CAR’s U.S. Automotive Forecast

Yen Chen Senior Research Economist

Center for Automotive Research

Annual Economic Outlook Symposium Federal Reserve Bank of Chicago

December 4, 2015

A New Peak/Plateau?

U.S. Light Vehicle Monthly Sales and SAAR

Oct. 2013 – Oct. 2015

1.2 1.2 1.4

1.0

1.2

1.5 1.4

1.6

1.4 1.4 1.6

1.2 1.3 1.3

1.5

1.2 1.3

1.5 1.5

1.6

1.5 1.5 1.6

1.4 1.5 15.2

16.4 15.4 15.2 15.4

16.4

16.1

16.8 17.0 16.5 17.5

16.4 16.5 17.2 16.9 16.7

16.2 17.1 16.5

17.8 17.2 17.6 17.8

18.2 18.2

0

2

4

6

8

10

12

14

16

18

20

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0O

ct-1

3

No

v-1

3

Dec

-13

Jan

-14

Feb

-14

Mar

-14

Ap

r-1

4

May

-14

Jun

-14

Jul-

14

Au

g-1

4

Sep

-14

Oct

-14

No

v-1

4

Dec

-14

Jan

-15

Feb

-15

Mar

-15

Ap

r-1

5

May

-15

Jun

-15

Jul-

15

Au

g-1

5

Sep

-15

Oct

-15

Mo

nth

ly S

AA

R

Mo

nth

ly S

ale

s (M

illio

ns)

SALES SAAR

Source: Automotive News; CAR Research 2

3 Mil. Higher than 2013!

U.S. Light Vehicle Sales Percent Change YTD Through Oct. : 2015 vs. 2014

-1.6%

12.4%

5.8%

Passenger Cars

Light Trucks

Total

Source: Automotive News; CAR Research

+ 794,997

+ 896,868

+ -101,871

8,103,806

55.9%

6,404,637

44.1%

14,508,443

100%

Must Have a Hatch or a Bed! Segment Breakdown - U.S. LV Sales Percent Change

Oct. YTD 2015 vs Oct. YTD 2014

-12.0%

-2.0%

-0.8%

0.3%

1.7%

7.5%

9.3%

10.4%

13.6%

45.7%

5.9%

-20% -10% 0% 10% 20% 30% 40% 50%

Large Car

Middle Car

Small Car

Van

Luxury Car

SUV

Large CUV

Pickup

Middle CUV

Small CUV

Total

Source: Ward’s Automotive Reports 4

Market Share: Segment Breakdown –

U.S. LV Sales Oct. YTD 2015

1.8%

3.2%

4.7%

5.2%

7.0%

7.1%

14.0%

17.5%

17.7%

21.7%

0% 5% 10% 15% 20% 25%

Large Car

Large CUV

Small CUV

Van

Luxury Car

SUV

Pickup

Middle Car

Small Car

Middle CUV

Source: Ward’s Automotive Reports 5

U.S. LV Sales Market Share: Segment Breakdown –

2015 vs. 2007

1.8%

5.2%

7.0%

7.1%

14.0%

17.5%

17.7%

29.6%

4.3%

7.0%

7.6%

11.9%

16.6%

19.7%

15.8%

17.2%

0% 5% 10% 15% 20% 25% 30% 35%

Large Car

Van

Luxury Car

SUV

Pickup

Middle Car

Small Car

CUV

20072015 Through October

Source: Ward’s Automotive Reports

CAR Forecast Notes

• Full-time employment is back to pre-recession level and continue to trend up.

• Consumer credit continue to expand at a healthy 6% annual rate. But loan lengths are approaching 70 months: Over $1Trillion in auto debt.

• Motor vehicle price inflation is higher than the CPI and wage inflation, but is offset by customer incentives (14%), low interest rates, longer auto loan terms, and cheap gasoline.

• US economy is relatively good. 3Q ‘15 GDP growth was 2.1%. Full year GDP growth is expected to be 2.4+ %. The Fed is almost certain to hike the interest rate. This could affect cost of large auto loans and is bad news for exporters.

