What's Really Holding Back the Auto Recovery?

By Karl Brauer August 25, 2010

Three years after the recession that started in December, 2007, and according to various economic indicators, one year into an economic rebound that began around July of last year, the strength of the recovery remains open to debate.

history of SAAR bounces after recession.JPGBut using these dates as a baseline and comparing current auto sales numbers to recession/recovery patterns of the past confirms what many already know: this time it's different.

To now, there's been a consistent and now-predictable pattern in auto sales demonstrated in the past recession/recovery cycles. As one might expect, during a recession car sales decline, during a recovery they grow. But what might not be as obvious are the historically consistent proportions of this decline/growth pattern over the course of the previous five recessions, dating back to 1970.

Edmunds.com analyzed these recession/recovery sales trends and confirmed a direct correlation between the level of decline and the subsequent level of growth. Put simply, the greater the drop-off in auto sales during a recession, the stronger the rebound in sales during the first 12 months of recovery.

But not this time.

In the most recent recession, auto sales dropped 39 percent from their pre-recession rate of 16 million units in late 2007 to 9.7 million units during the depth of the recession (June, 2009). Based on the pattern of previous recessions, car sales should have recovered 71 percent from 2009's low point, delivering a Seasonally Adjusted Annual Rate (SAAR) of 16.6 million units by this June.

Instead, the industry enjoyed a meager 14 percent recovery in sales, to a SAAR of 11.1 million units.

What Up With That?

Why is this recovery different? What's keeping auto sales from rebounding like they have following past recessions? There are multiple causes, though high unemployment, high consumer debt and a substantial drop in home and stock values are the most prevalent.

These factors are curtailing consumer confidence and reducing willingness to commit to long-term financial obligations such as a new-vehicle purchase.

Here's why this auto-sales recovery has been a bust compared with prior rebounds:

Rates can't go lower than low: The government's ability to stimulate new-vehicle sales has been limited compared to previous recessions. Financing rates currently are at historic lows and have been for nearly a decade. In 1982, the interest rate on a new-car loan was 18 percent; in May of this year, the average new-vehicle finance rate was 4 percent.

interest rates historic chart.JPGRock-bottom rates theoretically would encourage sales, but the near-perpetual availability of low-cost loans means buyers don't find cheap financing much of an inducement anymore, particularly if there are other pressures on household finances.

And despite such consistent lows, the rates aren't obtainable by everyone as they were a few years ago. It's no coincidence that easy credit and SAAR levels above 15 million units both vanished in 2008.

The new austerity and "substitution:" There's been a shift in consumer buying behavior; the recession has produced would-be new-car buyers who now are giving greater consideration to used cars when it comes time to replace a vehicle.

Normally, there's pent-up demand when consumers stop buying new cars that is balanced by an eventual spike in new-car sales. But today's vehicle owners are hanging on to their vehicles longer, and when they do finally decide it's time for a replacement, many are shopping lower-priced used cars instead of new.

A recent ballooning in used-car pricing seems to confirm the trend: Edmunds.com data indicate the average price paid for a 3-year-old used vehicle in July was up 10.3 percent compared with last year. And for many individual models, used prices have spiked well into double digits.

Historically high household debt: In the first quarter of 2008, households had amassed debt amounting to 131 percent of disposable income (1951: less than 40 percent). Households have reduced the figure to 122 percent over the last two years, but a deleveraging cycle to bring households back to more sustainable levels of debt is projected to take ten years.

household debt since 1981.JPGWhat's the most important factor in reducing household debt? Increasing income - and household incomes aren't going to appreciably improve, of course, until unemployment rates ease.

The effect of government stimulus is fading: Last year, many buyers of new vehicles were able to take income-tax deductions for sales tax paid on new-vehicle purchases. And at this time last year, the Cash-for-Clunkers program gave attractive payouts to encourage new-vehicle purchases.

Neither incentive is available this year, and many still argue the current slow sales pace can be partly attributed to the thousands of "pull-ahead" sales the Cash-for-Clunkers bonanza stole from subsequent months.

Meanwhile, the effect of government stimulus in other sectors of the economy also is wearing off, meaning the private sector increasingly is shouldering the burden of sustaining a recovery. But the recovery languishes behind legitimate worries about deflation as households and businesses, racked by the recession, now are being much more discretionary about spending.

