Bargains Won't Go Away

Just last month the talk was of interest rates gently rising, heralding a stronger, more resilient economy.

So you'd think those new-car dealer gimmicks - the $4,000 rebates and zero-financing deals - would go the way of multiple mortgage refinancings.

Well, think again. After several years of hype and hoopla that reached its peak a year ago, auto incentives hit a low point last month, down 7.6 % from June of 2003 - according to Power Information Network (PIN), LLC, an affiliate of market researcher J.D. Power and Associates.

What's more, sales dropped nearly 2% compared to a year ago. At General Motors (GM Quote) and Ford(F Quote), big incentive boosters, they slowed by at least 15%.

Dealers, meanwhile, are sitting on a near record inventory of four million 2004 vehicles.

"Consumers have certain expectations when it comes to incentives," said Tom Libby, director of industry analysis at PIN. "When incentives drop, consumers have shown that they're willing to wait until automakers sweeten the deal. We're already seeing automakers increase incentive amounts in July in order to boost sales."

With interest rates up only a quarter of a percentage point and June sales at Wal-Mart(WMT Quote) and Target(TGT Quote) pointing to a softening economy, auto industry observers are predicting incentives will be back in full force this summer.

It's all part of the ongoing quest for the right financing formula that will drive vehicles off dealer lots and into the consumer garages.

"The auto industry is just a glaring example of how difficult it is to compete in a global arena," said Bob Schnorbus, chief economist for J.D. Power and Associates. "The upside is that it's good for the consumer."

Still, if interest rates continue to rise over the next several years, as some economists in the auto industry predict, zero-percent financing will disappear.

"We have to wait and see what they come up with," said Schnorbus. But in the short term, with so much 2004 inventory, manufacturers and dealers are "going to have to raise incentives even more."