Sales Forecasts

Beige Book: Dealers see steady sales, watching for off-lease impact

WASHINGTON, D.C. - 

With 10 of the 12 Federal Reserve districts discussing new- and used-vehicle sales activity, the latest Beige Book highlighted that metal rolling over the curb generally was steady in April and May. On Wednesday, the Fed reported through its district-by-district rundown that looking at overall sales, truck and large vehicle turns outpaced car sales across many districts.

The Cleveland district was one of the shining stars from the latest reporting period as sales grew 1 percent over a year ago, with light trucks and SUVs dominating purchases. Truck purchases were strong in the Richmond district, too.

Still, pockets of the country suffered some sales softening, especially the Philadelphia, Atlanta and Kansas City districts.

Looking long term, Fed dealer contacts in the Philadelphia, St. Louis and Dallas districts reported an optimistic outlook for annual auto sales in 2016, due mostly to low gas prices.

Here are additional particulars from the 10 Federal Reserve districts that mentioned sales in more detail as a part of the latest Beige Book:

New York

The Fed noted that new-vehicle sales in upstate New York are reported to be steady at a fairly high level in April, though there were scattered signs of softening in early May.

“Inventories of new vehicles are reported to be somewhat on the high side for this time of year,” officials reported.

Meanwhile, the Fed determined sales of used vehicles were also described as steady in April with some signs of a pickup in May.

“While credit conditions generally remain in good shape, one contact notes some tightening at the low end,” the Beige Book said.

Philadelphia

Overall, Third District dealers reported that light vehicle sales have slowed somewhat during the current period.

“Some dealers suggested that early May sales appeared to be coming back,” the Fed said. “Others expressed concerns that sales have begun to slow from recent peaks.

“Dealers mentioned that lack of inventory, aggravated by high recall levels, has constrained supply,” the report continued.

The Beige Book also mentioned that “record” numbers of off-lease vehicles coming back to the used-vehicle market has lowered demand for new-car sales.

“Dealers hope that total 2016 sales may still eclipse 2015, in part, due to greater use of manufacturers' incentives,” the Fed said.

Cleveland

As mentioned previously, the Fed found that year-to-date sales through April of new vehicles rose 1 percent district-wide compared to those of a year ago. Purchases of light trucks and SUVs continue to dominate the market.

For luxury brands, the report indicated weakening demand that began early in 2016 continued into April.

“Although new-vehicle sales are expected to remain stable at high levels this year, dealers reported that fleet sales are rising, while retail transactions have flat lined or declined,” officials said.

“Transaction prices were stable during the past couple of months, and leasing remains very popular. Dealer payrolls increased along seasonal trends,” they added.

Richmond

The Beige Book said vehicle sales remained fairly strong but have started to slow, according to dealers and an industry expert, while motorcycle sales were sluggish.

Officials added that retail prices rose slightly faster, although increases were moderate overall.

Atlanta

Dealers told the Fed that sales of light trucks and larger vehicles had softened slightly from previously high levels.

“The outlook among district merchants remains generally optimistic,” the Fed said.

Chicago

The Fed found that sales of new and used vehicles remained “robust” and “strengthened further” in recent weeks, helped by “more generous” incentives.

Dealers also noted that leasing activity was especially strong. The Fed added that average overall transaction prices moved higher as the vehicle mix continued to shift toward larger, more expensive vehicles, and because of greater demand for high-tech options.

St. Louis

The Fed shared that reports from dealers were mainly positive. Most dealers noted sales were in line with 2015 levels, and several Memphis used-vehicle dealers reported record sales for the month.

Multiple dealers also noted a shift in demand toward more high-end vehicles.

“Contacts continued to report the beneficial impact of low gasoline prices and low interest rates,” the Fed said.

Minneapolis

The Fed highlighted that a dealership in central South Dakota reported that sales over the last quarter were up 60 percent since this time last year while its used-vehicle sales have nearly doubled.

