April Sales Pace Bucks Tradition

By Jeremy Anwyl May 2, 2011

2011 April Sales Prius.jpg

When April car sales are announced Tuesday, we at Edmunds.com anticipate the closely-monitored Seasonally Adjusted Annualized Rate (SAAR) of sales will come in at about 13.3 million vehicles, up from March’s 13.1-million SAAR. At first glance, that would seem to be a good performance for the U.S. auto industry, especially considering the events of recent months, including climbing gas prices and the Japan earthquake, tsunami and nuclear plant disasters. A deeper look reveals a more nuanced story.

Let’s start by looking at the sales on a week-by-week basis. The first few days of April continued the strong pace set the last week of March. The SAAR through the 3rd of April was estimated at a hefty 14.7 million, as many incentives were about to end on April 4. Looking at the first 10 days of April shows the estimated SAAR slipped slightly to 14.0 million. Through April 17, the SAAR slipped further 13.5 million units. And by April 24, the SAAR was at 13.3 million vehicles. Edmunds.com forecasts the last week of April saw a SAAR of 13 million units, giving us the total of 13.3 million for the full month.

The significance of downward trending sales pace is that it bucks the traditional trend. April sales usually start slow and then jump after April 15, perhaps having something to do tax-filing day. This year, the second half of the month is not as strong as the historical pattern based on the first two weeks of sales.  A possible explanation to this reversal of tradition is consumer reaction to news of production cuts caused by the Japan disasters. Buyers, looking to buy in advance of any possible shortages and associated price increases, advanced their purchases. However, this reaction looks to have played itself out by month end. Indeed, higher prices -- in the form of drops in incentives -- are starting to be felt.

042911 TCI Chart - AO.jpgInterestingly, so far, the bulk of price changes have been in the form of lower incentives. On the whole, dealer price increases have been modest, averaging around $180.  And much of this increase has been concentrated on smaller fuel-efficient vehicles, so popular in these times in increasing gas prices. For instance, the dealer margins on the Toyota Prius hybrid (top) have jumped $1,000 per vehicle. This suggests that manufacturers have been acting in advance of reduced inventories, while dealers have acted based on actual inventories at that moment. Dealer margins likely will start to climb, and Edmunds.com anticipates further drops in incentives over the next 60 days.

Because the manufacturers seem to be operating in anticipation of the market, it sets up an interesting dynamic. The standard view is that reduced supply will be the factor that constrains sales through the fall. Logically, automakers can reduce incentives as they can expect that pricing pressure will lessen. But if they act preemptively, it is actually possible that the aggregate price increase -- sticker price increases, lower dealer discounts and lower incentives -- will reduce demand at a pace that exceeds any reduction in supply.

Put another way, if overall price increases climb to $1,500 per vehicle -- plausible as they have already jumped around $700 -- then standard price elasticity modeling suggests a reduction in retail demand of around 1.5 million units annually, according to Edmunds.com’s calculations. Meantime, estimates in lost production vary, but around 700,000 to 800,000 vehicles seem realistic. Play this out and supply will not be a problem later this year. Demand will have been pushed down at a faster pace.

This is obviously a very simplistic view, but it does point out that many of the forecasts that are being offered are far too linear in their assumptions. This is a complex marketplace – one in which parts suppliers, vehicle manufacturers, dealers and consumers all are making decisions that are in what they perceive to be in their self interests. Often these decisions are being made with imperfect information. Anticipating how this complex set of factors interacts is very difficult. My guess is there may be surprises in the offing as all this plays out over balance of the year.

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