the coming months.

“We’re looking at a yellow caution flag,” Spinella wrote. “If the MSRP-TP gap falls below 83 percent, dealer and manufacturer profits will undoubtedly be damageed. If it falls below 80 percent, it would be time to head for the hills.

Ford Motor Co., the second-largest U.S. automaker, cut spending on discounts and promotions by 6.6 percent from a year earlier to an estimated $2,845 per vehicle, Woodcliff Lake, New Jersey-based Autodata said yesterday in an e-mailed statement. Chrysler Group LLC’s incentives fell 5.7 percent to $3,425. Nissan Motor Co. reduced discounts by 5.7 percent to $2,748, according to Bloomberg.

Industrywide light-vehicle sales ran at a seasonally adjusted annualized rate of 13.1 million in September. That’s the fastest pace since April’s 13.2 million and exceeds the 12.8 million rate that was the average of 14 analysts’ estimates. Toyota Motor Corp. and Honda Motor Co., which returned to full output last month for the first time since Japan’s tsunami in March, boosted incentive spending during the month.

“There will be temptation for automakers to pump up incentives to grab that market share that was lost over the summer,” Dan Montague, an analyst at the Autofacts forecasting unit of PricewaterhouseCoopers LLP, said yesterday. “Incentives will rise, there’s no question about that. But there won’t be any type of incentive war like what we’ve seen in the past.”

Honda, the second-largest Japanese automaker by U.S. sales, increased spending by 6 percent to $2,337 per vehicle. Toyota raised incentives 5.5 percent to an estimated $2,238, Autodata said. General Motors Co. boosted incentives 1.9 percent to $3,289 per vehicle.

Through September, industrywide average spending on U.S. incentives fell 9.6 percent to $2,498 per vehicle.

AutoNation’s Chief Executive Mike Jackson said on Thursday he expects U.S. sales of cars and light trucks to reach a 13 million vehicle annual rate by the end of the year.

“The auto recovery is going to resume probably in October,” Jackson said in an interview with Reuters. “We’re on a journey back to 16 million, 17 million. I can’t tell you exactly when we’re gong to get there, but we are going to get there.”

Jackson spoke on the sidelines of a meeting of AutoNation dealers and employees from Colorado in downtown Denver led by the CEO as well as AutoNation President Mike Maroone that was part business and part rally.

Jackson said it was too early to project U.S. auto sales for 2012. He said he wants to wait to see the trajectory of the recovery near the end of the year.

However, a slide Jackson showed in a presentation to the roughly 200 employees on Thursday projected U.S. auto sales at about 14.2 million vehicles in 2012 and 15.9 million in 2013.

Research firm J.D. Power and Associates expects U.S. auto sales of about 12.6 million vehicles in 2011, about a 9 percent increase over 2010. J.D. Power expects U.S. auto sales to reach 14.1 million in 2012.

Jackson said much of the U.S. auto industry will have recovered by October from the March earthquake and tsunami in Japan that limited inventory for Toyota Motor Corp, Honda Motor Co, and, to a lesser degree, Nissan Motor Co Ltd.

The 62-year-old Jackson said he is “convinced” U.S. new auto sales will return to more than 16 million per year in part because consumer auto loans have become available after the 2008-2009 recession quicker than home loans.

“We have reasonably good financing available for our customers, not what we had in 2005, 2006, 2007, but we may never have that again,” Jackson said, adding that there is pent-up demand to drive sales.

Maroone and Jackson said they do not expect a “price war” among automakers and dealers as they try to appeal to consumers in the fourth quarter.

“The whole business is much more disciplined, rational, much more focused on the long-term,” Jackson said.

He pointed to the discipline on incentives by the Detroit automakers during the inventory woes of Toyota and Honda.

“Incentives are going to be better than they have been for the last six months,” Jackson said, adding that they would not approach a level that would trigger a price war.

“We want to give residents of Oregon and Washington another reason to discover Chevrolet, Buick, GMC and Cadillac vehicles,” said Chris Perry, U.S. vice president of General Motors marketing. “We have new products like the Chevrolet Cruze, Buick Regal, GMC Terrain and Cadillac CTS Coupe that are now even more appealing with a year’s worth of insurance.”

