KBB predicts another good year while I begin to see dark clouds on the horizon.
Wayne Gerdes - CleanMPG
- Oct. 26, 2012
While vehicle sales have come back quite a ways, some automobile manufacturers are still struggling to reach pre-2008 levels.
According to KBB, new-car sales in 2013 should surpass 15 million units and will be driven by replacement demand, low interest rates, and compelling product redesigns and introductions. While I have been in the optimistic sales camp for the past 3 years with predictions of 12, 13 and 14.5 million units sold in 10, 11 and 12 respectively, the general economy appears to be flattening out and the demand for both “want” based (hottest sports car, latest must have feature or spare $’s in your pocket) and “need” based new and replacement for new automobiles may have finally reached a peak over the near term.
The Economics of the Automobile
Over the past 50 years, spending on light duty cars and trucks has accounted, on average, for about 3.7% of U.S. GDP.
New light vehicle sales rose to an annualized 14.9 million in September 2012, up from 14.5 million in August 2012 and 14.0 million in July 2012. September’s figure was the highest in four and a half years. Analysts at the Bureau of Economic Analysis (BEA) credit pent-up demand, more readily available financing, low interest rates a slew of appealing new models, and growing consumer confidence for the sales increase.
Past, Present and Future Estimates for Total US New-Car Sales Volume
Economic Conditions Show Modest Improvement
|2007||2008||2009||2010||2011||* 2012 (est.)||* 2013 (est.)|
* KBB Estimate
Consumer Confidence - The two best known surveys of consumer confidence come from the Conference Board and from Thomson Reuters/University of Michigan. They are based on monthly interviews with several thousand people and are designed to gauge the financial health, spending power, and confidence of the average U.S. consumer. The theory is that the more confident consumers are about their job prospects, income, etc., the more likely they are to buy stuff, especially big-ticket items.
Chief economist at Standard & Poor’s David Wyss:
“A confident consumer buys a new car. A cautious consumer repairs the old one.”
Consumers’ attitudes are heavily influenced by the unemployment rate, income, and gasoline prices. In addition, consumers’ sentiment is likely to be influenced by the tone and frequency of what they hear or read (on television, in newspapers, on the Internet, etc.), rather than solely by the economic fundamentals they face or think they will face.
The Conference Board’s consumer confidence index rose to 70.3 in September 2012 from 61.3 in August, bringing the index back to about where it was earlier this year. A reading of 90 or above is generally thought to indicate a healthy economy, so there’s still a long way to go.
About its September index, the Conference Board said:
"Consumers were more positive in their assessment of current conditions, in particular the job market, and considerably more optimistic about the short-term outlook for business conditions, employment and their financial situation. Despite continuing economic uncertainty, consumers are slightly more optimistic than they have been in several months."
Similarly, the Thomson Reuters/University of Michigan index of consumer sentiment rose in September, rising to 78.3 from 74.3 in August.
Unemployment dropped to 7.8 percent in September and remains only 3 million jobs shy of the peak employment level of 146 million from 2006.
Consumer confidence is highly correlated to vehicle sales, and previous analysis has demonstrated consumer confidence needs to be above 100 with an unemployment rate well below 7 percent to support sales of 16 plus million vehicles.
While KBB believes economic conditions are trending in the right direction and sufficient to maintain the industry's ever increasing sales momentum, the quickly flattening Industrial output and manufacturing growth curves gives me reason to pause.
Replacement Demand Remains Strong
KBB expects anywhere from 300,000 to 500,000 additional buyers to enter the market in 2013, thanks to the rebound in leasing that begin in 2010. Approximately 600,000 more vehicles were leased in 2010 compared to 2009 (when leasing nearly disappeared). Since the bulk of leases are written for two- or three-year terms, there should be a significant jump in consumers exiting their lease who likely will be in the market for a new vehicle.
Credit Conditions to Favor Consumers in 2013
Low interest rates also play a significant role in the current sales recovery, and according to the Federal Reserve's most recent Federal Open Market Committee statement yesterday, the industry should expect interest rates to remain near zero through at least the middle of 2015.
Strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely would run at or below its 2 percent objective…
The Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.
According to Experian's Q2 State of the Automotive Finance Market webinar, the average FICO score for a new-vehicle loan has declined from 774 to 753 since 2009 when financing all but dried up at the height of the recession. Today even subprime borrowers have re-entered the market. According to the same Experian data, subprime borrowers as a percentage of total car buyers have increased by 14 percent year-over-year, giving a strong indication that credit will remain widely available to those who need it.
Major redesigns in the full-size truck (F-Series and RAM) and sport utility categories (Escape, Santa Fe, CX-5, CR-V, etc.) have created demand for the latest style and amenities offered but most importantly, fuel economy has increased dramatically giving reason to trade up! Almost every subcompact and compact sedan is available with nearly 40 mpg on the highway, while mid-size sedans and small crossovers aren't far behind. The stellar product available today will continue to drive buyers to dealerships in 2013.
Demographic Trends - Continued Slow Growth
The number of vehicles currently registered in the United States to licensed drivers is a healthy 1.13, indicating that there is more than one vehicle registered for every person that currently holds a driver's license. The ratio of vehicles to total households also is impressive at 2.02 vehicles per household. While certainly below their respective peaks of 1.18 and 2.1 at the height of the real estate bubble, there is little indication of a shortage of vehicles per driver or household.
According to KBB, there is nothing to indicate that sales won't at least hit 15 million units next year. The demographics unfortunately do not indicate a sales increase in 2013 given the available number of vehicles in the average family’s stable. I continue to hope for improved sales but my past enthusiasm is being stamped out with higher tax rates looming after the New Year and the continuing downward spiral of European economies hampering our own lackluster economic growth prospects.