Feeling Uncertain about July Car Sales? Don't Give Up Yet

Pent-up Demand Could Give Us Another Good Month


July Car Sales

Mid-July is fast approaching, making it a good time to check the auto sales outlook for this month. July started on a positive note as June car sales surprised to the upside, beating expectations and posting the third highest month of the recovery to date (behind March and May and excluding Cash-For-Clunkers). The June outcome of 14.1 million at a seasonally adjusted annual rate (SAAR) suggests that any demand slowdown interpreted in the apparently weaker May SAAR of 13.8 million was temporary.

But what about sales in July itself? Since the beginning of the year, Edmunds.com has warned that there could be little to no SAAR growth this summer, anticipating that rising uncertainty about the upcoming elections, concern over the impending "Fiscal Cliff" and fear of contagion from the worsening economic situations in Europe and in China would deter at least some consumers from buying new cars. These factors have indeed emerged. Plus, numerous metrics indicate that the U.S. economy could be slowing as well. While the outlook seems shaky for July car sales, expanding credit, an aging fleet and appealing new models should continue to draw out pent-up demand and provide support for auto sales this month. As a result, it is too soon to write off July as a weak month in the making.

July Car Sales

Downward-Trending Confidence Could Continue

Traditionally highly correlated with auto sales, consumer confidence has been a key driver of the autos recovery to date. For example, increased confidence was an important contributor to auto sales strength from late 2010 to early 2011, and again from late 2011 to early 2012. In both of these periods, confidence was fueled by improved stock market performance, which is commonly viewed as a barometer of economic conditions. The rising stock market likely reassured many consumers with concerns about a renewed economic downturn. As a result, these newly confident car buyers, who previously had delayed new car purchases despite having the financial means and the access to credit needed, returned to market and boosted the release of pent-up demand.

Consumer confidence, as estimated by The Conference Board, soared to 71.6 in February, its second highest level since the recession began in December 2007. While remaining somewhat elevated in the following months, confidence has trended downward. Since the direction of confidence can be as important as its levels, this trend could mean bad news for auto sales. Some factors, such as rising inflation and especially rising gas prices, that caused confidence to slip earlier this year are no longer in play. Lately, though, the stock market has struggled to maintain its value, with the Dow Jones Industrial Average fluctuating nearly 800 points during the month of June. Such volatility can undermine consumer confidence.

Unfortunately, it is unlikely that the European debt crisis and recession or the slowing Chinese economy — two key sources of recent volatility — will make enough progress toward resolving to stabilize the stock market. While concerns eased somewhat when Greece voted in a new government and elected to stay in the euro last month, Greece still has a long way to go toward resolving its debt issues. Meanwhile, Spain and Italy appear to be spiraling downward as well. Chinese growth is not expected to revive until the second half of this year at the earliest, although government stimulus could help jump start growth.

Another key source of volatility — concerns about U.S. economic weakness — could well continue if earnings come in weaker than expected (and a number of companies have already issued earnings warnings). Plus, even though the Federal Reserve does not meet again until August 1st, the market will be sensitive to any signs of whether or not the Fed will adopt another quantitative easing program, which many believe is important to spark U.S. economic growth, especially jobs growth.

Consumer confidence could also take a hit from growing uncertainty about U.S. fiscal issues, including whether tax rate reductions and various benefits will be maintained when they expire at the end of the year. The upcoming election could further fuel uncertainty as the candidates attack each other's plans for the economy — a key issue for voters.

July Car Sales

Reasons for Hope

The good news is that while confidence may not improve any time soon, certain factors should help shore up sagging consumer spirits. After peaking at $4.00 per gallon on average nationwide for all grades in early April, gas prices have fallen steadily, most recently coming in at $3.47 for the week ending July 9. Expectations about slowing global demand should continue to put downward pressure on oil and gas prices. Helped by lower gas prices, overall inflation also has moderated; the most recent data from May showed that inflation decreased from a 2.3 percent to a 1.7 percent annualized rate.

Another positive for consumers can be found in the nascent housing market recovery. With supply decreasing and demand increasing, home prices are starting to rise. A full housing recovery is still in the distant future though, meaning many consumers won't be relying on housing wealth to purchase cars any time soon. But, even these small signs of progress have been encouraging for consumers.

Supply and Demand Plus Factors

Despite various headwinds, it cannot be emphasized enough that pent-up demand for autos remains strong at this point. Edmunds.com estimates that at least four million units have yet to return to the market. Access to credit is still growing — a key contributor to the release of pent-up demand this year — and is expected to continue to do so, given the headway made by lenders and consumers in ridding bad debt from their balance sheets and the improvements in delinquency rates.

In the marketplace, supply has recovered from last year's shortages, with total monthly units delivered in 2012 at their highest levels since early 2008. At that time, comparable levels of units delivered supported SAARs from 14 million to 15.5 million. Plus, the introduction of many all-new versions of top-selling models this year should further facilitate sales growth. While prices continue to be on the higher side, relatively low incentives means automakers and dealers could lower prices to gain share or combat any weakening demand.

And perhaps the most compelling reason of all to expect auto sales strength in July? June sales were significantly stronger in the second half of the month, suggesting that the apparent weakness of late May and early June may have been temporary. Strong traffic in early July on the Edmunds.com site supports this trend. So, will July sales excite or disappoint? It could go either way at this point. Stay tuned.

Lacey Plache is the Chief Economist for Edmunds.com. Follow @AutoEconomist on Twitter.

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