Kansas City

Officials found that vehicle sales continued to decline at a “moderate” pace and remained below year-ago levels, although dealer contacts expected a “modest” pickup in sales for the months ahead.

The Fed also noted that vehicle inventories decreased but were expected to rise slightly in coming months.

Dallas

The Beige Book indicated sales held fairly steady at “very high” levels and were up slightly from year-ago levels.

“However, a few contacts noted that the contraction in the energy sector was affecting sales,” the Fed said.

Officials added that trucks and SUVs were outselling cars. Inventories were generally at desired levels, although one dealer mentioned they were a little short on trucks.

“Contacts expect good sales volumes in the upcoming quarter but for margins to remain under pressure,” the Fed said. “The outlook is for strong sales in 2016, down very slightly from record highs reached in 2015.”

Economic concerns drag Auto Demand Index down 15 points

RAMSEY, N.J. - 

TechnoMetrica Market Intelligence didn’t have upbeat news for either dealerships or finance companies looking to turn new metal coming out of the holiday weekend.

The firm’s Auto Demand Index (ADI) — which measures the intent of consumers to buy or lease a new vehicle within the next six months — registered a sharp decline in May, falling 15 points from the previous month to a score of 91. This drop marks the second straight month for an index decline.

Meanwhile, the ADI’s three-month moving average also fell for the second month in a row, indicating what TechnoMetrica believes is a continued deceleration in momentum for vehicle purchase intent among U.S. consumers.

In addition, the share of Americans who plan to purchase or lease a new vehicle within the next six months declined three points from April to 15 percent.

TechnoMetrica president Raghavan Mayur explained the ADI is conducted monthly and is based on the response to a key question posed to more than 900 adult Americans: How likely is it that you will buy or lease a new vehicle within the next six months?

The firm pointed out the weakening in purchase intent is further demonstrated as analysts measured the index against the long- and short-term tracking rates.

May’s ADI score of 91 is 10 points below the 12-month moving average of 101 and trails the six-month moving average of 105 by 14 points. Thus, analysts at TechnoMetrica anticipate that new-vehicle sales will decrease “significantly” in the coming months.

TechnoMetrica contends a number of factors are contributing to the decline in the share of Americans who plan to acquire a new vehicle in the near future.

For instance in April, the cost of living in America rose at its highest rate in three years, according to a recent report from the Labor Department. As the price of gasoline continues to move higher, climbing 8.1 percent in April, and the cost of rent and medical care grows, consumers seem to be exercising caution in their spending habits. As a result, at least for the short term, TechnoMetrica thinks Americans are less likely to purchase higher priced items, such as automobiles.

In addition, as consumers observe the slow growth in the U.S. economy, the firm indicated there is increased concern among Americans over the future state of the overall economy.

TechnoMetrica also mentioned the ongoing presidential campaign season is also having an influence on Americans’ spending plans. The prospect of electing a new president tends to create a sense of unease and uncertainty among consumers, who may be concerned about the impact a new president’s policies could potentially have on the national economy.

“With the economy growing at a slow rate, the stock market still under pressure, and gas prices continuing to climb at a steady pace, there is a rising concern among consumers regarding the future outlook of the American economy,” Mayur said. “These anxieties are encouraging consumers to reassess their purchasing plans, especially regarding more expensive goods and services. Thus, we expect that new vehicle sales will decelerate over the coming months.”

Along with gaining insight into consumers’ vehicle purchasing plans through the Auto Demand Index, TechnoMetrica also measures consumer confidence regarding economic conditions in the country by producing the monthly Investor’s Business Daily/TIPP Economic Optimism Index.

In May, that index gained 2.4 points, or 5.2 percent, from the previous month, registering a reading of 48.7. However, Americans continue to be divided regarding the state of the overall economy, as half of consumers assert that the U.S. economy has not been improving, while 47 percent say that it is improving.

The Auto Demand Index survey also delves into various other aspects of consumers’ vehicle shopping plans, such as which brands prospective buyers are most likely to acquire.

