16M Sales Years Beyond 2015, Edmunds ForecastsBy Lacey Plache May 26, 2011
Are boom times for the automotive industry, a la the pre-recession 2000s, just around the corner? As sales strength has demonstrated during 2011 to date, the auto recovery is gaining strength. However, numerous headwinds, in particular post-earthquake supply issues, are exerting drag upon the recovery. Moreover, employment, access to credit and housing valuesall key contributors to pre-recession auto sales performanceremain years away from pre-recession levels at their current rates of recovery and are unlikely to accelerate substantially beyond these rates any time soon. As a result, Edmunds.com expects a more tempered pace of auto sales recovery, with sales not reaching 16 million until after 2015. In 2013, sales are forecasted to be 14.65 million units.
Cash, Credit, and Confidence
To understand whether auto sales will return to pre-recession levels, it is helpful to explore what factors drove such levels previously. Pre-recession, buyers enjoyed an abundance of all things that contribute to car sales. Unemployment rates sank and income grew, raising the ability to pay for durable goods purchases like autos. Lenders eased standards so that greater numbers of sub-prime borrowers had access to credit more than ever before. In addition, the two-decade decline in auto loan interest rates, coupled with generally high incentives for domestic and South Korean automakers, rendered vehicles more affordable than ever. Finally, consumer motivation to buy was buoyed by soaring stock market and real estate values.
Slow Recovery To Moderation
The recovery to date has been characterized by a lack of abundance for auto buyers. Persistent high unemployment and sluggish income growth have constrained consumer spending. Tight lending standards have limited consumer borrowing. Consumer confidence, and hence motivation to buy, has been dampened by uncertain economic conditions and the lack of a resounding recovery. Indeed, the housing market has yet to bottom out, with some industry observers predicting another year of bank foreclosures and declining prices. Furthermore, consumers venturing into dealerships have not necessarily found the deals that once existed. Domestic automakers, attempting to strengthen their own balance sheets, have reined in incentives. Recent supply shortages have led to higher prices and reduced Japanese and other automaker and dealer incentives to offer incentives.
However, during the past six to eight months, an increasing number of signs have appeared that suggest that economic fundamentals are improving. Namely, a prolonged stock market bull run has bolstered consumer confidence, lending standards are easing slightly for sub-prime buyers, and job growth is occurring at a healthy rate. These factors have all contributed to rising auto sales momentum. We expect this momentum to continue but at a moderate pace, given the extent of recovery in fundamentals still necessary. For example, at the current rate of roughly 250,000 jobs added per month, it will take nearly two and a half years to recover the 7 million jobs still needed to reach pre-recession employment levels, which do not include jobs needed to accommodate population growth.
By pre-recession standards of 16 to 17 million units per year, some 13 million units were potentially unsold during the recession and recovery to date. The amount of pent-up demand in existence currently is likely far less. While some consumers purchased used vehicles instead of new vehicles, many others are facing a new financial reality characterized by greater austerity. Indeed, consumers are still in the process of deleveraging from their debt acquisition binge that occurred pre-recession. As a result, consumers are holding vehicles longer and the average vehicle age is increasing. Also, the number of vehicles owned per household has decreased since the pre-recession days and is likely to decrease further, as Citi Autos survey research has found.
Numerous would-be auto buyers lost substantial value in their homes and investment portfolios during the recession and financial crisis. Aging baby boomers whose retirement portfolios deflated will be less likely to buy as many new cars or replace their cars as frequently as previously. Parents faced with job loss or stagnant incomes will be less likely to purchase vehicles for their teenage and young adult drivers, or even for themselves. Homeowners owing more than their homes are worth will be unlikely (and perhaps unable) to qualify for auto loans. Sub-prime borrowers will be excluded from the market to a greater extent than previously.
Forecast Through 2015
Last week two prominent industry observers published reports forecasting auto sales in the next few years. A.T. Kearney forecast that auto sales would once again hit the hallowed 16 million mark, by 2013 no less. Consumers who had passed on a new car during the recession would finally return to market. Lenders would once again extend credit to the less-than-prime borrowing population, enabling new car-buying from this group who had been shut out of the new car market since the financial crisis. The report estimates that up to 9 million units of pent-up demand accumulated during the recession and recovery periods will be released in the next 5 to 7 years. However, Itay Michaeli of Citi Investment Research offered a rather different forecast for 2013: 14.5 million. Based on survey research, he concluded that consumers simply are not maintaining as many vehicles per household as they did pre-recession.
The two different forecasts paint contrasting pictures of what kind of auto sales recovery can be expected and begs the question of how optimistic we should be about this recovery. Unlike previous recessions and recoveries in which the steep fall of auto sales was mirrored by a rapid recovery, Edmunds.com expects auto sales to follow a more moderate pace of recovery this time around. One key difference is the extent to which economic fundamentals must recover, which has been exacerbated by the financial crisis accompanying the recent recession. Indeed, research has found that unemployment often persists for 10 years following recessions coupled with financial crises. And, nearly two years after this recession officially ended, the housing market crisis has yet to reverse. Accordingly, we do not expect auto sales to return to the 16 million level until after 2015. For 2013, we place sales at 14.65 million. For 2011, we are still forecasting 12.9 million, with upside potential for sales up to 13.3 million if supply issues resolve rapidly enough.