Sober Reflections on Increasing Sales

With February vehicle sales pushing solidly past 14m units on a seasonally adjusted basis, evidence is building that the sales recovery is entering a new, more robust phase.

The case is not airtight though. Sales results are still being boosted by returning buyers who had waited for the supply of Japanese-sourced vehicles to rebound following last year's earthquake. And with one of the more mild winters on record — at least across much of the country — the assumptions in the SAAR formula could be knocked out of whack, making January and February something of a layup. Whether these factors are behind the nice SAAR numbers so far this year — or if we can count on a more fundamental return to market by recession weary consumers — will be made clear in March. March is when unit sales typically jump up, meaning that a good SAAR number is a much tougher hurdle. A March SAAR of over 14m total sales would be a very good sign.

One recent data point that argues in favor of a fundamental recovery is the age of vehicles being traded in. Over the last couple months, that number has hit highs not seen since Cash for Clunkers. The number of older vehicles being traded in suggests that consumers who have been holding off might actually be returning to market.

Switching gears a bit, I found it interesting that in the same week that we were seeing encouraging sales numbers, I also ran across a couple of articles that raised some troubling questions. The first article was in one of my weekly "must read" publications, The Economist. Their Schumpter column was titled: "This Time it's Serious.". The piece cites a raft of statistics — and also the Harvard Business Review — to make the case that America is becoming less and less competitive as a place to do business. From the headline, you can deduce this case has been made before, but this time there is more to it.

The second article that stood out was from a less likely source: Thomas L. Friedman's column in The New York Times titled "A Third Voice for 2012." The connection between the two pieces is American politics. The Economist cites it, along with the associated policy risk, as one of the factors behind America's declining competitiveness. Friedman's column points to some of the work being done by David Walker. Walker was the United States comptroller general from 1998 to 2008. Since leaving government, he has been a credible voice trying to raise awareness about our nation's fiscal mess. (Hint: It is much worse than the politicians acknowledge.)

Both articles are worth a read. They serve as reminders that, while sales are sure to improve in the short term, the recovery is but a normal part of the business cycle. Underneath this cycle, there are longer-term trends playing out as well. The implications of these trends for auto sales, and for the economy as a whole, are not pretty.

Something to think about as the sales forecasts for this year get ratcheted up...