Low Consumer Sentiment Concerning For Car Sales

By Lacey Plache August 12, 2011

110812 Consumer Sentiment vs. SAAR.jpgToday’s discouraging consumer sentiment reading supports concerns that falling consumer confidence could undermine auto sales momentum in August, although favorable buying conditions and deferred demand remain strong counterforces. Consumer sentiment fell sharply from July’s 63.7 to 54.9 in the mid-month August reading from Reuters/University of Michigan. Consumers have had ample cause for consternation, between the debt crisis in Europe, the debt ceiling negotiations and eventual debt downgrade in the U.S., and the ensuing stock market turbulence. Talk of another U.S. recession has increased as well. Given these factors, it is not surprising that sentiment has taken a dive. In fact, the actual report was worse than consensus expectations of 63.0.

Consumer sentiment strongly correlates with auto sales, in general. During the recent growth in auto sales momentum in late 2010 and early 2011, this correlation was particularly strong. Sentiment reflects consumer motivation to buy a new vehicle, and is often a critical a component of auto sales as a consumer’s ability to pay and access to credit.

The effects of falling sentiment may already be cropping up in the marketplace. July sales of new vehicles showed growth consistent with the auto industry’s progressing recovery from the Japanese earthquake and retail sales in general strengthened even beyond growth in autos. Both of these results created initial expectations of improvement in third quarter Gross Domestic Product (GDP) numbers, and boded well for continued auto sales growth in August. However, earlier this week, initial August sales reports from Edmunds.com’s transaction data indicated that consumers’ motivation to make large purchases of durable goods such as new vehicles may be wavering, or even waning. Sales for the first week of August indicated a pace of 12.1 million units for the month at a Seasonally Adjusted Annualized Rate (SAAR). If this rate holds, August’s performance would be slightly down from July’s 12.2 million units.

The auto industry’s ability to overcome current consumer depression lies with the amount of deferred demand that has been expected to release into the marketplace during the next few months as automakers return to normal levels of production post-earthquake and vehicle availability grows. In June, Toyota resumed normal production for the majority of its models built in North America and the effects began to show up in its July sales. Honda sales should likewise see a boost by September since most of Honda’s North American plants will return to full production in August, after operating at 50 percent for the past few months. Increased availability and accompanying increased incentives will draw consumers back to the market.

110812 Cumulative Deferred Demand.jpgNone of the current economic turmoil and uncertainty is likely to affect the auto industry’s production recovery. Increased availability will put downward pressure on prices. In fact, Toyota’s and Honda’s prices have already started to decline, even in advance of substantial gains in availability, in order to maintain market share. Higher incentives from the current summer selldown of 2011 models will further support lower prices. In addition, interest rates on auto loans should remain low in the short term, despite the recent debt downgrade. As a result, we expect buying conditions for consumers to continue to improve throughout the month, and even more so if automakers and dealers react to falling confidence by offering additional incentives.

We still expect the strength of deferred demand and favorable buying conditions to generate growth in auto sales in August from July. The extent to which consumer sentiment dampens this growth will depend on the extent to which the current market volatility subsides. At present, the European Central Bank has begun to take new steps to address the debt crisis there, which should ease some concerns reflected in the market. The beginnings of a virtuous cycle in which auto sales boost the economy and the economy then boosts auto sales had begun to appear in July. If sentiment improves, car sales just might save the economy.

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