In May, Ford maintained its position as the most preferred brand among consumers who are planning to acquire a new vehicle, with a share of 15 percent. Chevrolet, chosen by 13 percent of likely buyers, moved into second place in May, overtaking Toyota, which captured a 12 percent share of consumers. Meanwhile, nearly one in 10 prospective buyers (9 percent) are likely to acquire a Honda for their next vehicle purchase, a decline of two points from the previous month.

Regarding the types of vehicles consumers prefer, mid-size vehicles remain the most popular selection among likely buyers, as just over one in five respondents (21 percent) chose this vehicle type, a decline of two points from April.

Small SUVs were named by 16 percent of likely buyers as their preferred vehicle type, a rate unchanged from last month. Similar shares of consumers (13 percent) identified compact and full-size vehicles as the types they would most likely purchase as their next vehicle. Rounding out the top five, pickup trucks were chosen by 12 percent of likely buyers, a gain of one point from last month.

In terms of demographics, parents, male adult drivers, and Americans ages 25 to 44 showed the greatest increase in purchase intent in May.

In each of the three segments, the ADI levels grew by six percentage points, to 151, 111 and 121, respectively. The most significant drop in purchase intent was shown among Americans residing in the Northeast, who displayed a 19-point decline from April, along with drivers age 18 to 24, whose ADI score decreased by 17 points.

Respondents living in suburban areas and those 65 and older also reported sharp declines in intention to acquire a new vehicle.

Each month, TechnoMetrica uses Random Digit Dial telephone methodology to conduct live interviews with more than 900 respondents, using both landlines and cell phones. The margin of error for the survey is +/- 3.2 percentage points.

In addition, recent statistical analysis has shown a strong correlation between the Auto Demand Index and actual U.S. vehicle sales. The correlation is 0.76.

May used sales could approach 3.2 million units

CARY, N.C. - 

With fewer weekends to move metal, most used- and new-vehicle sales projections from TrueCar, Edmunds.com and Kelley Blue Book consisted of varying degrees of softening against year-ago results.

However, TrueCar’s used-vehicle sales projection for May was a bit upbeat as analysts expect this month’s total sales — including franchised and independent dealership turns as well as private-party transactions — to reach 3,181,877 units. Should the industry hit that mark, the result would represent a 2-percent gain versus May of last year.

Meanwhile, the team at Edmunds.com thinks used-vehicle sales will reach a slightly higher figure — an estimated 3.2 million units for a seasonally adjusted annual rate of 38.5 million. That projected SAAR is the same as a year ago, but Edmunds.com indicated last May’s sales figure came in at 3.4 million so the unit sales forecast is slightly lower.

In its May projection, the Kelley Blue Book team mentioned a prediction that could be noteworthy to used-car managers. KBB suspects that General Motors could be sustain a notable new-model sales decline because of its rental reduction strategy.

“General Motors is expected to report one of the largest sales declines of all major manufacturers in May 2016,” Kelley Blue Book analyst Tim Fleming said.

“GM has been outspoken about its rental reduction strategy, which accounts for much of the drop in volume and will impact sales totals on the company's high rental units like the Chevrolet Cruze, Impala and Equinox,” Fleming continued. “GM is keeping the end-game in mind here. By reducing the volume of GM vehicles in rental fleets, the company will eventually see strengthened residual values.”

No matter what automakers and dealers might do to move used or new metal before the end of May, they’re all facing the situation of one less weekend — a factor multiple analysts noted as likely to impact sales results.

Kelley Blue Book said new-vehicle sales are expected to decrease 6 percent year-over-year to a total of 1.53 million units in May, resulting in an estimated 17.4 million SAAR.

“This month’s sales results are set to fall year-over-year with two fewer selling days combined with retail demand that is holding steady, but not growing,” Fleming said. “While this year may not bring the growth the industry has become accustomed to, it is important to remember that sales are still at record levels and economic factors point to continued strength in the near future.”