The complimentary auto insurance includes both liability and physical damage coverage and exceeds requirements in the two states, according to GM. The company is currently testing auto insurance as a standard feature to determine consumer appeal, reported F&I and Showroom.

“This offer enhances the vehicle’s value proposition because our policy is considered one of the most comprehensive in the industry,” said Bill Moore, president of MetLife Auto & Home. “Our new car replacement feature is a benefit not found in most auto policies.”

The policy covers the vehicle and anyone who drives it with the owner’s permission for a full year from the date of purchase as long as the original purchaser continues to own or lease the vehicle, according to GM. The policy is not available on vehicles purchased or leased for certain commercial or fleet purposes.

Under MetLife Auto & Home’s auto policy, if a new car is damaged beyond repair within the car’s first year or first 15,000 miles, the company will repair or replace the vehicle with a new vehicle without deducting for depreciation.

The policy is available only to Oregon and Washington residents with valid driver’s licenses and who title their vehicle in those states. Vehicle owners also can renew the MetLife insurance at the end of one year.

Automakers said that sales dropped 3.7 percent during the month compared with the period a year earlier. Analysts said the closely watched, seasonally adjusted annual selling rate in May was just 11.8 million vehicles, the lowest level reported since last September, reported The New York Times.

While May was the worst month for sales so far this year, auto executives said they still expected overall sales in the United States would exceed 13 million vehicles for the year. However, the slowdown could continue into the summer before the pace picks up again. “We do believe the economy will continue its slow and gradual recovery,” said Don Johnson, General Motors’ vice president for United States sales operations.

The hardest hit of the auto companies in May were Toyota and Honda, which said that production disruptions from the Japanese earthquake had caused shortages of some models at dealerships.

Because of Japanese automakers’ setbacks, Detroit’s Big Three — G.M., Ford and Chrysler — ranked first, second and third in terms of sales in the United States for the first time since 2006. Last year, Toyota had ranked third.

But Toyota’s sales dropped 33 percent, allowing Chrysler, whose sales rose 10 percent, to climb into third place. G.M.’s sales slipped more than 1 percent during May, and Ford’s were flat.

And for the first time, the Hyundai Kia Automotive Group, of South Korea, outsold Honda, which reported a 23 percent decline.

Tight inventories and an unusually low level of discounts combined to keep many consumers out of the market during the month. Analysts said it appeared that shoppers had decided to hold off in the hopes of finding better deals or a wider selection.

“Some buyers looked at the reports or maybe heard something about it and decided to wait instead of going down to the showroom and look,” said Jeff Schuster, executive director of global forecasting at the research firm J. D. Power & Associates.

G.M. said its overall sales decreased by 1.2 percent, but that its passenger-car sales rose by 13 percent.

Ford reported a 0.3 percent decline, which excluded sales of the Volvo brand it no longer owns. The company said that small cars and crossover vehicles accounted for 27 percent of its volume, up from 19 percent a year ago.

Some carmakers bucked the trend and reported large gains. Kia’s sales rose 53 percent, to a monthly record of 48,212, and Hyundai’s were up 21 percent. The German carmaker Volkswagen said sales rose 24 percent and that May was the company’s best month in nearly eight years.

But across the industry, sales were down after increasing about 20 percent from January through April.

Toyota and Honda are still trying to recover from the earthquake that struck Japan in March. Both companies have said they expect to resume normal production levels later this summer.

Toyota is “well ahead of our recovery plans,” said Robert S. Carter, the company’s top United States sales executive.

While Toyota and Honda said their plants were building more vehicles, many of their most popular and most fuel-efficient models have become scarcer, causing consumers to look at other brands or put off shopping until inventories can be restocked.

“Toyota and Honda lost significant market share in May after cutting their incentives drastically to preserve inventories,” Brian A. Johnson, an analyst with Barclays Capital, wrote in a report to clients. “This strategy appears to have somewhat backfired on them, and Toyota had to raise incentives back midmonth in order to limit the damage.”

Incentive spending by automakers, which included cash-back rebates, subsidized financing rates and other deals, was down. TrueCar.com, a site that tracks vehicle sales and pricing, said incentives fell in May to the lowest level in nearly nine years.

