No matter how many times we’ve been told that the economy is getting better, the most recent Reuters/University of Michigan Index of Consumer Sentiment suggests that the public is not buying it. Coming in at an anemic 73.4 (although up from November’s reading), this is a long way from the 100 baseline that denoted consumer optimism in years such as 1985, which led directly into the first year in which U.S. car sales topped the 16 million mark.
In forecasting U.S. car sales for 2010, most prognosticators set the mark only slightly higher than today’s level—from 11.2 to 11.5 million sales. The auto industry’s dynamics suggest that much higher volumes are attainable. For one thing, the momentum of the used car market—which most new car dealers have promoted to stay profitable over the past seven years—is undergoing a major reversal. The day when new car dealers could pose as used car superstores is likely coming to an end. To survive, dealers will be forced to sell more new cars.
Creating large used car operations was an obvious step for new car dealers. Most were fed up as new car margins were cut to near zero. Constantly changing rebates and incentives meant that few dealers could properly plan their advertising. Worse, the manufacturers were often so late in announcing each month’s incentive programs that dealers commonly missed out on the first weekend’s sales.
No wonder retailers turned to used cars: They could control that end of the business and be less dependent on their franchise’s manufacturer.
Those suicidal incentives had a further major impact on the market’s dynamics: They put downward pressure on the wholesale cost of late-model used vehicles. Every time GM would offer $6,000 to $8,000 cash back on a Tahoe model, it lowered the resale value of similar trade-ins. The lower pricing on late-model used cars made them far more attractive to many who had previously purchased only new cars.
February’s wholesale used car market
Today that point of equilibrium has passed. The dealers’ near-decade-long used car gold mine is fast becoming a memory. Even this year, numerous articles have related that individuals in some major markets were actually paying the same money—or slightly more—for late-model used cars such as the Honda Accord LX than for a brand-new one.
Because new car sales have fallen from more than 16 million to barely 10 million, the availability of late-model used cars is starting to fall by a similar percentage. The situation is only going to worsen over the next three years. Factor in that incentives being offered to the public have shrunk in the past year and we see that the downward pressures on late-model wholesale prices have been reversed. While it may not yet seem dramatic as we enter the winter selling season, watch what happens to the wholesale used car market in February, when dealers are preparing to stock up for the spring market.
Another factor favoring a rising car market is that millions of consumers have deferred buying either a new or used car during this two-year automotive depression. While they deferred purchases, they kept paying current loans, helping to wipe out much of the negative equity in their trades. This makes it easier to purchase a newer vehicle—and thus more likely.
In a nutshell, the best late-model used cars look to be in short supply. Prices will come up, leaving new car dealers with no alternative but to find ways to sell more new models to offset their lower used car sales volumes.
Best guess on next year’s new car sales rate? 13.5 million.
The likelihood that this will come to pass? Unknown—because the American consumer is now living in the new Age of Uncertainty.
Until the average person can assess his or her financial future and feel more confident in that assessment’s accuracy, the forecasters calling for a long and painful recovery will probably be right. Certainly much is made of today’s unemployment rate, but as I predicted here in February of 2009, a reasonable percentage of those still gainfully employed have substantially reduced their buying.
This is what the public, responsible for close to 70% of our economy, faces in 2010. For the average person there are too many questions, and to far too many of them the answers could be ruinous.
If Congress negotiates a final health care bill, right or wrong, most Americans worry about its financial impact, or that they might lose coverage.
Families don’t know what their gasoline or heating oil bills could do in the near term, but some analysts, such as Jeff Rubin, former chief economist for CIBC World Markets, are already predicting oil at $225 a barrel as early as 2012. That would translate to $6 to $8 a gallon for gasoline depending on the refiner’s margins.
Electric utilities across the country have started introducing Smart Meters to homes. In California that’s given rise to a class action lawsuit against PG&E; many consumers claim their new Smart Meters raise their electric bills by hundreds of dollars every month. Similar complaints on Smart Meters are already being reported in Texas.
When the news reports that the Fed Reserve will keep the key interest rates near zero percent, that’s cold comfort to Americans whose credit card interest rates have skyrocketed past 20% in many cases. And borrowers inquiring about home improvement loans, even when they have outstanding credit and huge equities in their property, are being hit with up to 8.95% plus fees to close.
And what if agreements are reached in a Climate Change deal, and Cap and Trade expands in financial markets? This too will raise the price of all energy, from oil to electricity, and the ultimate burden will fall directly on the American consumer.
Because of the massive deficits we’re carrying, many commentators are correctly stating that at some time in the future Washington will have no choice but to raise taxes to balance the budget. This may be done through higher payroll taxes—but the individuals pushing the Value Added Tax are once again being heard. That tax is relatively regressive, meaning that the middle class would bear the brunt of that increased expense.
Most analysts and commentators have missed the fact that new car sales from 2003-2008 could have been much stronger, possibly an extra million new car sales a year, had dealers kept their focus on new sales instead of doubling their efforts in their used car departments. Now, with the availability of late model used cars declining at a rapid rate, they will have no choice but to take those former used car buyers back to new.
All that’s needed for a substantial surge in new car sales for 2010 is real consumer confidence that a substantial recovery is underway. So far, that’s the real missing ingredient.