• Outside US, Chinese economy is weakening. Japan in recession. EU is trying to keep its economy away from another recession by using negative interest rates.

• Residential construction is recovering. New housing starts SAAR came back to 1.2 million.

• Millennials and younger generations (under 35) finally found jobs. But labor force participation rates are still low.

7

Back to Where We Were Full Time and Part Time Employment (thousands, seasonally adj.) - Jan’

2000 – Oct’ 2015

16.0%

17.0%

18.0%

19.0%

20.0%

21.0%

104,000106,000108,000110,000112,000114,000116,000118,000120,000122,000124,000

Full

Tim

e

Full Time Part Time %

Source: Bureau of Labor Statistics 8

U.S. Principal Means of Transportation to Work

1989 & 2014

Source: U.S. Department of Housing and Urban Development, American Housing Survey, 1989 , U.S. Census Bureau

U.S. Department of Commerce, American Community Survey, 2014, U.S. Census Bureau

Automobile 86%

Public Transportation

5%

Walks Only 3%

Work At Home 4% Other

2%

2014

Automobile 87%

Public Transportation

5%

Bicycle and Motorcycle

1%

Walks Only 3%

Work At Home 2% Other

1%

1989

And Households Are Carrying More Debt Household Non-Housing Debt* 1Q 2003 – 3Q 2015

-

500

1,000

1,500

2,000

2,500

3,000

3,500

-

200

400

600

800

1,000

1,200

1,400

1Q2003

1Q2004

1Q2005

1Q2006

1Q2007

1Q2008

1Q2009

1Q2010

1Q2011

1Q2012

1Q2013

1Q2014

1Q2015

Tota

l in

Bill

ion

$

De

bt

in B

illio

n $

Student Loans Auto Loans Credit Card Other Total

Source: FRBNY Consumer Credit Panel/Equifax

*Excludes mortgage and home equity line of credit

A Change in Mix Drives RA Prices NADA New Vehicle Selling Price

(Incentives now about $3,000 on average)

1978 – 2015 (As of September)

$24,900 $28,351

$ 33,073

-5%

0%

5%

10%

15%

20%

-

5,000

10,000

15,000

20,000

25,000

30,000

35,0001

97

8

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

20

10

20

12

20

14

Ve

hic

le P

rice

Infl

atio

n

Ve

hic

le P

rice

, $

NADA selling price Vehicle price inflation CPI Inflation

Source: NADA DATA; BLS 11

Gasoline Prices (Real)

Jan. ‘03 – Oct. ‘15

$2.19 $2.50

$3.47 $3.49 $3.61

$4.43

$2.91 $3.11

$4.12 $4.04 $3.79 $3.68

$2.92

$2.29

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50

$5.00

Jan

-03

Jul-

03

Jan

-04

Jul-

04

Jan

-05

Jul-

05

Jan

-06

Jul-

06

Jan

-07

Jul-

07

Jan

-08

Jul-

08

Jan

-09

Jul-

09

Jan

-10

Jul-

10

Jan

-11

Jul-

11

Jan

-12

Jul-

12

Jan

-13

Jul-

13

Jan

-14

Jul-

14

Jan

-15

Jul-

15

Pri

ce P

er

Gal

lon

Source: EIA 12

Vehicle Sales Still Disconnected From Macro Economy U.S. GDP Growth Rate and Vehicle Sales Growth Rate

1956 – 2015

-30

-20

-10

0

10

20

30

40

-4

1

6

11

56 59 62 65 68 71 74 77 80 83 86 89 92 95 98 01 04 07 10 13

Ve

hic

le S

ale

s G

row

th R

ate

GD

P G

row

th R

ate

Sales Growth GDP Growth

Source: Bureau of Economic Analysis

Better than We Were . . . DOW JONES INDEX*

January 2000 – November 2015

5,000

10,000

15,000

20,000

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

Oct ’07 – Feb ’08: - 49%

Dec ’99 – Sep ’02: -34%

Feb. ’09 – November ’15: +152%

14 Source: Yahoo Finance

Consumer Confidence & Sentiment

January 2007— October 2015

0.0

20.0

40.0

60.0

80.0

100.0

120.0

Jan

-07

May

-07

Sep

-07

Jan

-08

May

-08

Sep

-08

Jan

-09

May

-09

Sep

-09

Jan

-10

May

-10

Sep

-10

Jan

-11

May

-11

Sep

-11

Jan

-12

May

-12

Sep

-12

Jan

-13

May

-13

Sep

-13

Jan

-14

May

-14

Sep

-14

Jan

-15

May

-15

Sep

-15

Consumer Confidence Index UofM Consumer Sentiment Index

Source: The Consumer Confidence Survey, conducted for the Conference Board; Federal Reserve Economic Data