At the same time, automakers have been raising prices to compensate for higher raw material costs; Ford this week announced the third price increase for its lineup this year. In addition, dealers have been able to charge more for many models with high fuel economy.

Both Ford and G.M. reported gains in sales of their smaller cars as consumers gravitated to vehicles with good fuel economy.

But auto companies do not expect consumers to pull back on spending as drastically as they did in 2008, when higher gas prices cut deeply into sales.

Since then, automakers have adjusted production to build more small cars and fewer pickup trucks and large sport utility vehicles. G.M. and Ford, in particular, have benefited from having more fuel-efficient cars.

“Customers increasingly are demanding new products that deliver compelling fuel economy,” Ken Czubay, Ford’s vice president for United States marketing, sales and service, said.

G.M.’s Chevrolet Malibu was the top-selling passenger car in the country in May, the first time in nearly three years that a Detroit model outsold perennial market leaders like the Toyota Camry, Honda Accord and Nissan Altima.

In fact, 8 of the top 10 vehicles sold in May were made by the Detroit companies. Despite a 15 percent decline in sales from a year earlier, Ford’s F-Series pickup was still the best-selling model over all.

Auto experts had expected a lull in May because of shortages of some of the most popular Japanese models, but they’re watching to see if there’s more to the slowdown than a dearth of supplies — perhaps some backsliding in demand, reported The Detroit News.

Forecasting firm J.D. Power and Associates said several factors are contributing to a “dismal” start in May auto sales.

“The biggest drivers are a pullback in incentives as well as lower availability of vehicles,” said Jeff Schuster, executive director of global forecasting at J.D. Power. “Those two are contributing the most.”

But gas prices nearing record highs also are weighing on the market, prompting some consumers to delay purchases, he said.

Based on sales in the first 11 days of May, J.D. Power estimates a monthly total of 1.07 million cars and light trucks — up 6 percent from weak prior-year levels, but down sharply from April.

It estimates this month’s selling rate at 11.9 million light vehicles after three consecutive months of sales exceeding 13 million units on an annualized basis.

Over the past three months, automakers had seized the opportunity to scale back on profit-eroding incentives, but Schuster expects them to start offering bigger discounts, particularly as the Memorial Day weekend approaches.

George Pipas, Ford Motor Co.’s market analyst, was reluctant to read much into the early May results.

With many Japanese models in short supply, “most observers expected the sales pace would fall off in May and June,” he said.

“But it’s too early to determine whether there’s something else out there besides the limited availability of models in the marketplace,” Pipas said.

High gas prices have an effect on the market, prompting consumers to buy smaller or more fuel-efficient vehicles.

As in 2008, when fuel prices hit record highs, demand for big pickups is down.

They’re sitting on dealer lots for more than three months, on average, while the days’ supply for small cars in the U.S. market has fallen to 36 days.

There’s a 10-day supply of Toyota Prius hybrids, and Honda Motor Co. warned U.S. dealers this month that supplies of the new Civic compact would be “severely restricted” and the Civic hybrid might not be available until later this year.

Japanese brands are experiencing more shortages this month than in April from a devastating March earthquake that halted most vehicle output in Japan for more than a month. Dealers in California complain of severe shortages.

But Ivan Drury, an analyst at auto research firm Edmunds.com, says the weakness in sales may be due more to a recent pullback in incentives — which translates into higher car prices — than the shortage of models. Except for the Prius, he said, there aren’t that many models that are unavailable.

Toyota Motor Corp., after recently announcing that it expected to restore production faster than initially thought, is bringing back some incentives. It is offering low-interest and attractive lease deals on a variety of models, including the Toyota Camry and Corolla sedans and Highlander SUV.

But while the incentives became available on May 12, showroom traffic in this region remains slow, said Bob Page of Page Toyota in Southfield.

High gas prices have prompted shoppers to defer purchases, he believes — and that’s what he hears from dealers with other brands.

“It’s not just Toyota. Dealers are all seeing business in May that’s fairly soft,” Page said.

“People are shocked at $50, $60 and $80 (gas) refills. I think they’re really feeling it.”