Over at TrueCar, analysts touched on how the calendar fell this month, too, putting its projection for total new vehicle sales, including fleet deliveries, at 1,569,538 units in May. That figure would mark a drop of 4 percent from a year ago, restrained by one less weekend compared with the same month in 2015.

“Memorial Day weekend kicks off the summer selling season and we see consistent strength in demand, particularly for crossover utility vehicles and pickups,” said Eric Lyman, TrueCar’s vice president of industry insights. “The industry is up against a tough comparison with May 2015 — with five weekends then versus four this year — but that doesn’t diminish the market’s underlying health.”

And at Edmunds.com, analysts expect that May new-vehicle sales would reach 1,537,436 units for an estimated SAAR of 17.5 million. The site’s projected sales figure would be a 2.3-percent increase from April but a 5.8 percent decrease from May of last year.

While sales appear to be slowing, Edmunds.com says that 2016 is still on track to break last year’s record of 17.47 million new-vehicle sales.

“It’s easy to look at May’s sales and conclude that the retail car market is losing steam, but it’s too soon to say for sure that auto sales are leveling off,” said Edmunds.com director of industry analysis Jessica Caldwell.

“As in previous years, the summer months will flush out more incentives from automakers and the urgency that shoppers show in responding to these incentives will give the industry a much better sense of how the market is trending,” Caldwell continued.

TrueCar reported that incentive spending by automakers averaged an estimated $3,034 per vehicle in May, up 7.1 percent from a year ago, but down 0.4 percent from April.

“Incentives moderated a bit this month while consumers stay focused on higher-margin products,” Lyman said. “Along with this May’s abbreviated selling period, automakers have to adapt to weaker demand for midsize and small cars as relatively cheap gas entices more consumers to upgrade to crossovers and pickups.”

Lyman also mentioned the Federal Open Market Committee left interest rates unchanged last month and overall U.S. economic conditions remain positive. He added that April’s unemployment rate held steady at 5.0 percent, the lowest for the month in eight years, and gasoline prices are still favorable for consumers, falling to a national average of $2.29 per gallon on May 24 from $2.738 a year earlier.

Off-lease impact: Not as bad as some fear?

CARY, N.C. - 

The impact from the upswing in off-lease volume isn’t likely to be nearly as dramatic as some have feared, says a report released Friday by Scotiabank.

And 2016 has started off with strong demand in both the new- and used-car markets.

A summary of the Scotiabank Global Auto Report said there has been a 3-percent lift in new-car sales this year, and used-car demand is up 6 percent year-over-year through March, more or less keeping pace with the growth rates of recent years.

Calling the off-lease volume gains expected to hit the market in coming years “modest by historical standards,” Scotiabank points out that it equates to just a 1-percent hike in total number of used cars for sale each year.

And helping to mitigate the increased supply is strong vehicle affordability, income and demand gains, and low interest rates.

“Despite record profitability for the two largest North American automakers in early 2016, concern about vehicle pricing and the U.S. sales outlook remains high among investors and many analysts. Auto manufacturers and parts suppliers are trading at multiples well below historical averages and at a large discount to the overall S&P500,” Carlos Gomes, senior economist and auto industry specialist at Scotiabank, said in the summary.

The concern is that more off-lease volume has put downward pressure on used-car prices, which could result in softer new-car prices and sales.

“However, we do not see any evidence of this occurring. In fact, demand for both new and used vehicles continues to strengthen in the United States, with average transaction prices for new models climbing to record highs in early 2016,” Gomes said.

More on new-car market

A similar analysis from TechnoMetrica also has a strong outlook for new-car sales, though perhaps not as vibrant as recent years.

Findings from the company’s latest Auto Demand Index survey suggest that thanks to low interest rates and gas prices as well as labor market improvements, new cars will still sell at a nice clip, just a bit slower.

With the monthly ADI survey, more than 900 U.S. adults are asked this question: How likely is it that you will buy or lease a new vehicle within the next six months?