UM Consumer Sentiment Index

Annual: 1978 - 2012

Monthly for Jan. 2013 – October 2015

October ‘15

10.011.012.013.014.015.016.017.018.019.0

60.0 70.0 80.0 90.0 100.0 110.0 120.0

Ligh

t V

eh

icle

Sal

es

(Mill

ion

)

Consumer Sentiment Index

Source: Automotive News 16

Not Back Yet . . .

U.S. Housing Starts and Auto Sales

Jan. 2001 –October 2015

0.0

5.0

10.0

15.0

20.0

25.0

0

500

1,000

1,500

2,000

2,5001/

1/2

001

7/1

/20

01

1/1

/20

02

7/1

/20

02

1/1

/20

03

7/1/

20

03

1/1

/20

04

7/1

/20

04

1/1

/20

05

7/1

/20

05

1/1

/20

06

7/1

/20

06

1/1

/20

07

7/1

/20

07

1/1

/20

08

7/1

/20

08

1/1

/20

09

7/1

/20

09

1/1

/20

10

7/1

/20

10

1/1

/20

11

7/1

/20

11

1/1/

20

12

7/1

/20

12

1/1

/20

13

7/1

/20

13

1/1

/20

14

7/1

/20

14

1/1

/20

15

7/1

/20

15

Ligh

t V

eh

icle

Sal

es

(Mill

ion

s SA

AR

)

New

Pri

vate

ly O

wn

ed

Ho

usi

ng

Un

its

Star

ted

(Th

ou

san

ds

SAA

R)

Housing Starts Auto Sales

Source: American Housing Survey for the United States, U.S. Census Bureau; BEA 17

Labor Force Participation Rate Is Falling

Even After the Last Two Recessions Labor Force Participation Rate 1978 – 2015

59%

60%

61%

62%

63%

64%

65%

66%

67%

68%1

97

81

97

91

98

01

98

11

98

21

98

31

98

41

98

51

98

61

98

71

98

81

98

91

99

01

99

11

99

21

99

31

99

41

99

51

99

61

99

71

99

81

99

92

00

02

00

12

00

22

00

32

00

42

00

52

00

62

00

72

00

82

00

92

01

02

01

12

01

22

01

32

01

42

01

5Lab

or

Forc

e P

arti

cip

atio

n R

ate

Women’s participation In labor force

Economy Boomed. GDP grew 3.8% per year

Lowest since 1978

Source: Current Population Survey, Bureau of Labor Statistics

Who is Dropping Out of Labor Force? Change in Labor Force Participation Rate by Age Cohort Since 2000

-15

-10

-5

0

5

10

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Pe

rce

nta

ge P

oin

t C

han

ge

16-24 25-34 35-44 45-54 55-64 65+

Source: Current Population Survey, Bureau of Labor Statistics

Location of Household by Householder’s

Age 2013 1989

45% 35% 31% 29% 31% 31%

36% 47% 49% 49% 46% 42%

19% 18% 20% 21% 23% 27%

0%

25%

50%

75%

100%

Under25

25-34 35-44 45-54 55-64 65 andabove

Center City Subrubs Rural

Source: American Housing Survey for the United States, U.S. Census Bureau.

42% 38% 32% 28% 27% 25%

36% 46% 51% 54% 52% 50%

22% 16% 17% 19% 21% 24%

0%

25%

50%

75%

100%

Under25

25-34 35-44 45-54 55-64 65 andabove

Center City Subrubs Rural

American Are Moving Into Suburbs

U.S. Occupied Housing Units

32%

31%

29%

30%

46%

47%

51%

50%

22%

22%

20%

20%

0% 20% 40% 60% 80% 100%

1989

1997

2009

2013

Central Cities Suburbs Outside MSAs

Source: American Housing Survey for the United States, U.S. Census Bureau.

