Steady Improvement Forecast for US Market As Auto Sales Rebound in Full Swing

Some of the world's top economists, auto industry executives, and journalists gathered on Tuesday (3 April) at the Grand Hyatt in New York City for the third annual NADA/IHS Automotive Forum, hosted by the New York International Auto Show. Hundreds of attendees from all aspects of the auto industry, from suppliers to dealerships, were on hand to hear IHS' top economists, a panel of top industry sales executives, and various experts on what the coming years hold for auto sales in the US and abroad. Starting off the day was a discussion of the macroeconomic climate around the world by IHS Automotive's chief economist Nariman Behravesh, who gave the audience an update as to where the US, Europe, Asia, and various developing markets are heading in this post-recession world. At the moment, according to Behravesh, the US looks to be improving better than originally thought. Rising oil prices and gasoline (petrol) prices are being offset by rising income and employment growth in the US. "Consumers can absorb higher prices at the pump," said Behravesh, "because they're getting help from things like super-cheap natural gas that heats their home." Behravesh said that the forecast risk of recession in the US has fallen from a 40% likely scenario this time last year to just 20% likelihood, as many factors are now pointing to positive and continued sustainable growth. US consumers in particular have gone through a massive deleveraging, paying off debt, and while this has slowed improvement in short-term spending increases, it has set consumers up to be "perfectly positioned for excellent long-term spending." Household debt as a percentage of disposable personal income shot up in the mid-2000s, but has already come back down to more reasonable levels as consumers have paid off that debt.

This has had a significant impact on auto sales in the first quarter of 2012, according to IHS Automotive Senior Principal Economist George Magliano. "Pent up demand is now driving sales," Magliano told the group. "The fleet itself is now 11 years old on average." The recent gains in sales are "healthy" sales as well, he says, as retail increases are driving the business, and they are happening with limited incentives and pricing discipline among automakers. To top it all off, used car pricing and inventory is also still very strong, leading to higher residual values for new cars, which has contributed to a resurgence in leasing new vehicles. Inventory is improving among the earthquake-stricken Japanese automakers, and that return to retail leasing outside the luxury brands is happening as credit flows once again to the consumer auto market. The bottom line, according to Magliano, is that while things are looking up considerably in the US market, a still-weak overall economic improvement will keep the release of that pent-up demand as a slow flow, instead of a raging torrent.

Outlook and Implications

As IHS' top economists were on stage talking about how the American auto market continues to improve, results were coming in from the March 2012 sales month, which showed dramatic improvement for many automakers. Chrysler and Volkswagen (VW) both ended the quarter up nearly 40% year-on-year (y/y), and GM posted record sales of vehicles earning over 30 mpg for a single month. And the key, it seems to be, is a spate of new vehicles in showrooms now that are the same size as vehicles were just a few years ago, but featuring technology that has boosted fuel economy considerably. As Mike Jackson, president & CEO of AutoNation put it in a panel discussion later that morning, "I've never seen a time when the market was so in tune with what customers want to buy. I almost think that the rising gas prices are actually driving people into the showrooms, instead of making them second-guess purchases. I can't remember when I've seen the product pipeline match so perfectly with consumer demand."

And that may just be the key to what is driving current sales. Every automaker that was devastated by the 2007-2009 recession, fuel price spike, and wholesale retreat from trucks and sport utility vehicles (SUVs) has retooled their showrooms to feature a far broader line-up of vehicles. Ford for instance looks much more like Honda now than it ever has, with products ranging from 40 mpg subcompacts to a variety of hybrids and plug-in vehicles, but still maintaining the full-size trucks that are needed in the market, albeit with a technology twist of turbocharged engines. In March, over 41% of F-150 pick-ups featured the EcoBoost V-6 engine, a far higher number than anyone even at the company figured would be the take-rate for that feature, according to Ford's Jim Farley, group vice president for global marketing, sales, and service. As the vehicle fleet ages to the point where replacement becomes necessary, customers are going to showrooms to find that vehicles similar to the ones they are trading in now get 30% better fuel economy than they did just a few years ago, thanks to downsized engines, lighter materials, stop-start technology, and mild hybridisation for example. For example, a customer bringing in a 2005 Buick Park Avenue would find that an even bigger 2012 Buick LaCrosse with eAssist actually achieves 10 mpg better highway mileage now. These kinds of advances are likely a major reason why the rising fuel prices seen right now are not dampening car-buying spirits, in the least, and have caused IHS to increase its forecast for US light vehicle sales for 2012 to 14.2 million units.