First the good news – market conditions are perfect for another solid gain in auto sales in 2015, bringing the industry well above pre-recession levels. On top of that, average transaction prices are up, so automaker profitability is climbing with those higher sales totals.
On the other hand – a phrase that has most product planners looking for one-handed economists – analysts expect sales growth to slow to half of 2014’s pace, which was about half of 2013’s increase. As the market returns to historically normal sales rates, growth will be harder to achieve, so industry watchers are expecting fiercer competition and possibly some price wars in 2015.
Several analysts polled by Today’s Motor Vehicles peg total 2015 sales between 16.9 million and 17 million cars and light trucks, about a 2.4% increase from 2014’s 16.5 million level. During the decade before the awful years of 2008 and 2009, the industry had been selling between 16 million and 16.5 million units per year, so the 2015 projections would match records not seen since 2001.
“A lot of new product is coming, and that’s going to excite buyers,” says Mike Jackson, director of North American vehicle production forecasting for research company IHS Automotive. “Fuel prices are also going to help customers. They’re going to give people a little more incentive to spend, a little more confidence that they can afford something nicer than basic transportation.”
Economic tidal forces
Tom Webb, chief economist for automotive auction company Manheim, says people like to talk about a lot of indicators to predict future sales – fuel prices, consumer confidence, stock market performance, the weather – but the health of auto sales comes down to two economic “tidal forces.”
“Labor market conditions and credit conditions are at the heart of auto sales. When those forces are supportive, sales go up,” Webb says.
And those numbers look very supportive of increased auto sales in 2015.
On the labor market side, employment hit pre-recession levels in mid-2014 and has gained steadily ever since. Involuntary layoffs are at an all-time low, and an increasing number of workers are quitting their jobs, a positive economic sign meaning they’re confident they can find better work elsewhere, Webb explains.
On the negative side, labor-market-participation rates are at 37-year lows – the number of people working full time is still lower than it was in 2007 because many workers have only been able to win part-time jobs. The number of involuntary part-time workers is declining yet still high.
“Overall, labor market conditions have been supportive of auto sales, and improvements will continue in 2015,” Webb states.
In credit markets, lenders are issuing more loans with longer repayment terms to people with lower credit scores than they were a few years ago, Webb says. Subprime lending rates are lower than they were before the recession, but higher than in 2008 and 2009, he adds.
Some economists have expressed concern that growing numbers of sub-prime loans could hurt automakers in the future if borrowers default. Webb downplays those risks, saying that default rates remain very low, and low interest rates from the Federal Reserve make it inexpensive for banks and finance companies to take on extra risk. He adds that the good credit conditions today are the result of more conservative lending practices that followed the Great Recession.
“We’ve already paid the price of admission, so we may as well stay on until the end,” Webb adds.
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Luxury crossovers remain hot With gas prices falling through much of 2014, bigger vehicles did well, and that trend should continue, but don’t expect a return to the early 2000s when giant sport utility vehicles dominated the roads. The fastest-growing segment in 2014 was compact sport utility vehicles such as Ford’s Escape or Honda’s CR-V. Expect that growth to continue this year, especially in small luxury crossovers, says Alec Gutierrez, senior economist for Kelley Blue Book. “The compact SUV/CUV market has had tremendous growth, more than doubling in the last seven years. In luxury CUVs, growth has been 326% since 2007,” Gutierrez says. Automakers have noticed the trend with several luxury brands rushing new small crossovers, such as Buick’s Encore, to the market.
“The luxury market is experiencing strong gains, driven by explosive growth in two market segments where Cadillac, as yet, does not have a single entry – namely the segment for compact premium sedans below where ATS is positioned, and the segment for compact premium crossovers below where the SRX is positioned,” DeNysshecn says. “These important omissions in our current product portfolio are clearly stunting our growth in the U.S. market.” Gutierrez and other economists say favorable credit and leasing terms are driving the small luxury market. Longer loans, with lower monthly payments, are helping younger drivers to afford smaller, less-expensive luxury cars and crossovers.
“Fuel efficiency is still important, but for most buyers, we’ve reached a point where everything is good enough. Everything out there, whether it’s a Ford F-Series pickup or a Honda Fit, is more efficient than it was a few years ago,” Gutierrez says. When gasoline hit $4 per gallon in 2008, many drivers parked inefficient SUVs. Since then, the average fuel economy of vehicles as large as Chevrolet’s Suburban has climbed 13%. Typical mid-sized cars are 26% more efficient than they were in 2007. |
At a product launch announcement at the North American International Auto Show, Cadillac President Johan DeNysschen acknowledged that the lack of entry level vehicles is hurting General Motors’ luxury division.
Other vehicles expected to do well are pickups and mid-sized sedans. Lower gas prices make it easier to fill the tanks on those vehicles, but Gutierrez notes that sales had been increasing for those markets when gas was still more than $3 per gallon. Pickup growth tends to track home construction, and increased car sales have more to do with intense competition than with people being comfortable with less-efficient vehicles.
Concerns for 2015
The biggest risk for strong 2015 sales, several economists say, is the credit market. Federal interest rates have effectively been zero for several years, giving prime buyers auto loans with interest rates as low as 2%. Most economists expect some sort of increase in 2015, and Manheim’s Webb says the size of the increase will determine whether or not auto sales will slow in response.
“Look at where we are right now. I think that we can handle a little rate increase,” Webb says.
Other analysts say raising rates by about one percentage point won’t push many buyers out of the market, but steeper increases could make monthly payments too high for buyers on the edge between opting for new vehicles or used ones.
A secondary issue will be how interest rates affect different companies. As the United States raises interest rates, economists expect Asian and European central banks to lower theirs, making the dollar more valuable against the euro and the yen. A strong dollar will make it easier for U.S. shoppers to buy vehicles made in Japan or Europe, so the sales environment will allow Toyota and Mercedes to offer discounts that will be tough for Ford and GM to match.
Webb adds that low oil prices could also hurt U.S.-based manufacturers in terms of commercial truck sales. While consumers are happy with low gasoline prices, energy producers are cutting back on production and delaying purchases of new trucks and vans used in oil fields. He adds that the odds are higher that pickup sales will increase, thanks to growing home construction rates, but that market faces some risks as well.
What to expect
Optimism remains high in the auto industry. Car producers are not only selling more vehicles, they’re making more money than before the recession because of higher transaction prices and lower operating costs. Dozens of new vehicle models are on the way to showrooms, potentially drawing more shoppers.
The big question for 2015 is how much the industry will grow, which is an improvement from the bad years of the recession and the uncertainty during the recovery.
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Higher/lower predictions Several analysts and economists agree that 2015 auto sales should be between 16.9 million and 17 million vehicles. What could push that number significantly higher or lower? Mike Jackson, director of North American vehicle production forecasting, IHS Automotive: Lower sales – The industry’s operating at some very high utilization rates. There’s not a lot of room to produce more vehicles if demand goes higher. That could act as a headwind on production and sales. Alec Gutierrez, senior economist, Kelley Blue Book: Lower sales – The biggest concern is interest rates. If we go up 0.25%, the market will absorb that with no damage. If we jump 2%, there will be a big change immediately. |
IHS Automotive
www.ihs.com
Manheim
www.manheim.com
Kelley Blue Book
www.kbb.com
General Motors
www.gm.com
About the author: Robert Schoenberger is the editor of TMV and can be reached at 216.393.0271 or rschoenberger@gie.net.
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