General Motors Corporation, facing a shrinking market for used cars, has slashed incentives offered to potential leasing customers during the third quarter, a regulatory filing shows.

The cutback, disclosed in a quarterly report filed with the Securities and Exchange Commission (SEC), coincides with an increasingly cloudy economic outlook for the U.S. Slower economic conditions usually affect the residual value car manufacturers realize when they seek to resell cars returned by leasing customers.

While leasing and the incentives associated with it have helped keep the assembly lines rolling at GM and other carmakers, the companies have lost money by overestimating the residual value of off-lease vehicles. The manufacturers are now trying to protect their profits as the economy winds down.

The uncertainty stems from an economic slowdown: the Commerce Department reports that gross domestic product, the sum of all goods and services produced in the U.S., increased at a 2.7 percent annual rate in the third quarter, compared to an annual growth rate of 5.6 percent in the second quarter.

More directly, automobile prices fell 1.8 percent in October, the biggest decline in a decade, according to a report released earlier this month by the Department of Labor. Used-car prices generally track those of new vehicles, according to Art Spinella of CNW Marketing/Research, an automotive market research firm in Bandon, Ore.

So this leaves lessors such as GM at risk because at the time a vehicle is leased, they must estimate how much it will be worth when it is returned by the customer several years later. Short of a crystal ball, there's almost no way to be entirely certain of the market forces that may come into play in the intervening years. The residual estimate, along with the money factor (the term auto lessors use for the interest rate charged on a lease) determines the size of the customer's monthly payment.

It doesn't take a rocket scientist to see that leases with big estimated residuals and smaller monthly payments are a much easier sell -- but residuals that are off by thousands of dollars do eventually come home to roost.

General Motors Acceptance Corporation (GMAC) noted in its quarterly SEC filing that GM had decreased leasing incentives during the third quarter. The result is, the number of operating leases that GMAC financed for GM and other dealers declined by more than a third -- 36 percent -- to 153,000 during this year's third quarter when compared to the same period in 1999, when 239,000 leases were financed, according to the quarterly report.

GM typically reduces leasing incentives -- usually in the form of reduced interest rates and/or optimistic residuals (subvention) -- during the third quarter because model-year inventory must be cleared out. But the annual price reductions that accompany this annual housecleaning makes leases even riskier for carmakers because they have even less room for error when calculating residual values.

Industry analysts caution against reading too much into the third quarter results, noting the ebb and flow of leasing incentives.

Regardless of the interpretation, however, GMAC reported that its inventory of previously leased vehicles more than doubled to $1.02 billion as of June 30 from $499.8 million at the end of 1999, the latest figures available. GMAC attributed the increase to higher leasing volumes during the past few years; as Spinella also points out, more leases expire in the summer than in the winter.

Analysts note that auto manufacturers have suffered losses in the past on such inventory. Just last month, DaimlerChrysler AG reported that higher U.S. incentives reduced the the resale value of its leased vehicles, forcing the company to take a third-quarter charge of $430 million.

According to Spinella, the marketing money which had been spent on lease incentives is typically shifted over to some other sort of incentives, likely sales incentives. This is less risky because they don't vary according to residual values.