That disconnect between weaker U.S. auto sales and aggressive production has Wall Street analysts forecasting a ballooning of new vehicle inventories that could cut into earnings next year, especially at DaimlerChrysler AG's Chrysler arm (NYSE:DCX - News; XETRA:DCXGn.DE - News) and Ford Motor Co. (NYSE:F - News)

"Production comparisons are going to be particularly difficult for Ford and Chrysler, as these two automakers built a significant amount of inventory in 2002," Deutsche Bank analyst Rod Lache said on Friday. "We now believe double digit production declines are possible for Ford and Chrysler" in the first half of next year.

Dealer inventories are measured by days' supply, with 60 to 70 days a standard range for Big Three inventories and a lower range for foreign automakers. October's weak sales left the industry with a 69 days' supply, higher than normal but not alarming.

But Chrysler's 31 percent drop in October sales left it with a 97 days' supply, while Ford's inventories swelled to 81 days' supply. Some analysts have forecast that Chrysler could end November with over 100 days' supply.

Several Wall Street analysts have lowered their 2003 earnings estimates for automakers and suppliers based on lower production in the first quarter next year. Goldman Sachs analyst Gary Lapidus estimated that a 150,000 vehicle cut in Ford's production would reduce its earnings per share by 30 cents, while a 200,000 vehicle reduction at Chrysler would hit its earnings per share by 75 cents.

WALKING THE LINE

Automakers set production schedules by quarter, and are loathe to cut them once a quarter is underway. Despite the larger inventories, overtime has been plentiful in the Big Three's factories this quarter. Chrysler will be running overtime at six plants this week; Ford ran overtime shifts at 10 plants last week.

And even if they could make changes, automakers would likely choose to keep running full-tilt. Executives like to caution that one month doesn't make a sales trend; a strong November and December could bring inventories back in line. And inventories usually rise in the first quarter as automakers prepare for the spring sales season.

But November sales have not been showing that much strength. After gloomy predictions earlier this month that sales might not meet October's seasonally adjusted annual rate of 15.4 million vehicles, expectations have risen slightly that the month could produce a 16 million rate.

The boost was helped in part by a drop in U.S. jobless claims, along with improving consumer confidence. Consumer spending accounts for two-thirds of the U.S. economy, and new cars account for roughly 15 percent of retail spending by consumers.

Automakers may have tweaked their incentives this month, which averaged $2,000 per vehicle in October for the industry as a whole and about $2,500 per vehicle for the Big Three.

General Motors Corp. (NYSE:GM - News) has been aggressively pushing no-interest loans and its no payments for 90 days offer, a deal Chrysler has added as well. And Ford is letting lease customers cancel their contracts several months early, as long as they take another Ford vehicle.