Too Early to Boast About Car Sales

Industry experts predict car sales for the upcoming year.
Too Early to Boast About Car Sales
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This March, the U.S. Federal Reserve System (Fed), reported in its Beige Book modest to moderate economic expansion, reasoning that weather conditions were responsible for the less than favorable economic conditions.

For example, New York and Philadelphia suffered a slight decrease in economic activities, while Chicago and Kansas City reported a slowdown in activities, all contributing to the modest to moderate expansion.

The Summary of Commentary on Current Economic Conditions, commonly known as the Beige Book, is released eight times each year by the Fed. It provides a snapshot of the current economic condition in all of its 12 districts.

In its summary, the Fed reported that auto sales since the beginning of the year are nothing to brag about, with the exception of Cleveland. Again, the severe weather conditions were blamed for the lower-than-expected auto sales.

“Auto dealers also noted that the weather contributed to lower showroom traffic and sales. However, some contacts pointed to wavering consumer confidence as an alternative reason for lower auto sales,” according to the Beige Book.

Pent-Up Demand in the Works
“Auto dealers harbor greater hopes than general retailers that spring sales will capture pent-up demand from winter losses. The outlook for 2014 remains positive,” reported the Beige Book.

Also promoting the pent-up demand theory is an April 1 article in Business Insider, but the article also points fingers at higher-than-usual discounts for moving cars from dealers’ lots.

Looking at March 2014 sales compared to March 2013, the Fed’s predictions appear to be right on. According to Automobile magazine, Mitsubishi’s sales increased by 70 percent, followed by Subaru with a 21 percent increase, Chrysler Group with 13 percent, Daimler-Benz with 11 percent, and Volvo with a 10 percent increase in sales.

Motor Intelligence also reported auto sales by manufacturer for March 2014 compared to March 2013, agreeing with the numbers reported by Automobile.

The pent-up demand prediction was contested, however, by an April article by Automotive News. The article stated that rather than pent-up demand, it is vehicle lease expirations that drove the increase in March auto sales.

“The increase in off-lease vehicle returns this year will approximate the total increase in new-vehicle sales,” according to the article.

Research Firms Chime In
“The combined effect of delayed purchases and the beginning of the spring selling season led to strong sales in March,” stated a March auto sales analysis by Zacks research. “The improvement is expected to continue in the months ahead, backed by a strong outlook for 2014.”

The article continues that strong pent-up demand, lower gas prices, and willingness by lenders to extend auto loans will continue to drive this year’s auto sales. The lower-than-ever interest rates, improvement in the unemployment situation, uptick in the housing market, and better-than-usual consumer confidence indexes will all be catalyst for pre-recession auto sales levels.

Subprime Lending Boosting Auto Sales
Market experts promote different reasons for decreases or increases in auto sales. However, few market analysts have delved deep into the numbers to assure that increased auto sales are not just a mirage.

“When we look closer, we discover auto sales in the U.S. economy have reached a new six-year high—with the help of subprime lending,” stated an April 11 article by Profit Confidential. “Cars are being sold to those with poor credit ratings.”

TransUnion forecasted in December 2014 an increase in the U.S. auto delinquency rate throughout 2014, increasing from 1.1 percent at the end of 2013 to 1.19 percent by the end of 2014.

However, Equifax disagreed with TransUnion, reporting on March 6 that delinquency rates in the U.S. auto sector will remain at their lowest level.

A March Experian automotive report stated that the subprime market for new vehicles is on the increase, and with it a likely increase in the delinquency rate. The report stated that credit scores on new car leases decreased by 16 points and decreased on new car sale loans by 9 points between the end of 2012 and 2013.

Lending standards in the automotive industry are returning to pre-recession levels, resulting in an increase in delinquent loans, according to a February report by Standard and Poor’s (S&P) Ratings Services.

For 2013 and the beginning of 2014, S&P has not downgraded or put on negative watch any subprime securities, despite some isolated cases of delinquencies.

Predictions of a depressed auto sales market are muted and auto industry associations are upbeat on behalf of their members. Warning signs about a possible meltdown were discarded. Only the future will tell whose predictions will come true.

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