April’s ADI reading was 106, which was a 5-percent decline. The index had climbed for three straight months. That said, last month was the fourth straight reading above 100, leading TechnoMetrica to believe that “purchase intent will maintain its positive trajectory in the coming months.”

The company also pointed out that 18 percent of Americans in April planned to buy a new car within the next six months, which was steady with the March level.

(Explaining how the ADI works, the company said that the “index has been set to an initial value of 100 based on demand levels between February 2007 and April 2007, when annualized sales registered at 16.3 million units.”)

“Consumers are less optimistic regarding the current state of the U.S. economy, due to such factors as the recent volatility in the stock market and growing fears of another recession,” said Raghavan Mayur, president of TechnoMetrica, in a summary of the report. 

“However, positive developments surrounding the auto industry, including relatively low gasoline prices, will continue to drive new-vehicle sales upwards, though at a slightly lower rate than what we have been witnessing lately,” Mayur added.

April used sales expected to soften nearly 4%

CARY, N.C. - 

While multiple forecasts have new-vehicle sales gaining significant or perhaps record-setting steam in April, the projection for used-vehicle sales to be generated during the fourth month of 2016 contains a year-over-year decline of nearly 4 percent.

TrueCar indicated that its used-vehicle forecast for total sales — including turns at franchised and independent dealerships as well as private-party transactions — may reach 3,346,766 units, which would be down 3.7 percent from April of last year.

Edmunds.com also is saying that used-vehicle sales will drop this month.

Edmunds indicated that an estimated 3.3 million used vehicles will be sold in April for a seasonally adjusted annualized rate (SAAR) of 38.2 million compared to 3.6 million or a SAAR of 37.1 million used sales in March.

On the new-model side, TrueCar is much more upbeat as analysts pegged their projection for total new-vehicle sales, including fleet deliveries, to reach 1,502,100 units in April. The forecast represents a 3.2-percent rise from a year ago and the highest volume for the month since 2000.

TrueCar went on to share that the month’s SAAR for total light new-vehicle sales is an estimated 17.4 million units for the month versus 16.75 million units a year ago. On a daily selling rate basis, overall sales dipped 0.6 percent given one more day compared with April 2015.

Excluding fleet sales, TrueCar determined U.S. retail deliveries of new cars and light trucks should rise 4 percent to 1,233,900 units on steady consumer demand.

“April is typically a transitional month wedged between higher-volume March and May, but this year dealerships appear to have benefited from an early Easter that fell in March,” said Eric Lyman, TrueCar’s vice president of industry insights. “It’s reassuring when retail sales grow faster than the overall industry pace as it indicates consumers remain very active and engaged in the new vehicle market.”

The analyst team at Kelley Blue Book shared similar sentiments about where April’s new-car sales figure could land

KBB analysts indicated new-vehicle sales are expected to increase 4 percent year-over-year to a total of 1.51 million units in April, resulting in an estimated 17.5 million SAAR. They added that April sales could report the highest April volume ever, surpassing the previous record of 1.5 million units in April 2005. 

“Following a disappointing March, we expect sales to get back on track in April with SAAR in the mid-17 million range,” Kelley Blue Book analyst Tim Fleming said.  “Increased fleet sales and rising incentive spending among automakers remain the factors to watch, but retail demand appears to be holding steady, signaling the industry’s strong run isn’t over quite yet.”

And like TrueCar and KBB, Edmunds.com also is suspecting that new-vehicle sales could produce records in April.

Edmunds.com forecasted that 1,514,855 new cars and trucks will be sold in the U.S. in April for an estimated SAAR of 17.5 million. Its projected April sales figure would be a 4.8 percent decrease from March but a 4.3-percent increase from April of last year.

Jessica Caldwell who is Edmunds’ director of industry analysis, explained that this month’s sales are poised to eclipse the April record of 1,500,648 new car and truck sales set in 2005, and 2016 is on track to shatter last year’s full-year record of 17.5 million sales.

