GM, Ford stocks stocks slammed as poor sales raise red flag about economy

• Ford shares dropped nearly 4 percent to a 21-month low after its April sales fell 7.1 percent.
• GM's April sales declined 5.8 percent, much worse than expected.
• The auto weakness "deserves a yellow light in the sense we're watching it closely," said one economist.

Ford Motor and General Motors shares dropped after both reported weaker-than-expected April vehicle sales, continuing a shift to a slower sales pace and raising concerns about consumer spending.

Ford shares plunged nearly 4 percent to a 21-month low after its April sales fell 7.1 percent, with demand soft for its passenger cars and unexpected weakness in light trucks. GM's stock dropped 2.7 percent, after its sales were down 5.8 percent. Sales were based on one fewer selling day this year than last year.

Toyota also reported that sales fell 4.4 percent with the Lexus brand dropping 11.1 percent, and Fiat Chrysler shares fell more than 5 percent after it reported sales were down 7 percent.

"This has been ongoing since Q4 of last year, where the upward momentum just petered out," said Ward McCarthy, chief financial economist at Jefferies.

Sales for the industry were expected to be flattish in April, after March sales disappointed but the sales level is still expected to be high after peaking around 18 million late last year. Sales were forecast to range between a 17 million to 17.5 million annual selling pace.

There was a slight drop in Treasury yields, which move opposite to prices, as the weaker car sales rolled in. The weakness is the first key consumer sales report for April, ahead of next week's retail sales report. The sales also follow last week's report of slower growth in consumption in the first quarter.

Economists have blamed some of the softening in vehicle sales on tighter credit after industry sales surged. The peak sales also came amid a period of heavy incentives coupled with looser lending standards and a high amount of subprime loan activity.

GM on Tuesday said it was seeing strength in crossover vehicles, which were up 27 percent on a retail basis. It said April's Chevrolet crossover sales set a record, however Chevrolet sales were down 10.4 percent overall. Buick was up 17 percent.

"It does seem like credit has tightened up somewhat, and of course you had both Easter and Passover in April, which is unusual. That could have been a factor. The bottom line is the upward trend in light vehicle sales peaked," said McCarthy. "Going forward light vehicle sales are not likely to contribute to trend growth. They'll be a factor in month-to-month changes in retail sales."

GM said it expects to end 2017 with about the same inventory levels as 2016 on a days' supply basis but with fewer cars and more trucks and crossovers in stock.

Luke Tilley, chief economist at Wilmington Trust, said it's too early to worry about the consumer for the second quarter, but car sales are a big part of consumer spending.

"It deserves a yellow light in the sense we're watching it closely. At the same time, we think the auto market is something that has its own internal dynamics and isn't something indicative of consumer spending," Tilley said.

He said the market is affected by such factors as an increase in leased vehicles coming on the market. "At this point we don't think it's indicative of consumers retrenching in the overall sense."

GM said in its release that it expects car sales to remain at a strong pace.

"When you look at the broader economy, including a strong job market, rising wages, low inflation and low interest rates, and couple them to low fuel prices and strong consumer confidence, you have everything you need for auto sales to weather headwinds and remain at or near historic highs," said GM's chief economist, Mustafa Mohatarem, in a statement.