January 2013 U.S. new light vehicle sales climbed 14% from a year ago and sales for the rest of the year are expected to climb as well, though at a more modest rate. There are several drivers of this growth, both at the macroeconomic level and within the industry itself. Consider the following:
- Interest rates remain exceptionally low, and with the Fed promising to keep them there until unemployment declines to 6.5%, we can expect to see low rates for quite awhile. This means that OEMs and dealers will continue to offer low interest incentives including 0% APR programs.
- The housing market continues to recover. According to the Standard & Poor's/Case-Shiller index, housing prices rose 5.5% in November, the greatest year-over-year increase since August 2006. This same report mentioned that prices rose in 19 of the 20 markets surveyed. Further, new home construction in December reached an annualized rate of 954,000, its highest rate since June 2008 and up 37% from December 2011. All this bodes well for the car business for two reasons. First, the housing industry is strongly linked to the large pickup segment, one of the largest and most profitable categories in the auto industry. Secondly, as the values of owners' homes rise and the owners' home equities also rise, owners are more likely to purchase large ticket items such as vehicles.
- There are some signs that the employment picture is brightening. Although the national unemployment rate inched up in January to 7.9%, the number of jobs climbed by a respectable 157,000. Also, the average monthly number of jobs added in 2012 was revised upward to 181,000.
- The stock market is doing well recently, with the Dow Jones Industrial Average recently ending above 14,000 for the first time since 2008. The DJIA is now within 200 points of its all-time record high.
- Lastly, factory activity seems to be picking up. The Institute of Supply Management’s factory activity index recently reached 53.1, its highest level since April.
Within the auto industry itself, there are also encouraging signs:
- Each of the major OEMS has (at least) an adequate inventory and each of them also continues to rapidly bring new products to market in some of the most competitive segments.
- In the non-luxury area, we will see a redesigned RAV4 (officially launched in early January), Nissan Rogue and Subaru Forester in the growing compact CUV segment, re-designed large pickups from GM and Toyota, and the Fiat 500L, an extended version of the 500.
- In the luxury space, a wealth of new products are coming including the all-new Mercedes-Benz CLA compact "four-door coupe," a new Lexus compact crossover, a new BMW 4-Series compact coupe, a re-designed Infiniti Q50 (formerly the G37), a re-designed Acura MDX midsize CUV, a re-designed Lincoln MKZ (originally scheduled to be launched last fall), a re-designed Cadillac CTS and an all-new Cadillac ELR electric coupe among others. This industry-wide competition will keep downward pressure on transaction prices, which will continue to spur demand.
What could de-rail the momentum of the industry? Several things:
- First, if tensions in the Middle East and/or northern Africa were to boil over into military conflict, there could be either an escalation in oil prices or an interruption in the supply of oil, either one of which would quickly hurt vehicle sales.
- Second, if GDP growth does not move back up to the 2-2.5% range after a dismal fourth quarter (when it was down), that would inhibit vehicles sales as well.
- Third, gas prices need to stabilize and not continue to rise. Recently they have risen rather rapidly and if this trend continues, they will have an impact on the mix of vehicles if not overall demand.
- Lastly, if the unemployment rate remains elevated, at some point industry growth will slow.
At the moment, though, the positive drivers seem to be out-weighing the inhibitors and the year looks to continue the upward movement we have witnessed in the past three years. Polk forecasts that 2013 U.S. light vehicle registrations will reach 15.3 million units, up 7% from 14.4 million in 2012. And we are also optimistic about 2014, as we see new registrations reaching 15.8 million.
Posted by Tom Libby, Lead Analyst, North American Forecasting, Polk (02.11.2013)