What's Next For Auto Sales?
Welcome back, cars!
Auto sales are close to levels last seen before the recession:
Since collapsing from 16.1 million a year in 2007 to as low as 9 million a year in 2009, we're now selling 15.4 million autos a year. The last time we hit these levels was December 2007 -- the month the last recession began.
This is obviously great news for Ford and General Motors (NYSE: GM), as the trend could continue, as I'll explain below. But here's what's impressive about the rise in auto sales: Unemployment is still far above December 2007 levels. There are 3.2 million fewer Americans working today than there were back then. We're driving less, too:
So, why are we buying more cars if the economy is still flatlining?
In a December interview, value investor Mohnish Pabrai put it this way:
Even though we have a real unemployment picture which is quite bad, autos seem to be transcending that trend, right? Whereas one would think that autos are tied to the health of the economy. But the thing is, there is another factor that affects it and probably affects it more than the unemployment rate, and that is that the average age of a car on American roads is now 11 years. That is I think an all-time record. And so we have such an old fleet and those years where the sales were so low and people have deferred purchases, it becomes really expensive to repair old cars and interest rates are low, so there are lots of incentives for even someone who is having a tough time to trade in a beater and get a small Honda Civic or something and just take away the repairs.
So we are seeing autos, for example, rebound, even though the economy is not super healthy. We are seeing housing rebound and again, these rebounds are happening because of the long period where very little happened, there was very little demand. And so I would say that sometimes the headline numbers of unemployment rates, etc., can be trumped by the more salient factors that affect these.
And a year ago, Mesirow Financial chief economist Diane Swonk told me in a separate interview:
Pent up demand for vehicles is very high, and it is one of the few places that they got a waiver on the consumer protection laws, so it's almost easier to get a subprime vehicle loan than it is to get a subprime credit card. You may not be able to get a mortgage, but you can buy a vehicle and live in your car, which is unfortunately what some people are doing. I think it is important to understand that this industry has been scrapping vehicles faster than we have been buying them for more than four years. The pent up demand is enormous, and there is financing available, and it's one of the places where we are starting to see some movement again, and that's positive for the U.S. economy.
Another explanation for the rise in sales is that better fuel efficiency of new cars makes trading in your guzzler a bargain. If you go from an SUV that gets 15 miles per gallon to a car that gets 35 miles per gallon, you only need to drive 20,000 miles to save $3,000 at current gas prices. If you have a long commute, buying a new car can pay for itself quickly.
Auto sales should continue to rise. The populations of Americans age 30 to 44 will begin increasing this year for the first time since 2000. As a prime age group to purchase new vehicles, this should provide a demographic boost to auto sales that we haven't seen in more than a decade.
Add these trends up and, if the missing link of employment rebounds to more normal levels of the coming years, it's reasonable to expect auto sales to return to 16-17 million vehicle sales per year -- more than a million units above current sales rates.
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The article What's Next For Auto Sales? originally appeared on Fool.com.Morgan Housel has no position in any stocks mentioned in this article. The Motley Fool recommends Ford. The Motley Fool owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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