CAR U.S. Light Vehicle Sales Forecast:

2015-2020

16.1

13.2

10.4 11.6

12.8 14.5

15.6 16.5

17.5 18.1 18.5 18.6 18.1 17.9

0

5

10

15

20

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

U.S

. LV

Sal

es

in M

illio

ns

Source: CAR Research, November 2015

6.1%

3.4% 2.2%

0.5% -2.6%

-1.1%

2018 Downturn-1: Sales, -12% Prices, -13% Revenue: -24%

22

2018 Downturn-2: Sales, -33% Prices, -5% Revenue: -37%

N.A./U.S. Production Forecast: 2007-2020

15.4

12.9

8.8

12.2 13.5

15.8 16.5

17.4 18.1

19.3 19.7 19.9 19.7 19.7

10.8

8.7

5.7

7.7 8.7

10.3 11.1

11.7 11.9 12.1 12.2 12.2 11.8 11.5

70%

67% 65%

64% 64% 65%

67% 67% 66%

63% 62% 61% 60%

58% 0

2

4

6

8

10

12

14

16

18

20

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Mill

ion

NA Prodution US Production US Share of NA

Production includes HD Trucks. Source: CAR Research, November 2015 23

3.9% 6.6%

2.1% 1.0%

+2.1% 1.7% 0.8%

0.0%

-0.9% -0.1%

-3.3%

-2.5%

Automaker Investment Announcements, Jan 2010-May 2015

Canada $5.4 billion

United States $53.4 billion

Mexico $24.2 billion

U.S. Great Lakes

$ 28.2 billion

South $12.0 billion

Note: U.S. Great Lakes includes: IL, IN, KY, MI, MO, and OH while South includes: AL, FL, GA, MS, SC, TN, and TX

Total North America

$83.0 billion

Source: CAR Research, Book of Deals 24

Mexican Automotive Wages are One-Eighth to One-Fifth the

Wages Paid to U.S. Hourly Auto & Parts Workers

$0

$5

$10

$15

$20

$25

$30

200

7

200

8

200

9

201

0

201

1

201

2

201

3

Motor Vehicles Parts

$0

$5

$10

$15

$20

$25

$302

00

7

200

8

200

9

201

0

201

1

201

2

201

3

201

4

U.S

. D

olla

rs/H

ou

r

Motor Vehicles Parts

Average Hourly Wages for Production and Non-Supervisory Workers in Motor Vehicle and Parts, 2007-2014

Sources: U.S. Department of Labor, Bureau of Labor Statistics; Mexico National Institute of Statistics and Geography (INEGI: Instituto Nacional de Estadística y Geografía) 25

In Dollar We Trust MX/USD

October 2000 – October 2015

8.00

10.00

12.00

14.00

16.00

18.00

Pe

sos/

USD

23% depreciation since 2011

26 Source: Federal Reserve Economic Data

Bigger Than Germany! Mexican Capacity, Production, and

2015-2018 Production Forecast

2.0 2.1 1.5

2.3 2.6 2.9 2.9 3.2 3.4 3.6

4.1 4.8

5.2 5.5 5.6 5.5

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Mill

ion

s

Mexican Production and Forecast Mexican Production Capacity

Sources: LMC Automotive 27

Some Mexican Advantages

US/MEX Difference in Hourly Labor Cost on a Subcompact Car

$674 a car

US/MEX FTA advantage on a Q5 Export to Europe

$4,500+ per vehicle

28

Imported From ____

Summary

• New US vehicle sales records set a new higher plateau.

• Have to have a hatch or bed to sell now with low fuel prices.

• Auto market having the best year in 15 years—Jobs , credits, interest rates, gasoline price, household wealth, etc. are all in favorable conditions—but for how long?

• Sales downturn is coming—but when?

• Even the US sales are held, US vehicle production will not.

30