U.S. auto sales reached a record high in 2016 but had a slow start this year. With speculation of a “dying industry,” are slower sales a signal of something big? Dina Ignjatovic, Economist, TD Bank, talks to Sara D’Elia about the road ahead for car sales in the U.S. and the three speed bumps the industry is facing. TD Economics reports are available here.
So I need to start off by asking you, what's your take on the overall health of the US auto industry?
Well, I think the auto industry in the US is still very healthy. Sales are coming in around the 17 million unit mark, which by any historical means is a very healthy level of sales. And I don't think automakers can really complain about that. Yes, they have come down a little bit from what we've seen at the end of last year, but again, it's still a pretty healthy level.
You say in your report that this isn't the first time, quote unquote, "we've seen a speed bump in sales." What do you mean by that?
Well, last year auto sales kind of started off the year on a pretty soft note, at least softer than expected, and in the second half of the year really ramped up, especially the last four months of the year where sales were coming in around the 18 million unit mark. And so could we see that again this year? Yes, of course we could. But I think that there are some signs that the underlying strength in demand is fading, and so we probably won't get that strength this year.
Now, you point to three potential speed bumps in the market. And the first one is demand. What makes you think people aren't as eager to buy new cars right now?
Well, first of all, during the recession auto sales fell, and so there was a lot of pent up demand in the market. And as the years have gone by where they have slowly built up or replaced those vehicles, and so the pent up demand in the market has really been sated, I would say, by now.
And as well, if you look at the data coming out, you have incentives at pretty high levels, at over 10% of a list price. And at the same time, you have inventories that are very elevated. So I mean, even with all the incentives that automakers are putting out there, they're still not getting sales back up to where they were at the end of last year. And so that really shows that underlying demand could be weakening.
And by incentives, you mean a cash discount, lower rates. Is that the type of incentive?
Yeah, exactly. Anything that makes the car cheaper for consumers to purchase.
Now, you touched on trends after the financial crisis, and we're going to bring up a chart on the screen. But it shows between 2010 and 2016 how sales edged up higher and higher each year. What makes the dynamic different today, or how are these market conditions changing?
Well, I mean, the lack of pent up demand is obviously one aspect. But also, there have been some changes in the trends of lifestyle trends. And even the used car market is now providing a lot of competition, let's say, for the new car market.
During the recession, leasing pretty much dried up. And as financial conditions started to ease a little bit, leasing came back. And so over the last few years, leasing accounted for probably close to a third of overall sales. And so now these models are starting to come back to the market as their leases are up. So three, four year leases are pretty typical. And so now you have a lot of three, four-year-old vehicles that are available that still provide you with the reliability that a new car would, as well a lot of the technology that's in new cars.
And so as more of these used vehicles come to market, A, prices will go down a little bit for them. And it might be a better option for some consumers when considering a young used vehicle versus a new vehicle.
So we talked about two of your main points. We talked about demand and we talked about competition from the used market. But the third one that really surprised me was around credit. You highlight that almost 9 out of 10 buyers need some type of loan when they buy a car. What's changing about the credit market right now?
Well, there has been some evidence that credit conditions have been tightening, particularly by banks. But a lot of this has been focused on the subprime market, because loans to the prime market have been fairly strong lately. We've had delinquency rates come up a little bit for subprime borrowers. They're still very low, but they have ticked up a little bit. And so that may have caused a little bit of concern among lenders. And so we are seeing a little bit of tightening on that side.
So it sounds like you're not convinced that this is the end or the death of the auto industry in the US, but it sounds like, if I'm hearing you correctly, that you think trends are changing or the market's changing, or how they do business is going to be different in the future.
Well, I definitely don't think it's the end of the business. We are obviously going to need vehicles to get around. But you know, there are some sort of lifestyle changes that have taken place. A lot of people are moving to more urban centers and trying to-- or able to use the car sharing services that are provided there or public transportation, if it's good.
But people are moving into more suburban areas later in life, having children later in life, which is when you need to purchase a car. And so you know, these trends will obviously impact overall auto sales. But on the whole, I do think that they can remain at a healthy rate going forward.
Thank you very much.