“Even though Q1 ended with a relatively lackluster March the industry still as strong as ever, and this month’s sales will only reinforce that strength,” Caldwell said. “Considering that April is typically the calm before the storm of summer sales, there’s every reason to believe that 2016 will be a year for the history books.”

Edmunds.com also estimated that retail SAAR will come in at 14.4 million vehicles in April, with fleet transactions accounting for 18.4 percent of total sales.

Like the KBB team, Lyman over at TrueCar mentioned incentives to move new metal, too. TrueCar indicated incentive spending by automakers averaged an estimated $3,021 per vehicle in April, a 13.1-percent increase from a year ago, though down 2.7 percent from March.

“Incentives have ticked up, but backed off from the post-recession high seen in the third quarter of 2015,” Lyman said. “This is a metric we monitor closely as the longest auto sales expansion in the modern era continues. The bottom line is that economic conditions remain favorable and there are still many consumers who need to replace aging cars and trucks.”

TrueCar also pointed out several general economic trends that could help to spur both used- and new-vehicle sales.

“The Federal Open Market Committee left interest rates unchanged last month and overall U.S. economic conditions are still healthy,” TrueCar said.

“March’s unemployment rate was 5.0 percent, the lowest for the month in nine years, and gasoline prices have stayed favorable for consumers, falling to a national average of $2.14 per gallon on April 26 from $2.53 a year earlier,” the firm went on to say.

Dealers tell KeyBanc that used grosses still ‘under pressure’

CLEVELAND - 

KeyBanc Capital Markets indicated that the majority of principals and managers who participated in its March dealer survey said used-vehicle gross margins “remained under pressure.”

By how much are those grosses being pinched? Well, 57 percent of respondents told KeyBanc that grosses stayed flat or dropped by more than $50 per unit in March. When considering the entire first quarter, the percentage of dealers who said grosses either remained flat or declined by more than $50 was even higher. KeyBanc reported the survey sentiment at 65 percent.

“F&I (gross profit per unit) remains strong and continues to partially offset new- and used-vehicle (gross profit per unit) decline, and resulting front-end (gross profit per unit) is relatively intact,” KeyBanc noted in its latest survey report

Meanwhile, dealers told KeyBanc that used-vehicle sales volume remains strong as 71 percent of participating stores mentioned an increase in March. An ever higher penetration of respondents (86 percent) posted used-sales rises for Q1.

Switching to new-model activity, dealers conveyed that grosses are “under pressure” when turning new metal, too. A total of 71 percent of respondents experienced a new-vehicle gross dip of more than $50.

“We remain confident new-vehicle (gross profit per unit) pressures are largely driven by the mismatch of supply versus demand of cars vs trucks/SUVs as consumers have shifted their preference to trucks/SUVs following a decline in gas prices a year ago,” KeyBanc analysts said.

“We expect new-vehicle (gross profit per unit) will improve in the second half of the year as passenger car production is expected to decline,” they added.

KeyBanc elaborated about its reasons why for a projected improvement. Analysts pointed to the devastating series of earthquakes that led to what is anticipated to be a one-week shutdown of production at Toyota in Japan. The firm mentioned that could impact as many as 56,000 units of output based on early reports.

KeyBanc also mentioned the decision by Fiat Chrysler Automobiles to shut down production of the “slow selling” Chrysler 200.

“Tighter passenger car supply combined with a previously planned increase in light trucks for 2016 should help align the light vehicle supply mix with the demand mix, which we expect will lead to an increase in new vehicle (gross profit per unit),” analysts said.

KeyBanc closed with one other points about the new-vehicle market; this time about sales volume which analysts said ticked up by 3 percent in the first quarter.

“We believe lower than anticipated reported March new-vehicle volumes were a result of the Easter holiday timing. For the first time in several years Easter fell into March, which is not a holiday when consumers shop for large items, and it therefore took a weekend of sales out of March results,” KeyBanc analysts said.

