automotive outlook q4 2016 - center for automotive research€¦ · car’s u.s. light vehicle...

Automotive OutlookQ4 2016

CENTER FOR AUTOMOTIVE RESEARCH | 3005 BOARDWALK, SUITE 200, ANN ARBOR, MICHIGAN 48108 | WWW.CARGROUP.ORG

CAR’s U.S. light vehicle sales forecast is a plateau at 17.5-17.6 million units through 2019, with the possibility of a downturn in 2020

CAR U.S. LIGHT VEHICLE SALES FORECAST2016-2020

The Near TermCAR’s forecast is for U.S. light vehicle sales to end 2016 at 17.5 million units—a virtual plateau from 2015, but still 6 percent higher than 2014 year-end. In 2017, CAR projects a marginal sales increase of 100,000 units, to end at 17.6 million light vehicle sales in the United States. Through 2018 and 2019, sales are expected to hover in the 17.5-17.6 million range, with the possibility of a roughly 2 percent decline in 2020. Even though sales remain at a plateau—it is at a relatively high level; U.S. light vehicle sales will likely surpass the 2015 record high of 17.47 million units between 2016-2019.

There are several positive economic forces that will continue to support new vehicle sales:• U.S. employment continues to grow, albeit slowly. Over the past 12 months, 2.3 million full-time jobs

were added to the workforce, driving the unemployment rate down to 4.9 percent. This may be the natural rate of full employment for the U.S. economy. Full-time employment drives the demand for dependable transportation as well as gives the wherewithal for obtaining credit for personal vehicle purchases. Credit—either through loans or leasing—is utilized in nearly 90 percent of total new vehicle transactions.

• The Federal Reserve has been cautious to tighten monetary policy which keeps interest rates from rising. This is related to slower, sustainable employment growth, and mixed domestic and international economic signals. The low cost of capital has allowed captive- and commercial-lending firms to extend

Source: Center for Automotive Research, October 2016

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terms, keep lending rates low, and expand credit availability for vehicle purchases and leases.• Housing starts have maintained momentum with an annualized rate of 1.1 million units. The housing

sector drives the need for trade trucks, delivery vehicles and other spin-off economic activity.• Gasoline prices have remained near historic lows in real terms. The national average for all grades was

$2.33 per gallon in September 2016—providing consumers increased discretionary spending capacity within their personal or family “transportation budget line.”

However, we cannot ignore the fact that after seven years of year-over-year growth, the industry may be approaching the end of the sales cycle. There is some indication that the macroeconomic environment may soften, which presents potential risks of U.S. light vehicle sales.

• Overall economic growth continued at a slow pace in the first half 2016—with GDP growth at just 1.0 percent. While this is a sustainable rate, there is little margin for error. Interest rate increases, trade wars, capital investment reductions, inventory growth, and similar trends could take the wind from under the economy’s wings and force it into a stall.

• Slow economic growth is a drag on employment and income growth. One negative factor in the employment picture is that the labor participation rate has fallen to 62.8 percent of the total working-age population—a near historic low.

• Consumers are more cautious and concerned about their debt levels. Consumer credit growth has slowed to 5 to 6 percent, from 6 to 7 percent just 12 months before.

• Vehicle manufacturers have increased use of incentives. The average incentives is now $4,000, which dampens the impact of the average transaction price which has risen to $34,000.

Taken together, these factors add up to the potential softening of the total personal consumption spending on motor vehicles, which we observed in the first two quarters of 2016.

Historical PerspectiveIn the context of the U.S. light vehicle sales trend back to 1975, CAR’s current forecast pulls U.S. sales back down to the long-term trend line. The 2010-current sales cycle has not resulted in significant sales over the trend line—which means there isn’t much of a “bubble.” In comparison to the precipitous fall in vehicle sales during the great recession, the current sales cycle above the trend line appears modest. These factors lend themselves to CAR’s “soft-landing” scenario.