But they’ll have to come back into the market at some point, consulting firm A.T. Kearney said this week. It said the average age of vehicles on U.S. roads is now 10.4 years, resulting in huge pent-up demand that will help lift auto sales to 13.2 million cars and light trucks from 11.6 million last year. It sees sales recovering to prerecession levels of about 16 million vehicles by 2013.

Nissan on Thursday told its dealers in a memo that its supply of vehicles at U.S. dealerships had grown in May from April, and as a result the auto maker is offering subsidized leases and lower pricing on its Altima and Maxima sedans and many of its trucks, reported The Wall Street Journal.

Nissan had geared up production heading into 2011, in expectation of rapid growth this year. As a result, it is still delivering healthy supplies of vehicles to dealerships, while Toyota and Honda Motor Co. are struggling to maintain inventories. All three companies have had to slow production in the last two months following the March 11 earthquake that shook Japan and forced factories across that country to close.

At the beginning of May, Nissan dealers had 175,913 cars and trucks in stock, up about 3,000 from the month before, according to market researcher Autodata Corp. Toyota’s inventory was 277,658 vehicles at the start of May, down from 352,153 the previous month. Honda’s was 172,487, down from 236,034.

Nissan’s sales grew rapidly in the first three months of the year, thanks to a program that paid dealers bonuses for hitting aggressive sales targets. But in April, after the campaign ended, its sales slowed. Nissan’s new incentives are designed to return the company to faster growth.

“Despite this successful sales increase, the Nissan division lost market share [in April] as the total industry was up 17.9 percent. This result does not match our ambition as we have consistently achieved market share gains over the last few years and this is a trend we intend to maintain,” Al Castignetti, vice president of the Nissan division said in the memo. “The main message I want to deliver to you is that here in the U.S. Nissan is in a much healthier position than either of our two main Japanese competitors.”

Nissan also reported higher fiscal fourth-quarter earnings Thursday in spite of the earthquake. In the three months ended March 31, Nissan posted a profit of ¥30.8 billion ($380.6 million), up from a loss of ¥11.6 billion in the same period a year earlier. Nissan’s sales grew 10 percent in the quarter to ¥2.351 trillion from ¥2.138 trillion. Operating profit rose 7.2 percent to ¥88.6 billion from ¥82.7 billion.

Toyota is launching its own raft of new sales incentives. In the past several weeks, it had offered virtually no discounts on any of its models as it tries to conserve inventories.

But with the announcement yesterday that it would ramp up production in North America next month to 70 percent of its normal volumes, the company is trying to avoid deeper market share losses. Toyota’s sales were flat in April and without incentives, May results could have been worse.

Throughout the crisis in Japan, caused by the March 11 earthquake, Nissan has been in a stronger position. Its dealerships in the U.S. had more existing inventory on lots than its two Japanese rivals and it makes more of its top-selling models in North America.

Unlike Toyota and Honda, which are still running at 50 percent or less capacity at plants in North America, Nissan has had only a few down days as its supply of parts has been less affected by Japanese suppliers.

Toyota and Nissan indicated this week that their supply situation appears to be improving. Honda has not yet updated its situation. Its plants in the U.S. have been operating at 50 percent volume and as of yesterday, there were no plans to raise production, said spokeswoman Christina Ra. Honda has very limited incentives on its models in May.

“We’re chasing profit more than we’re chasing volume,” said Peter Miles, executive vice president of operations for BMW’s North American unit. He spoke in an interview today in advance of the Los Angeles Auto Show, which opens to the press tomorrow.

Toyota Motor Corp.’s Lexus, helped by customer discounts, earned the top-selling luxury spot in October, the first time since May, to help widen its lead for the year. The Toyota City, Japan-based company’s luxury brand is under pressure to keep the lead after Toyota’s record recalls this year and new products from competitors BMW and Daimler AG’s Mercedes-Benz division.

The average cost of incentives on Lexus cars rose to $3,746 in October from $1,121 a year earlier, while incentive spending on Lexus trucks rose to $2,810 from $696, according to Autodata Corp., a Woodcliff Lake, New Jersey-based researcher.