“We are confident April volume will show a year-over-year jump as April will not have the Easter impact it had last year and has one extra calendar weekend relative to last year,” they went on to say.

4 factors bringing ‘meaningful’ risk to industry health

LAS VEGAS - 

Perhaps the 2016 J.D. Power Automotive Summit poured a bit of cold water on things just as the festivities in Las Vegas cranked up ahead of the NADA Convention & Expo.

J.D. Power cautioned the industry on Thursday that the U.S. auto market must adopt a more “disciplined” approach to maintain long-term health for the industry.

J.D. Power also warned dealers and other leaders that incentive spending on new vehicles has risen rapidly in the past year and is trending toward recession-era levels for the industry as a whole and has already exceeded recession-era levels on cars.

The analysis found that while overall new-vehicle retail sales are expected to grow by 300,000 to 14.5 million units this year, the growth is being delivered through actions that pose “meaningful” risks to the long-term health of the industry. J.D. Power indicated those actions include:

—Elevated incentive spending
—Increased use of extended loan terms
—Rising loan-to-value ratios
—Record levels of leasing

“Overall, auto sales figures continue to post strong results, but when you peel back just one layer beneath the surface, some worrisome trends are taking hold,” said Thomas King, vice president of the Power Information Network at J.D. Power.

“Chief among the trends is the fact that first quarter sales incentives averaged 9.6 percent of MSRP, a 70 basis-point increase from last year and are trending toward levels observed at the height of the recession,” King continued.

“The increased spending, which is due primarily to manufacturers trying to offset a shift in demand from cars to trucks and SUVs, has the potential to reduce future resale value,” he went on to say. “Significant declines in the value of used cars would disrupt consumers’ ability to buy new vehicles (due to lower trade-in values), while vehicle manufacturers and lenders would have to deal with exposure on their lease portfolios (if off-lease vehicles fail to achieve their expected resale value).”  

King noted that an immediate and significant reduction of incentives on new cars is required, but that means manufacturers will have to reduce vehicle production levels. While J.D. Power noticed that many manufacturers have already made significant adjustments to their production schedules, analysts pointed out the scale of the shift away from cars toward trucks and SUVs is such that further, more significant changes are required.

The J.D. Power briefing mentioned four other key findings. Data is for the first quarter of this compared with the first quarter of last year, unless otherwise noted.

—Overall sales growth projected through 2017: In 2015, 14.2 million retail sales were achieved. That figure is projected to grow to 14.5 million in 2016 and 14.7 million in 2017.

—Rising incentives are major concern: Industry-wide, incentives are averaging 9.6 percent of MSRP and are just 150 basis points shy of the peak level reached at the height of the recession.

—The industry’s average incentives mask a significant deviation between spending on cars versus trucks: Spending on cars has reached 12.3 percent of MSRP, well above peak recession levels, while spending on trucks has remained stable at 8.2 percent.

—Long-term loans and leases on the rise: The percentage of loans in the 84 months and longer range is now 5.4 percent of total sales, up 140 basis points from 2015. Likewise, the percentage of vehicles that are leased is now 31.4 percent, up 360 basis points from 2015.

—Buyer credit scores declining: The proportion of new-vehicle buyers with FICO scores below 650 has increased 40 basis points from 2015 with a total of 17.6 percent of all buyers now falling into that category.

AutoNation: Disruption from recall policy ‘advantage’ in long-term

FORT LAUDERDALE, Fla. - 

Sixteen percent of AutoNation’s used-vehicle inventory was unable to be sold at the end of last year due to its own internal policy to not sell any vehicles with open safety recalls. Add that to the less than 2 percent of their new-vehicle inventory affected by the same policy, this represents roughly 6 percent of all of AutoNation’s inventory that it had grounded at the close of 2015 for this reason.

Bill Berman, AutoNation’s executive vice president and chief operating officer, says this policy, which AutoNation put in place last year, has certainly impacted the company’s used-vehicle sales – but will prove to be worth it.