CAR Sales Forecast

Source: Center for Automotive Research, October 2016

However, the automotive industry remains a cyclical industry and manufacturers, suppliers and service providers selling into the industry must be prepared for the inevitable downturn. During its Investor Day Conference on September 14, 2016, Ford Motor Company presented a recession scenario that shows a 36 percent drop in U.S. light vehicle sales—to 11.1 million units. Factors companies should be monitoring to anticipate what might trigger a recession and how severe it might be include:

• Federal Reserve monetary policy – With long-term rates at such low levels (10-year U.S. Treasuries at 1.6 percent), increasing short-term rates can quickly invert the yield curve. Inverted yield curves can trigger a reduction in available credit, as lenders do not want to sell (in longer-term loans) less than they buy (for shorter-term deposits). This constrained credit has the potential to trigger a recession.

• Trade policies of the next U.S. administration – While campaign rhetoric does not always equate to governing policy, the extreme anti-trade discussion in the current presidential campaign could trigger an increase in consumer prices and rising costs of business intermediary goods.

• Consumer debt, stock market and housing valuations – With the stock market currently at record levels and real estate values in most regions at strong post-recession recovery levels, household net worth is in a healthy state. However, should interest rates rise quickly and the stock market and real estate values correct equally as fast, consumer confidence may decline—with a contraction in consumer spending soon after.

• Vehicle regulations – Safety regulations, corporate average fuel economy standards, and greenhouse gas emissions regulations may increase new vehicle prices beyond the point of affordability for some buyers. Manufacturers may need to add additional incentives or squeeze costs and margins to maintain affordability.

In summary, even at this point in the sales cycle, CAR sees more positives than negatives in the overall market. Top line vehicle unit sales are expected to stay strong in the short term. As the overall market plateaus, there will likely be pressure on pricing to protect and grow market share, as well as on costs to protect margins. Finally, the cyclical history of this industry will repeat itself, it is only a matter of when and how deep. Prudent

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1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 2015 2019

Sales Trend


industry stakeholders will “stress-test” themselves to prepare for a potential shock scenario over the next five years.

Vehicle ProductionCAR forecasts trends in U.S. and North American vehicle production to mirror the shape of CAR’s light vehicle sales forecast—with the next four years on a high plateau, followed by a slight drop off in production in 2020. It is important to note that U.S. production increases are expected to be modest, and the more substantial increases over the next three years in CAR’s North American production forecast is largely due to new production capacity coming online in Mexico during this time period.

CAR U.S. and NORTH AMERICAN MOTOR VEHICLE PRODUCTION FORECAST

2016-2020

*CAR’s forecast of motor vehicle production includes light vehicles as well as medium- and heavy-duty trucks.Source: Center for Automotive Research, October 2016

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Sales and Production DeterminatesCAR considers the following variables in constructing our vehicle sales and production forecasts:

• U.S. Full Time Employment level• U.S. Population estimates• Changes in Outstanding Consumer Credit• New Vehicle Selling Price (and vehicle price inflation relative to overall inflation)• Real Gasoline Prices• Household Net Worth• Producer Prices• Imports to the U.S. Market

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U.S. FULL TIME EMPLOYMENT AND POPULATIONJANUARY 2000 - JUNE 2016

CONSUMER CREDIT AND LIGHT VEHICLE SAARJANUARY 2001 - JUNE 2016

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U.S. Full Time Emp. U.S. Population Estimate

Source: Bureau of Labor Statistics; Census Bureau

Source: Federal Reserve Statistical Release, G.19, Consumer Credit; Automotive News SAAR

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Light Vehicle Sales SAAR Percent Change of Consumer Credit

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NADA NEW VEHICLE SELLING PRICE1978 - 2016 (AS OF MAY)

GASOLINE PRICES (REAL)JANUARY 2003 - JULY 2016

Source: NADA DATA; RSQE

Source: EIA

$2.21$2.53

$3.51 $3.53$3.66

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$2.94$3.15

$4.18$4.09

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HOUSEHOLD NET WORTH AND VEHICLE SALES1978 - 1Q 2016

*Net worth as of Q2 2014; sales as of Q1-Q3 2014 SAAR. Real Household net worth is deflated by CPI.Source: Federal Reserve Statistical Release , Z.1, Flow of Funds Accounts of the United States

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automotive outlook q4 2016 - center for automotive research€¦ · car’s u.s. light vehicle...

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