Why U.S. Auto Sales Should Speed Up in 2011

While the overall health of the economy in 2011 remains hard to diagnose at the close of 2010, at least one part of the economy seems likely to receive a shot in the arm: car sales. Predictions for next year range from 12.5 million to 14 million, which would signal a boost of at least 10% over this year's anemic numbers.

"There are a lot of people out there who have held off on buying a new car for the last three years," says Karl Brauer, a senior analyst at auto website Edmunds.com, who forecasts sales of 12.5 million next year. Although the final sales are still being counted, it looks as if car sales will reach 11.4 million in 2010.

But although analysts predict auto sales will fare better in 2011 than in 2010, they're hardly forecasting a banner year. As recently as 2006, auto sales routinely amounted to between 15 million and 17 million a year -- far higher than even the most optimistic forecasts for next year, Brauer notes. An increase of only 10% won't give the country the V-shaped car-sales recovery it usually experiences after a recession, he adds.

Corporate Buying Is Back

Aaron Bragman, a senior analyst at IHS Automotive, an economic consultancy in Detroit, predicts sales will grow to around 12.8 million next year. This year's sales were mostly thanks to corporate buying, he says, adding that consumers still haven't reentered the market in a big way.

"I think perhaps the big Christmas spending season has bolstered predictions that people are ready to start buying automobiles again," Bragman says. "But next year will still be a year of recovery and we're still looking at what unemployment numbers do and consumer confidence does."

Investment bank Morgan Stanley is even more bullish than the auto industry analysts. On Dec. 28, the bank's auto analysts said they expect 2011 auto sales to reach 14 million and 2012 sales to rebound to 15 million.

"The average car on the road is over 10 years old, and we estimate has about 120,000-150,000 miles on the clock," the analysts wrote in a research note. "At that point, major components reach the end of their life and repairs tend to be expensive, making it more economical to simply purchase a new vehicle."

The U.S.'s total stock of cars on the road declined in 2008 and 2009 for the first time in history, with more cars scrapped than sold, Morgan Stanley noted. And used-car prices have grown substantially, which also might body well for the new-car market. "A lot of people who are looking at used cars are saying, 'I'm going to buy a new car because the car I want isn't that much cheaper than the new version of it,'" Brauer says.

Cash for Clunkers Cleaned Out Old Cars

According to Edmunds.com, used-car prices have soared from an average of $16,586 in December 2009 to $19,345 currently. The reason? Mainly a shortage of used cars. For one thing, the fact that fewer people have bought new cars means they have traded in fewer used cars. And the government's Cash-for-Clunkers program in the summer of 2009 took an estimated 700,000 used cars off the road.

The increased availability of financing also could boost new-car sales. Better credit quality will eventually lead to a credit recovery, with more credit available for buyers, Morgan Stanley says. And the firm's Auto Credit Quality Index has increased for nine consecutive months.

Bragman notes that automakers and lenders already are rushing to offer car loans to subprime borrowers for the first time since the recession. GM (GM) just bought Americredit to create its own subprime lending organization, while Canada's TD Bank purchased Chrysler Financial to make a similar push. "We may be seeing increased competition for these auto loans, and if the economy starts to improve and unemployment starts to drop, you could see a return to better levels," Bragman says.

Carmakers Grow More Confident

One question mark hanging over the industry is how the group of car buyers who are 25 years old and younger will behave. While that's a large group demographically, it hasn't been buying cars because of underemployment. If the economy improves, the industry could see a huge new group of buyers entering the market for the first time.

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In the face of that possibility, automakers are showing signs of becoming more confident. Incentives have dropped way down this year, for example. Edmunds.com says incentives for domestic, European and Korean cars fell in 2010, with the average U.S. incentive declining from $3,766 in 2009 to $3,333 this year. However, Japanese automakers raised incentives from $1,637 last year to $1,968 in 2010.

Domestic automakers have decided to move away from incentives because they cheapen the brand, Brauer says. The fact that inventories are lower also makes it possible to offer fewer sales promotions. As he puts it: "When you tighten up inventories, you can run lower incentives and not feel pressured to do something to move all this iron that's just sitting around because there isn't as much of it as there used to be."

Of course, if sales start to pick up, companies with the inventories to meet the demand could see an advantage. At this point, the industry will be happy to keep the gearshift out of reverse throughout 2011.