Automakers on Cruise Control

Ford Motor (F), General Motors (GM) were among several companies and analysts releasing a flurry of forecasts and data for the auto industry this week.  The consensus is that 2017 saw a slight dip in US auto sales after seven years of consistent growth and that 2018 will produce still less sales than 2017.

Autodata, for instance, reported that US sales fell to 17.23 million vehicles from about 17.55 million in 2016.  It predicted sales for 2018 to come in at about 16.7 million vehicles.

Sales for 2018 are widely expected to be down for a variety of reasons.

Most importantly, seven years of consistent growth means that many potential buyers have already bought cars in recent years and there are many good vehicles on the road.  The average consumer keeps a car for approximately 6 years and the average age of a car on the road today is approximately 11 years old.

In addition, 2017 marked a bumper crop of off-lease vehicles hitting the used car market.  Approximately 3.5 million of these cars came on the market in 2017.  This is on top of about 3 million that came on the market in 2016.

In today’s market, quality used (or ‘pre-owned’) cars compete with new cars.  Also, an increase in the supply of used cars pulls prices down.  The average used car is worthless, including with respect to its trade-in value toward the purchase of a new car.

Further, rising interest rates will make new cars marginally more expensive in 2018.  Bankrate expects that the average interest rate on a five-year loan is expected to rise to 4.85% by the end of this year, from 4.43% at the end of 2017.

Finally, softer sales will be a bit of a self-fulfilling prophecy because automakers are simply cutting back production due to the factors above.  After seven years of gains, it makes sense to take some chips off the table and bide their time until the supply of cars on the market wanes and demand builds again.

However, automakers have some good fortune heading into what ordinarily would be a cyclical downturn.

First, newly enacted federal tax cuts and the ongoing strength of the stock market will give consumers more money for discretionary spending.

An additional promising fact is that low gas prices and a stronger economy are pushing consumers away from economy cars and into high-profit SUVs, crossover utility vehicles and pickup trucks.  So, while consumers may buy fewer vehicles, profit per vehicle sold should increase.  This is a similar trend to what the auto industry experienced in the 1990’s when SUVs first became widely popular.

The increased focus by consumers and automakers on pick-ups and utility vehicles will come at the expense of conventional passenger vehicles.  Having leaned out after the government bailouts in the Great Recession, automakers are expected to be less patient than they had been historically with mediocre model lines.  Automakers ordinarily announce changes in their product lines toward mid-year and 2018 may see more pronounced pruning than most years.

Judging from the stock prices of automobile manufacturers this week, as demonstrated in the chart of First Trust’s Auto Index ETF “CARZ” below,  the market seems to believe that the auto industry is in relatively good shape notwithstanding that it is heading into a year of lower unit sales.

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