No Relief In Sight

What does this mean for the future of new-vehicle sales? The same factors depressing the recovery in auto sales over the past year are likely to continue for the foreseeable future, keeping sales in the low 12-million range even through next year, Edmunds.com predicts.

Although pent-up demand for new cars exists - and is growing - it will take time for buyers to reduce their debt loads, particularly if unemployment stays higher than 9 percent and home values languish.

New-vehicle buyers clearly have hunkered into a "needs-based" mindset. All indications suggest getting them back into "wants-based" mode won't happen anytime soon.


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deagle13 says: 11:03 AM, 08.25.10

Interesting info - it's understandable that you lumped the 1980 and 81 - 82 recessions into a single event, but why don't you have any data for the 2001 recession? Also, I noticed that if you arrange the data chronologically, the size of the "bounce" as a percentage of the preceding decline trended downwards from 69-70 (229%) to 90-91 (-10%) then popped up in 07-09 (36%). I'm guessing improved reliability plays a big role here with last year's C4C program distorting the most recent data point.

nick88 says: 12:56 PM, 08.25.10

16 million new sales per year resulted from a combination of asset bubbles and financing schemes that made little economic sense. Those days are gone. Hopefully, they never come back. Get used to 11/12 million units per year, because the recovery is complete.

Expanding sales beyond 12 million units, by offering no money down and zero percent interest, may make sense from the point of view of an industry that is too big to fail(privatize the profit and socialize the cost). But, it is counter productive from societies point of view, because such financing schemes cause over production, which the taxpayer and the people who default on their loans end up paying for. From socities point of view, saving for a rainy day is a much more productive venture.

I must be honest. My opinion would totally change if the government were to classify me as too big to fail. I would immediately spend like a politician or a CEO of a firm that is too big to fail. Nobody can stop me from dreaming. Hopefully, Congress will make my dream come true.

cwc1 says: 8:12 PM, 08.25.10

There seems a reluctance among the automotive media and especially the canned sources of "news" propaganda to state the core reason for this. There is no recovery; that is a myth started by the (non-economist) Keynesians and Obama administration and furthered by sycophantic mass media coverage, most of whose members serve as useful pawns toward advancing the myth, as they echo the nonsense of the supposed experts. The emperor has no clothes - the Obama policies are hostile to business and job creation.

seppoboy says: 6:51 AM, 08.26.10

The industry has had very significant amounts of excess capacity for years, even in a 16mil unit market. The financial crisis and deep recession should have been a time of hardship that would have reduced excess capacity through company failures and plant closures. The limited amount of capacity reduction that actually occurred leaves the industry highly vulnerable to a new norm of 12mil units, or fewer. Sustainable profits will not be possible without another much more painful round of reduction in capacity, and the government policies that prevented these adjustments will be seen in later years as catastrophic failures.

guy1974 says: 10:45 AM, 08.26.10

cwc1 - you need to go back to writing at GOP.com.
There is a recovery, 4 consecutive quarters of GDP growth - fact.
Now other indicators don`t show a strong recovery but we are not in recession or worst depression. Anyone notice that from 1981 onwards debt load increased massively - that coincides with Conservative, free spending, have lots of credit economics brought in by Reagan and continued by all administrations since.
There is a limit to how much debt people can take on (home equity loands, maxed out credit cards, working 2 jobs, having both spouses working etc). Now we as a country face the music - not the current Presidents fault.

carguy58 says: 11:26 AM, 08.26.10

Excess Capacity in a 16 million car sales market? The Domestic Big 3 was mostly responsible for that. The Japanese, German, and Korean car companies never had excess capacity except for Hyundai(2006- early 2009) or Mitsubishi(after the 0/0/0 deals went bust) maybe earlier in the last decade(2003-2004). Now The Domestic Big 3 and Hyundai have learned their lesson I hope!

I think the normal new car sales for a year will be at 14.5-15 million units sold including fleet sales. Thats what it was from 1994-1997. In 1998 the industry sold 15.5 million units as a whole then in 1999 and in 2000 sales ballooned to 16.9 and 17.3 million units sold before leveling off to 17.1 million units sold in 2001.

cwc1 says: 9:38 AM, 08.27.10

^^Yeah, I had to give that job up because the current GOP leadership doesn't have much of a clue. The GDP is phony because it has been distorted by massive, unsustainable federal spending. All that money has been confiscated from the private sector and mostly squandered...and it's devaluing our currency and stealing it right out of our pockets. The private sector is being destroyed.


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