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Customer LoginsAuto sales momentum is strong: so, what's there to worry about?
April auto sales continued at the strong pace set in the first quarter with a Seasonally Adjusted Annual Rate (SAAR) of 14.4 million light vehicles. This is the fourth month in a row that SAAR passed 14 million and it represents a real milestone in the auto sales recovery. Noting year-to-date sales strength, Edmunds.com, recently raised its 2012 forecasts. It appears that auto sales are accelerating at long last, but that does not mean that no speed bumps lie ahead. Between high gas prices, a fickle economic recovery and resin shortages, the news media sounds alarms almost daily, raising the question of how confident we should be about auto sales. Here's a brief rundown on what to worry about and, just as importantly, what not to worry about:
1. Gas Prices: Rising gas prices have figured prominently in the news since the beginning of the year, with some observers speculating that the average nationwide price of regular gas could rise as high as $4.50 or $5.00 per gallon by Memorial Day. Since the beginning of April, though, gas prices have declined, falling 11 cents during the past four weeks. As a result, the likelihood that gas prices reach $4.50 or even top $4.00 by Memorial Day has decreased substantially. In any case, higher gas prices pose limited risk to car sales, especially if gas prices increase slowly enough that consumers have time to adjust their budgets and habits accordingly. When gas prices increase, consumers tend to change what kind of car they buy rather than not buy at all. The recent gas price hike as well as previous hikes revealed little change to auto sales. Instead, consumers drove less and were more likely to purchase vehicles with greater fuel efficiency.
- Verdict: No worries here.
2. Economic growth: A constant theme throughout this recovery has been the slow pace of economic growth. Just recently, the initial estimates of GDP growth for the first quarter of 2012 failed to excite—coming in below expectations and well under the growth seen in the fourth quarter of 2011. Slower growth is not surprising for this recovery, since recessions caused by financial crises, such as the recent Great Recession of 2007, tend to require longer recoveries. And the first quarter data also showed strength in two key components of GDP: consumer spending and exports. Strong economic growth has not been necessary for strong auto sales in the past, and it may not be now, given the strength of pent-up demand and the pressure from the aging U.S. fleet.
- Verdict: No worries here, for now.
3. Car prices: At the beginning of the year, prices were expected to become more competitive in 2012, as automakers restocked inventories and expanded production to increase their market shares. To date, though, discounts from MSRP have actually decreased, to the lowest levels of the past decade. Many all-new versions of popular products – particularly in the midsize and compact crossover SUV segments ‒ will support higher prices on these vehicles, as will automaker commitments to keep incentives low. And, with higher-than-expected demand streaming into the market, the anticipated oversupply scenario may not materialize. Ford has already indicated that its production may not keep pace with demand. Shutdowns from resin shortages also threaten to constrain supply. As a result, prices could remain tight for the foreseeable future. But not all pricing news is dim. With the Federal Reserve’s support, interest rates are likely to remain low as well.
- Verdict: Consumers should worry—a little; ultimately, automakers and dealers may need to worry as well.
4. Government policy: I read at least one article every day about potential government fiscal and/or monetary policy and its effects. For example, has economic growth been slow enough for the government to implement additional stimulus? Will there be more quantitative easing, a.k.a. QE3? Will the government (finally!) make a long-term decision about the expiring “Bush” tax rates and other spending cuts, or will we fall off of the so-called “Fiscal Cliff?” At what point will astronomical budget deficits significantly impact the average American’s budget? While some of these actions–and their negative impacts‒may never pan out, the problem is that inaction and speculation about potential government action (and its impact on consumer spending) breed uncertainty. Uncertainty can cause consumers to delay major purchases like automobiles. At least part of the pent-up demand that accumulated during the recent recession and recovery is a testament to such delays. And, with the upcoming Presidential election added to the equation, the uncertainty about government policy poses a definite risk to auto sales this year. The good news, though, is that when/if the uncertainty on some of these fronts is resolved, car buyers should return to market.
- Verdict: Worth worrying about, for now.
What about you? What are you worried could dampen auto sales momentum? What are you not worried about? Post your thoughts here!
Posted by Lacey Plache, Chief Economist, Edmunds.com