BMW lowered its incentive spending by 39 percent last month to an average of $2,926, while Mercedes was relatively flat with a decline of 3 percent to $3,879, Autodata said. BMW’s incentive spending declined 27 percent for the year through October and Mercedes dropped 30 percent.

Subsidizing Leases

BMW traditionally spends most of its incentive money on subsidizing leases, said Jesse Toprak, vice president of industry trends at TrueCar.com, a researcher that follows automobile sales and marketing.

“This year, because of the recovery in the leasing markets, BMW actually was able to control their incentives while still being able to offer attractive lease programs,” he said.

While the same improved leasing conditions apply to Lexus and Mercedes, those automakers are spending on incentives as they go for the No. 1 selling spot, he said.

U.S. sales for this year through October totaled 183,529 for Lexus, 178,080 for Mercedes and 176,736 for BMW, the global leader in luxury-vehicle deliveries.

The totals don’t include non-luxury models such as BMW’s Mini cars or Stuttgart, Germany-based Daimler’s Smart cars and Sprinter vans.

BMW’s November and December incentive spending should be in line with October, Miles said, without providing details.

The company’s U.S. sales will increase 16 percent next year on growth from new products such as the redesigned X3 sport- utility vehicle, the 5-Series and the new 6-Series, Miles said.

“We’re fueling our growth now with new products,” he said.

The race for the No. 1 spot should continue to be close next year, analysts said.

“I think we will see a photo finish” of the 2011 selling year, Toprak said.

The program, which allocates $1,500 per vehicle, was set to end Aug. 31.

“We are continuing to provide strong sales tools to our dealers so they are able to remain competitive in the marketplace,” Ford spokesman Steve Kinkade said. Some dealers feared Ford would reduce the per vehicle dealer cash amount to $1,000, but Kinkade says that amount has not been reduced.

Ford announced on June 2 it would shutter the Mercury brand by Dec. 31. It plans to sell all remaining Mercury inventory before the year ends.

Many dealers welcomed the extended dealer cash program as they try to sell their last remaining Mercury products.

“It’s good news. It’s helped us,” said Ed Witt, owner of Witt Lincoln Mercury in San Diego. He has a 30-day supply of Mercury vehicles.

“Business in general is still difficult,” Witt said. “But we have a big luxury market here and we feel confident with a lot of hard work and support from Ford we’ll do fine.”

At the end of July, Ford had about 8,200 Mercury vehicles in U.S. dealer stock, said Ken Czubay, Ford’s vice president of U.S. marketing, sales and service. That’s less than a 40-day supply.

At the end of June, Ford had 10,000 Mercury products in U.S. stock.

Ford plans to end production of Mercury vehicles in early October.

“The sell down is proceeding smoothly,” Czubay said during a July sales call. “By the end of the year there will be very few Mercurys in stock.”

Toyota’s month-over-month sales increased by 20.4 percent, while Nissan’s jumped by 27.5 percent. Both manufacturers’ car and truck segments outpaced last month’s industry marks by significant amounts. The total industry car sales increased 5.5 percent in July, while total industry truck sales jumped by 8.2 percent.

CNW’s Art Spinella wrote that only the Kia car segment, which achieved a 20 percent sales increase, performed well based on “solid marketing and clever advertising.”

Among the Detroit Three, the Buick car and Cadillac truck segments reported sales increases of 32 percent and 42.5 percent, respectively.

The only Ford nameplate to report a month-to-month sales increase was the Lincoln truck segment.

The European brands had mixed sales results with increases from BMW car, BMW MINI, Saab car, Porsche car and truck, and Volkswagen car and truck. The increases were more of a result of lower June sales numbers than an actual jump in demand, wrote CNW’s Spinella.

The overall sales results illustrate that the market is responsive to manufacturer incentives. “While a majority of automakers have pulled back in general, consumers are focused on those who remain in the incentive game,” Spinella added.

He added that Toyota’s sales figures indicate a strong response to its incentives, but said it won’t help the company’s bottom line in the future.

“After months of dark clouds because of recalls and government accusations, the upturn for the top Asian brand is the first step in ‘clearing its name,’” Spinella continued. “We expect the incentive levels for Toyota to return to earth as soon as memories fade.”