Automakers reported November US sales on Thursday, and they beat expectations.
According to Autodata, sales rose at a seasonally adjusted annual rate of 17.87 million vehicles. Economists estimated that sales would rise at a rate of 17.7 million, Business Insider’s Akin Oyedele reported.
With just one month left before 2016 is in the books, the US market could conceivably break last year’s record total, when 17.5 million new cars and trucks rolled off dealer lots.
That many new autos had never sold in the US before. But records were made to be broken – and 2016 could be another record-breaking year.
There will be plenty of justified celebrating if this happens, but the market dynamics at the end of 2016 are different from what they were at the end of 2015.
Sales last year were being driven by three key factors: cheap gas, relatively high average vehicle age for cars on the road (over 11 years), and flowing credit. Carmakers were made very happy by these fundamentals because consumers were buying pickups and SUVs, the vehicles that bring in the most profits.
Bigger – but not better?
Those key factors remain in place, but the US market probably shouldn’t be expanding at this juncture. It should have plateaued at a high level, staying there as the pent-up demand from the post-financial-crisis year is worked through.
The consensus among market-watchers is that the continued strong sales, elevated above 2015, are being buoyed by incentive spending. The automakers effectively discount their vehicles, spending their profits to maintain sales, and in the process holding their market shares.
- dodge challenger1/Flickr
If you ask around the industry, you’ll perceive no sense of panic about this, and you’ll hear that incentive spending is rising somewhat in unison.
So is this anything to worry about?
It all depends on when you think a market retreat will arrive.
The auto industry is a cyclical business, and sales always fall. In a crisis, they could fall to a 10-million annual pace in the US.
But from current levels, a run-of-the mill dip would bring the market down to a 15-16 million level.
If the pullback is modest, that’s still around 1.5-2 million fewer overall sales, a significant amount.
My take is that 2016 could very well beat 2015’s record. The sales numbers are simply coming in too strong to hold that achievement back.
But once all the Champagne is drunk, a near-18-million sales year should give the industry pause, because the market isn’t sustainable at a 17.5-18 million level in the same way it was at 16.5-17.5 million.
- Business Insider
The calculation at the automakers’ HQs might be that the time is now to gorge on high-profit sales, before the downturn hits. But because I now think a certain amount of demand is being pulled forward in time, the contraction could begin in mid-2017, ahead of an admittedly unpredictable schedule.
Then the question becomes, “How severe will it be?”
Maybe not so severe. But it’s hard to call these types of events, because other factors can come into play.
For example, the Federal Reserve might raise interest rates, tamping down some marginal lending activity. Or subprime lending defaults could increase. After expanding their household balance sheets, consumers may decide that they need to slow down on their borrowing.
So while the US auto market is on the verge of setting another record, that milestone will be less likely to be surpassed by the end of 2017.