Can U.S. Auto Sales Keep Growing At 2015 Pace In The Coming Period?
Sales of new vehicles reached their highest level in fifteen years in the United States in 2015. Overall vehicle sales of 17.5 million units in 2015 was the highest level recorded since 2000, when 17.4 million units were sold. The strong pace of vehicle sales has led many people to speculate that sales might breach the 18 million barrier in 2016. Below, we take a look at three reasons to support those forecasts and two to oppose them.
Reasons to be Bullish
There are primarily three main reasons that support forecasts of 18 million unit sales in 2016:
1) Oil prices have continued to decline. In recent weeks, the price of U.S. oil fell below $27 a barrel on fears of declining economic growth in China, the biggest contributor to global economic growth, and removal of sanctions on Iran. [1] The additional supply of oil, combined with expected weak demand, will put downward pressure on oil prices. This likely means that gas prices will be even lower than a year ago. The average gas price was hovering around $2.00 per gallon compared to $2.30 per gallon in the last week of December, a 15% decline. Cheap gas prices are important even though consumers generally decide in favor of vehicles based on their purchase price rather than the ongoing costs of ownership. To the extent, that variable costs drive auto sales, low gas prices are likely to push consumers toward bigger vehicles like SUVs and pick-up trucks.
2) There is plenty of pent-up demand for vehicles in the market. The average age of a car on the road has increased in recent years from 9.0 to 11.5 years despite increasing new vehicle sales. [2] This implies that consumers have yet to catch up with the decline in auto sales due to the financial crisis of 2009-10. As a result, it is reasonable to expect a large number of these consumers to want to replace their old vehicles with newer ones. While some of these consumers might go for used vehicles, a large majority of them are likely to go for new models. Thus, demand for vehicles should continue to be strong in the coming years.
3) While the Federal Reserve raised the short term lending rate last month, interest rates still continue to remain extremely low. The Fed also guided for a slow increase in the long term interest rate but rates are still lower than what they were in most of 2014. This should result in a high supply of affordable financing deals for auto vehicles.
Reasons to be Bullish
1) Despite all these reasons, there are some risk factors that auto makers need to be mindful of going forward. Chief among them is the glut of vehicle sold through leases in recent years. Prices of used cars have remained quite stable because of the low supply of cars in the rental market. Rental companies usually sell off their fleets after a couple of years and these cars then go on the used car market. However, a large number of vehicles were sold through leases in recent years and when those leases expire, these cars will go on the used car market. This could push down vehicle prices, not just in the used car market, but also in the new vehicles market.
2) There seems to be an ongoing shift in how consumers think of transportation. With the rise to prominence of on-demand and ridesharing companies like Uber and Lyft, a lot of younger consumers have decided to forego new vehicle purchases. And it is increasingly common for them to think of car transport as a utility rather than as a necessity. Many millenials would rather use these companies to meet all their transportation demands rather than purchase vehicles themselves. This trend is supported by the decline in the total number of driving licenses ((The Decline of the Driver’s License, The Atlantic, January 2016)) and miles driven per car in the United States. [3]
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- U.S. Oil Falls Below $27 a Barrel, Wall Street Journal, January 2016 [↩]
- Average age of cars on U.S. roads breaks record, USA Today, July 2015 [↩]
- Why America stopped driving, USA Today, February 2014 [↩]