A commonly held view among auto industry observers is that new-car sales peaked in 2016 at 17.5 million annually and that the next few years will see relatively flat to slightly declining sales. Indeed, 2017 sales to date support this view, coming in at seasonally adjusted annual rates (SAARs) ranging from 16.5 million to 17.5 million. But, one thing the "Peak Auto" proclaimers have not taken into account is the impact of Donald Trump's presidency. President Trump has vowed to "Make America Great Again," promising new jobs and a surge in economic growth. To do this, he has proposed a number of policies, including increasing infrastructure spending, cutting taxes, and imposing tariffs on imports. This policy agenda raises the possibility of higher new-car sales as well. But surpassing Peak Auto is not a foregone conclusion. While economic conditions are supporting current sales, driving higher auto sales will largely depend on economic growth that brings new buyers into the market.
Starting With the Right Ingredients Economywide
President Trump takes office at a time when the economy has been in a particularly long expansion. It has been over seven years since the last recession ended in June 2009, compared to the typical four years between recessions. But given the slower pace of this recovery, economic forecasts, even before the election, have called for GDP growth to continue at about a 2 percent rate through 2019, and just slightly less in the longer run.
Other measures also demonstrate current and expected economic strength. The unemployment rate is currently near a 10-year low, at 4.5 percent, at which level the Federal Reserve projects unemployment to remain through 2019 before rising slightly in the longer run. And, importantly, wage growth and the share of the working-age population that is employed (i.e., the employment-to-population ratio) continue to make gains, suggesting that the labor market continues to tighten. Meanwhile, the stock market remains at all-time highs and home prices continue to rise. Moreover, consumer confidence just reached its highest level since December 2000. The combination of these factors provides strong support for consumer spending and, in particular, for spending on big-ticket items such as automobiles.
Yet, even with this current economic strength, there is room for improvement. Despite labor market gains, the labor force participation rate, defined as the share of the working-age population who is employed or actively seeking employment, is at its lowest level since the 1970s and the share of the long-term unemployed (six months or more) at 22.6 percent remains near historic highs. And, although nominal household income has grown in recent years, real median household income remained essentially flat during 2016, and purchasing power is down slightly from the beginning of the century. Presumably, economic growth would draw from these sources.
Challenges to Automotive Growth
Growing new-car sales poses a challenge for a market that appears to be at equilibrium, following double-digit sales growth from 2010 to 2015 and record sales the past two years. The 2017 forecasts for new-car sales typically do not expect sales to top 2016 levels. Automakers are struggling to adjust to the new normal, as evidenced by rising inventory levels due to a failure to anticipate slowing demand and by increases in incentives and a resort to fleet sales to meet sales targets.
There is opportunity, however, for sales growth. While much of the pent-up demand that accumulated during the recession and early recovery is considered to have come back to market, sales figures reveal segments of the population who are underrepresented in terms of new-car purchases and likely account for the remaining pent-up demand. One key group is millennials (roughly 18 to 34 year olds), who account for 29 percent of the population but just 11.5 percent of new-car sales. This age group's share of population has remained unchanged since 2008, when its share of new-car sales was a somewhat higher 14.5 percent. Another underrepresented group is households with annual income of $50,000 or less; they account for 45 percent of the population but just 26.5 percent of new-car sales. Economic policies that successfully impact these and other underrepresented segments have the greatest chance of increasing new-car sales.
Not All Policies Are Created Equal
Ultimately, growing new-car sales depends on the ability of Trump's policies to spur faster replacement by existing car owners and/or bring new buyers into the new-car market. In economic terms, the policies will have to generate enough jobs and income growth to offset interest rates, which will continue to rise as the economy improves, and outpace increases in vehicle prices from either growth-driven inflation or from tariffs.
While Trump's goal is to increase economic growth, his key proposed policies to do so have varying potential to drive car sales. The most promising one is his plan to massively increase infrastructure spending. Another policy, cutting personal and corporate taxes, also has high upside but is less certain to have an impact. Meanwhile, a third Trump policy — tariffs on imports — has the greatest likelihood to harm new-car sales and at best will merely redistribute sales among automakers.
A detailed assessment of the potential impact of the following proposed policies is provided separately:
For additional Edmunds commentary on the impact of Trump's policies on new-car sales:
Beyond Roads and Bridges: How Trump's Infrastructure Spending Plan Could Grow Auto Sales | Trump's Tax Cuts Are Not Likely to Bring Much Windfall to Auto Sales | Trump's Tariffs Could Import a Big Hit to New-Car Sales
Lacey Plache is the chief economist for Edmunds.com. Follow @AutoEconomist on Twitter.