As of Feb. 1, automakers had an average 88-day supply of unsold vehicles in the U.S., the most since the height of the Recession in 2009. The Detroit 3 started February with more than a 100-day supply. While bad winter weather kept car buyers home, are supply issues a trend?

At the Automotive News World Congress in January, AutoNation CEO Mike Jackson told the industry it needed to contain inventory levels of unsold vehicles. If not, the industry could be faced with an incentive war to move the metal, he warned.

Total discounts on new cars have been inching higher since November and year over year, according to Edmunds.com and CNW Research.

This comes on top of reports of auto manufacturers opening up new domestic plants and increasing production. Volkswagen is investing $7 billion in North American manufacturing infrastructure in the next four years. Japanese automakers Nissan, Honda and Mazda are building and opening plants in Mexico to serve North America. General Motors, Ford and Toyota are ramping up production at existing plants.

And while new car transaction prices remain high, new vehicle sales in 2014 aren’t expected to sustain the double-digit growth of the past few years.

Sales Into Rental

“Sales gains appear to be slowing for a number of manufacturers, although it may be difficult to tell from January’s sales reports due to the bad weather,” writes Eric Ibara, director of residual value consulting for Kelley Blue Book. “Should the slowdown turn out to be real, it will mean that virtually all manufacturers will have to decide whether they continue to run their production lines or pare back to preserve their margins.”

“Of course, along with higher incentives, the option of diverting more volume into daily rental will loom large for any manufacturer that chooses the former option,” Ibara continues. “If that happens, the possibility that the rental industry will see more volume this year could be real, and accompanying that route of course is the likelihood of lower used car values.”

Since the Recession, the automotive industry has done a historically good job of rightsizing production and tempering sales to rental fleets. According to data from Auto Rental News, last year’s rental fleet sales did not keep pace with the overall increase in new vehicle sales.

However, one fleet seller acknowledged a higher level of manufacturers’ year-end dealmaking than unusual.

“The OEMs swore they were only doing so many cars into rental,” says the fleet seller. “The manufacturers are sacrificing profit for market share, which means residuals will suffer.”

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Wholesale Outlook

The used car market has been on a gentle and steady decline since reaching historic peaks in 2011 and 2012. This year, used values are expected to drop up to 2%, according to Edmunds.

Looked at another way, Black Book estimates first-year depreciation for 2014 to run 14.5% to 15%. On average, vehicles depreciated 15% to 17% before the Recession, according to Black Book. In the Recession years — on short supply — those numbers dipped to 12%-13%.

As a result, “Depreciation needs to be adjusted to reflect the changing market,” says the fleet seller.

“It’s still a reasonably good seller’s market for late-model used cars,” says Tom Kontos, ADESA’s chief economist, referring particularly to one-year-old vehicles or rental units. “There is still a healthy supply-demand balance to sustain prices at levels that are above an overall softening used car market for the [higher-aged] cars. But that won’t last forever.”

But the used car market faces added inventory this year from a new influx of post-Recession lease returns, this time from the retail side. Those former retail leases have fewer miles than commercial leases, thus creating competition with used rental cars.

The recent market conditions shouldn’t be cause for worry about the big picture, analysts say.

“The overriding dynamic in today’s used vehicle market is rebounding supply, which is putting downward pressure on wholesale prices,” writes Kontos in his January commentary. “However, strong retail demand is restricting this downside, as is the gradual nature of the supply increase itself.”

Kontos points out that this demand isn’t artificially inflated, as it had been before the Recession when retail buyers used some of that adjustable-rate mortgage money to also buy cars they didn’t need.

Nonetheless, fleets need to keep a closer eye on the micro-market changes. “The one thing you can say is ‘Fleet management is now more important than ever,’” says the fleet seller.

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