The sharp downturn in vehicle sales and production that intensified the depth of the global economic downturn seems to be easing, according to a report released Wednesday by Scotia Economics.

“The sharp cutbacks in industry output and the recent sales improvement will likely reduce U.S. dealer stocks to a more manageable 80 days’ supply by the end of April, down from a peak of 125 days’ in January,” says Carlos Gomes, Bank of Nova Scotia senior economist and auto industry specialist.

With inventories for most manufacturers now better aligned with lower demand, automakers have scheduled output of an annualized 8.5 million across North America in the April-June period, including roughly 9 million in May, up from a first-quarter average of 7.3 million units, Scotia Economics says.

The gain will be largest in the United States, with a 15% quarter-to-quarter jump in output. Both the Detroit Three and the new Domestics will post double-digit gains in assemblies, despite the recent announcement that an automaker will close most of its plants for nine weeks this summer. This increase will add an annualized 0.8 percentage points to U.S. economic activity, the first positive contribution to economic growth from the auto sector since mid-2007, helping to reduce the extent of the ongoing economic contraction.

Car production in Canada is also scheduled to post a double-digit sequential increase in the April-June period. However, the overall gain in Canada will be held back by the permanent closure of an Oshawa truck plant in mid-May. Scotia Economics estimates that the shuttering of this facility will limit the contribution from the auto sector on economic activity in Canada to an annualized 0.3% in the second quarter, roughly one-third of the contribution south of the border.

“Aside from the scheduled increase in assemblies across North America, other key indicators such as rising used car prices, increased credit availability and slightly higher consumer confidence point to stronger car and light truck sales in coming months,” adds Gomes. “A pick up in confidence is a key requirement for a rebound in vehicle sales, as this index normally begins to edge higher at least one quarter prior to the bottom in U.S. car and light truck sales.”

Used car prices, another key leading indicator for the new vehicle market, have also started to improve in both Canada and the U.S., after declining steadily since late 2007, Scotia Economics notes.

“Despite these improvements, there is still tremendous uncertainty regarding the outlook for the U.S. and Canadian economies,” concludes Mr. Gomes. “In this environment, public policy will remain highly supportive, with both monetary and fiscal stimulus just starting to gain traction. Last week the Bank of Canada committed to keep short-term borrowing costs low well into 2010.”

Passenger vehicle sales in the U.S. advanced to an annualized 9.8 million units in March, up from an average of 9.0 million during the previous two months. The pickup in the U.S. was broad-based, with virtually every automaker beating expectations last month.

Car and light truck purchases also increased in Canada last month, climbing to an annualized 1.42 million units, the best performance since November and well above the 1.34 million unit pace of the previous three months. The advance was also broad-based, with eight manufacturers posting year-over-year sales gains, and most other automakers reporting smaller declines than in previous months.

IE