When revealing its first Industry Report for the year, ALG did not make any significant adjustments to the current used-vehicle supply outlook.

Analysts acknowledged the last major adjustment was made for their July/August 2011 edition.

Looking ahead to when they next roll out a report for the March/April edition, ALG analysts projected to see a positive seasonal pattern.

“Expected declines (depreciation and seasonal pattern) will be within 0.5 points to 1 point on average due to a positive seasonal pattern than what was seen in the January/February edition with varying degrees for particular segments due to differing depreciation rates,” ALG explained.

“Based on the latest economic data, including housing and labor market figures, as well as overall economic growth rates, ALG may make further adjustments in the March/April edition to reflect the current and anticipated economic situation,” analysts emphasized.

ALG contends the general consensus on the outlook of the economy still remains a view of slow growth even with the improvement in labor markets.

“There are still many potential problem areas that need to be worked out including the European debt issues and slow growth in housing prices, among other things,” ALG acknowledged.

“ALG is paying close attention to these metrics, which affect the wealth of consumers, thereby having an impact on current and future big ticket item purchases such as automobiles,” the firm pointed out.

More Economic Commentary

ALG delved deeper into U.S. economic data, beginning with a mention that GDP grew at a 2-percent seasonally adjusted annual rate in the second estimate for the third quarter.

Relative to the 0.4-percent and 1.3-percent growth rates for the two prior quarters, analysts declared this third-quarter number is a welcomed improvement and has dampened thoughts of another U.S. recession.

ALG highlighted consumer confidence also saw a huge bump in November, going from its lowest level in more than two years (40.9 in October) to 56 in November.

“Though this is still far lower than what was seen prior to the recession, and not even close to the post-recession peak, the increase is a good sign as the economy moves further into its recovery,” analysts explained.

“There are clearly still many issues that need to be dealt with, including the prospect of a European recession, which some say has already begun, and the difficulties with the U.S. deficit,” they continued. “However, at present, the recent numbers have at least given some cause for optimism.”

Next, ALG turned its focus on fuel markets, noting there was little change made to the gas price outlook for its January/February edition relative to the November/December 2011 edition.

Analysts indicated oil prices for the last three months through October have been hovering near $86 per barrel while gas prices sat at $3.45 per gallon in October. This is down significantly from the $3.91 that was observed earlier in the year.

“Recent months have seen fairly stable oil and gas prices, though they often fluctuate a great deal from one period to another,” ALG stated.

“With this in mind, ALG expects that gas prices will average about $3.90 per gallon in the 36-month term, and continue to show steady growth in the foreseeable future,” the firm added.

In regard to the housing and labor markets, ALG took guarded approaches when discussing these sectors.

“Unlike many of the other indicators, which have at least shown some improvement, housing prices have not been able to sustain any sort of growth throughout the recovery,” analysts explained.

“Not surprisingly, housing permits have also not shown much improvement, with prospective builders unwilling to get the ball rolling again with the expectation of low prices cutting profits,” they continued. Though ALG does remain confident that 2012 will be a better year for home prices, it continues to remain an outlook of slow growth.

“Though there has been some significant improvement during the last quarter, the labor market still has a very long way to go before it returns to levels seen prior to late 2007,” analysts went on to note.

Analysis of Minicar Segment

Turning back to a discussion about vehicles, ALG used its latest Industry Report to shine a light on a niche segment — minicars.

“Minicars have been around for many years in other parts of the world,” ALG explained. “From the ‘city cars’ of Europe to the ‘kei cars’ of Japan, markets outside the U.S. have needed vehicles adapted to their tight city streets and tough parking situations. These small cars also helped to save fuel, which has generally been priced higher overseas.

“In recent years, the U.S. market for small cars has grown, especially as fuel prices have become less stable, and there has been a proliferation of B-sized cars, such as the Ford Fiesta and Honda Fit,” analysts continued.

“Sales of B cars are definitely up, and the long-term prospects for that segment are strong. But the Minicar portion of small car sales is less proven,” they stressed.

ALG recapped BMW’s Mini brand entered the market in 2002, and has been what the firm called a “resounding success.”

Analysts conceded models that have followed such as the smart fortwo and Fiat 500 have not seen the same results, and “the future of the segment in North America is unclear.”

ALG mentioned Toyota, Chevrolet and Mitsubishi are introducing new entries in this segment but some nameplates such as Kia and Ford have decided against it.

The firm insisted it intends to continue to study the interaction between “related segments, in this case minicars and the larger subcompacts, and how it impacts market share, retail sales and residual values.

Analysts went on to outline what elements they plant to watch closest:

—Fuel Economy: ALG believes there seems to be a strong link between the average price of gasoline and the fuel economy that buyers demand.

