Small car demand collapses

Consumer demand for small cars reached a peak in the summer of 2008, coinciding with very high gasoline prices. Now that gas prices have fallen, so has demand for small cars.

Practically every small car in the market is stacked up at dealerships. At the end of February, Honda Motor Co. had 22,191 Fits on dealer lots -- enough to last 125 days at the current sales rate, according to Autodata Corp. In July, it had a nine-day supply, while the industry generally considers a 55- to 60-day supply healthy.

If expectations are rational, consumers should be looking ahead to the price of fuel over the lifetime of the automobile. That demand has collapsed so suddenly suggests either that consumers expect gas prices to stay low, i.e. that we will not recover quickly from the recession, or that expectations are not forward looking, and are instead driven by the current gas prices.