Edmunds: Annual car sales strength expected to slow

(February 13, 2013) IRVINE, Calif. — New-vehicle sales are expected to grow nearly 6 percent in 2013 to 15.3 million units overall, breaking the three-year trend of double-digit sales growth that has persisted since 2010, according to Kelley Blue Book.

"Although the sales pace is expected to slow this year, automakers have demonstrated that they can generate solid profits with sales at current levels, which is a strong indication that they will remain disciplined by continuing to match production to meet demand," said Alec Gutierrez, senior market analyst of automotive insights for Kelley Blue Book. 

"Sales growth won't come easily, especially considering the challenges facing the industry in today's economy. While economic growth is expected to arrive slowly in 2013, there are several indications that point toward solid auto industry sales growth in the years ahead."

Among the various factors contributing to the ongoing recovery, Kelley Blue Book believes that pent-up demand, high used-vehicle values, improving credit availability and low interest rates all have played a direct role in the auto industry's ability to outperform the economy.  Each of these factors has been critical to-date and will continue to drive sales this year and beyond.

Kelley Blue Book:  New-Car Sales to Hit 15.3 Million Units in 2013

 

2007

2008

2009

2010

2011

2012

2013

Annual Sales Volume (Millions)

16.1

13.2

10.4

11.6

12.8

14.5

15.3

The economy has come a long way since nearly collapsing in late 2008, yet a long road to recovery remains. At the depths of the recession in 2009, the unemployment rate hit a 30-year high of 10 percent, new-vehicle sales hit a 30-year low of 10.4 million units, and the Conference Board's Consumer Confidence Index hit an all-time low of 25 (for perspective, in 1985 the index was at 100). 

Some feared the onset of a second Great Depression in 2009, and while a repeat of the 1930s doesn't appear to be in the cards, the nation still has a long way to go before the economy is completely back on its feet.

Today unemployment remains at an uncomfortably high 7.8 percent, while consumer confidence is below 60, which is notably better than in 2009 but well below the 4.5 percent unemployment rate and 100+ consumer confidence readings from 2007. This is important to note since 2007 was the final year of a 10-year span in which the auto industry consistently posted sales of 16 million units or more. 

Although the economy has recovered slowly and still has a long way to go before unemployment and consumer confidence are back to levels last seen in 2007, Kelley Blue Book doesn't see a reason why auto sales cannot continue to outperform the pace of the economic recovery.  

"Looking at the historical relationship between unemployment and auto sales from the 1980s through 2007, unemployment would need to be below 6 percent to generate auto sales of 16 million units or more," said Gutierrez.  "According to estimates from the Federal Reserve, unemployment only will drop down to 7.4 percent in 2013 at best; a point that would historically justify sales of only 13 million to 14 million units.  However, since 2010, new-car sales have outperformed their traditional relationship with unemployment, which means that sales in excess of 15 million units clearly are attainable."

Auto sales also have outperformed their historical relationship to consumer confidence by a significant margin.  Despite expectations for consumer confidence to remain well below levels historically required to justify sales of 15 million units or more, Kelley Blue Book believes auto sales will continue to grow as predicted provided that consumer confidence remains stable.

While economic growth has remained relatively weak and only explains part of the auto sales recovery, Kelley Blue Book sees pent-up demand playing a more critical role in the rebirth of the industry.  According to Polk, registered vehicles in the United States are 11 years old on average; the oldest ever recorded. 

The increase in vehicle age can be attributed to two key trends. First, vehicles have grown much older as consumers have opted to hold onto them longer, due to the weakened economy. Consumers have focused on deleveraging after the collapse of the real estate bubble, and unless they require a replacement or the model no longer meets the needs of its owners, many are choosing to hold on to their vehicle rather than acquire additional debt to purchase an all-new vehicle. 

This leads directly to the second major influence of increased vehicle age, which is improved vehicle quality. 

Aging Vehicles to Continue to Generate Demand in 2013

 

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Avg. Registered Vehicle Age

8.9

8.9

9

9.1

9.4

9.5

9.7

9.8

10

10.3

10.6

10.8

                 

Source: Polk

"Vehicles produced during the past few model years are significantly higher in quality than those produced in previous decades," said Gutierrez.  "In the 1990s, consumers came to expect a vehicle produced by a Japanese manufacturer to last 100,000 miles and beyond.  Now we can say the same about vehicles produced by all manufacturers.  Whether shopping for a Toyota, Honda, Chevrolet, Ford or Hyundai, consumers can be reasonably assured that their vehicle will hit 100,000 miles with ease, and 200,000 miles or more with proper maintenance and care."