Car Sales Slump Seen Overdone With Pent-Up Demand Being ReleasedBy
Analysts see room for growth even after six years of gains
But ever-increasing incentives raise concerns for industry
After a six-year run of sales gains, it’s been looking like the U.S. auto industry passed its peak. Now some executives and analysts say there may be more room to run.
Jeff Schuster of LMC Automotive, one of the first analysts to project a contraction in 2016, says the industry may still have some pent-up demand as a stronger labor market and rising consumer confidence prompt buyers to make big purchases. Though auto sales increased a scant 0.6 percent in the first eight months of 2016 and last fall’s numbers were the highest ever, another record this year or next isn’t out of reach.
“There are buyers out there that have decided for whatever reason to not come into the market that might have otherwise,” said Schuster, who in July cut his estimate for the year to 17.4 million cars and light trucks from 17.7 million. The record set last year was 17.5 million.
Automakers’ September sales reports to be released on Monday should set the tone for the rest of the year and show whether a new high can be attained. In 2017 and beyond, most see sales staying around last year’s record or slowing slightly to a still-thriving level.
The pace this month was probably 17.5 million, the average estimate of analysts surveyed by Bloomberg. Among the biggest automakers, Toyota Motor Corp. may have the biggest gain, 2 percent, while Ford Motor Co., which enjoyed elevated fleet sales in the second half of 2015 and first half of this year, may report the steepest drop, a decline of 8 percent.
Some of the untapped demand may be released as Americans who had been buying less-expensive used cars switch to buying new ones in a stronger labor market. And some buyers may be enticed by technological improvements, such as new entertainment options and semi-autonomous capabilities intended to make driving easier and safer.
Honda Motor Co., which eschews discounted bulk sales to rental car companies and other big buyers, sees remaining strength in the retail market, said John Mendel, the company’s top U.S. sales executive.
“We’re continuing to see very healthy sales growth,” he told reporters on a conference call last week. “Our fundamentals are very, very good: low incentives, strong organic demand for not only trucks but cars, and still no fleet business.”
For a chart on September sales estimates, click here
The average auto sold new has been with its original owner for seven years, Mendel said. At the time of purchase, the average car got 24 miles (39 kilometers) per gallon of gasoline, he said. Now the average crossover utility vehicle, or car-based SUV, gets about 25 mpg.
“So you’re looking at an upgrade and a significantly different vehicle and no compromise on fuel economy, and you’re saying, ‘Hey, this is pretty good,’” Mendel said.
Light-vehicles sales through August rose to 11.7 million, but the comparisons with 2015 are getting tougher: The industry reported annualized selling rates of 18 million or higher in September, October and November -- an unprecedented three-month streak.
Sales this year may have been inflated somewhat by big discounts offered to customers. Incentives reached a record of $3,923 per vehicle this month, according to J.D. Power. The previous record of $3,753 was set in December 2008, the month that the U.S. government first issued emergency funding to General Motors Corp. in preparation for its eventual bankruptcy filing.
Average transaction prices are higher now, and automakers are generating massive profits in North America. But ever-increasing incentives in the face of waning demand raise concerns about the industry’s ability to react to higher interest rates or other threats to demand.
“The industry is getting to a point that it’s a risk and potentially a problem,” said Schuster. With inventory at the end of August at a healthy 61 days of supply, he said he’s “certainly not panicking” about the elevated promotions.
Not everyone is so sanguine. Ford has been warning that in addition to its planned decrease in fleet sales, demand for vehicles by regular consumers is done growing.
“The industry has plateaued,” Ford CEO Mark Fields said this week on Bloomberg Television. “We are seeing some weakness in the retail end of the marketplace that’s manifesting itself through more competitive pressures.”
After sales fell to a 27-year low of 10.4 million in 2009 -- the year that Chrysler and GM reorganized in bankruptcy court -- available credit, relatively cheap gasoline, and rising employment and consumer confidence have fueled growth that helped lead the U.S. economy back to relative prosperity.
The question is where it goes from here. Barring any shocks, the outlook remains fairly rosy -- whether there are more records or not. U.S. consumer confidence rose in September to the highest level since before the recession on optimism about the labor market, the New York-based Conference Board said this week. Automakers say they can continue to profit even if sales fall significantly.
“Part of the reason the industry is strong is there’s consumer confidence, there’s low interest rates and we’re continuing to make vehicles affordable for consumers that also have technology improvements and great safety improvements,” said Bill Fay, head of U.S. sales for Toyota’s namesake brand. “That is the primary reason we’re optimistic that this industry can continue to move at a very solid rate here over the next year or two.”