“It’s especially interesting to see how the passage of certain price inflection points creates spikes in purchases of more fuel-efficient vehicles as happened at both the $2.50 and $3 points,” analysts noted.

“As ALG expects gas prices to hover around $4 per gallon in the longer term, fuel economy will continue to increase in its importance for buyers,” they continued.

—Vehicle Size: ALG pointed out the two-passenger fortwo sits at the small end of the spectrum, and the firm thinks its fuel economy is not high enough to account for the compromises it entails. Analysts project the new Scion iQ should improve this equation with a small back seat and nearly as much interior space as a Mini, as well as better combined mileage than the smart.

“Despite the Ford Ka and Chevy Spark being nearly identical in size, Ford doesn’t believe the U.S. is the right market for a minicar, while GM has given the green light,” ALG said. “The Kia Picanto will also stay away from North America, at least for now.”

—Entries: With the addition of the iQ, Spark and electric Mitsubishi i-MiEV, ALG tallied that there will be six models available measuring under 146 inches in length, with the market pioneer, the Mini Cooper, being the longest.

—Sales and Residual Outlook: Until 2008, ALG indicated residuals consisted solely of models from Mini, what it believes is one of the strongest brands in the industry.

With the addition of the smart and Fiat models, which have much weaker forecasted retention, analysts explained residuals have declined.

They added retail sales among minicars spiked in 2008 when smart debuted with more than 24,000 sales, but the brand quickly dropped off, and Fiat has been “slow to contribute.”

New Model Assessments

ALG offered commentary about four new models mostly from foreign OEMs, projecting how these vehicles might be received and where their residual trends might be headed.

—2012 Buick Verano: “Buick has been looking to inject some youth into its brand, and that has meant going smaller,” analysts insisted. “The brand has dropped the full-size Lucerne and added the Regal, a European midsizer. Now the Verano bows as a mid-compact to offer an entry point for young buyers. The new sedan slots between traditional mid-compacts like the Chevy Cruze on which it’s based, and the premium entry luxury models like the Audi A3 and Acura TSX. The cabin is luxurious in current Buick style, and the ride is quiet and controlled. The 180-hp 2.4L has plenty of power for the car with a turbo four coming in 2012.

“The Verano is well-suited to its mission of offering a premium experience to younger drivers for a modest price, though those looking for some sportiness will need to shop elsewhere,” ALG projected.

—2012 Mazda Mazda3: “The new Mazda3 may not look all that different — though designers have toned down its oversize smile a bit — but the biggest enhancements are under the hood, with its new Skyactiv-G engine and 6-speed transmissions,” analysts highlighted. “The 2.0L engine bumps both power and fuel economy, with a combination of 155 hp (up 7), 148 lb-ft of torque (up 13) and 39 mpg highway for the auto (up 6). The 3 also loses weight and gains stiffness though chassis mods, strengthening its already-sporty attitude, while interior enhancements keep the cabin fresh.

“The Mazda3 has new ammo in the fuel-economy battle among mid-compacts, and it offers an excellent balance between efficiency and fun,” ALG surmised.

—2012 Volkswagen Passat: “The new Passat, larger and more affordable, was developed with a stronger focus on the North American market,” analysts asserted. “But because it’s being sold throughout the world, it needed the refinement that European VW drivers expect. There are subtle signs of where the cost was removed, but overall the Tennessee-built Passat feels smooth, solid and quiet. It’s also significantly roomier inside, and its trunk grows while its base price drops roughly $7,000. One cost-cutting measure was to leave out the turbo engine; the base 5-cylinder has only 170 hp, but a 280-hp V6 and a diesel with 236 lb-ft of torque — and 40 mpg highway — are available as upgrades.

“VW is serious about targeting the heart of the market, and it has managed to retain enough of its premium feel to offer a unique selling proposition in the U.S. market,” ALG stressed.

—2012 Toyota Camry: “Toyota Camry has had an impressive run, retaining its sales crown in the midsize segment for most of the last decade,” analysts indicated. “To keep this trend going, the 2012 Camry has been reworked, but with the same basic underpinnings as the last model. Consequently, the dimensions and the engines carry over from the 2011 model. Thanks to some tweaks, including a new auto transmission, fuel economy edges up by a few mpgs. The styling is new inside and out, with the interior getting better materials and some interesting contours. Toyota also adds some techno gadgets, like voice-activated nav, a touch-screen for its stereos and the Entune connectivity system.

“The redesign should help the Camry sustain healthy sales in the U.S. But without a revolutionary redesign, Toyota gives competitors a chance to start closing the gap,” ALG concluded.