“We continue to implement systems and processes in support of our efforts to ensure no vehicle with an open recall is retailed,” Berman said. “We continue to believe the long-term safety benefits for our customers far outweigh the short-term impact to our results and further support the AutoNation brand promise.”

Pointing out that the recall policy has virtually no impact on new-vehicle sales, AutoNation chairman, chief executive officer and president, Mike Jackson, believes the short-term discomfort the recall policy is having will iron out within the first half of 2016 and will eventually be a selling point for its customers.

“It’s a significant impact on preowned. Just to discuss the issue for a moment, I think the auto industry really had some credibility issues it has to face up to,” Jackson said. “Everything from some of these horrific recalls we’ve had with significant loss of life to credibility issues around the Volkswagen situation. So we sit there and say, you know, what can we do on our part to make it better? So on preowned it’s a significant issue. On any given day 15 percent of our inventory has open recalls.

“These are significant safety recalls and we feel the time has passed that it’s appropriate to take a vehicle in trade with a significant safety recall and turn around the next day and sell it to a consumer,” he continued. “We’re the only one that’s done it, we think it’s a brand attribute, we will work to make it a brand attribute in 2016, and we feel in the long term it will be a tremendous advantage to us. In the meantime, it’s very disruptive to our used-car business because we see no way to get it below 15 percent with new recalls arriving every day. So we have to increase inventory to get to the same point.”

Although Jackson does say that the disruption from these recalled vehicles being grounded impacted used sales, he thinks there is a bigger issue for the industry that “pulls the rug out from under” AutoNation’s used-car inventory: new-vehicle incentives.

“I think the biggest threat to used-car values are additional incentives from the manufacturers, or additional discounts from us,” Jackson said. “That’s the big-picture issue. So it’s very interesting, our fourth quarter performance, where manufacturers are increasing incentives by $250 a car, us increasing our discount by $20 a car, that had an immediate impact on our used-car values. And then we had to discount anything that was relatively new versus the new vehicle on the showroom floor. It’s a double impact. It impacted our new-vehicle gross margin. It impacted our used-vehicle gross margin. That’s the biggest issue and that’s my greatest concern about over-production.”

Jackson said he hopes incentives won’t go further into the double-digit percentages than they currently are, which he said is roughly 10 percent, because it disappoints his dealer base and his customers by depreciating their trade-in values.

To check out AutoNation’s fourth-quarter and full-year sales results for 2015, click here.

Used-car sales to increase in January despite weather

SANTA MONICA, Calif., and IRVINE, Calif. - 

Depending on whose prediction you look at, the currently projected estimation for new-vehicle sales in January is expected to decline from as little as half a percent to as much as 3 percent compared to January 2015. The used-car market, however, is expected to clear 3.05 million vehicles by Monday, which would result in roughly a 2-percent increase over last-year’s January results.

According to the analysts at Edmunds.com, the 3.05 million used vehicles they anticipate will have been sold in the United States in January would be a slight increase over the 2.99 million they say were sold in January 2015.

Unfortunately, it appears as though new-vehicle sales did not weather the harsh snow the country experienced in January quite as well.

Edmunds is predicting that 1,143,839 new vehicles will be sold in the U.S. in January, while Kelley Blue Book is estimating that 1.12 million new vehicles will be sold by the end of January.

"As expected, Winter Storm Jonas limited car sales from reaching their full potential, especially for import brands, which are traditionally popular in East Coast markets," said Jessica Caldwell, Edmunds.com’s director of industry analysis. "But weather factors aside, this was still a pretty good month for car sales. The January sales rate typically falls on the low end of the curve every year, so if historic patterns hold we're off to a healthy start for 2016."

Edmunds pointed out that 19.5 percent of total new sales in January were made up of fleet transactions. The company’s estimated SAAR came out to 17.5 million.

KBB analyst Tim Fleming agreed with Caldwell, saying that the blizzard’s impact on densely populated areas hurt dealer foot traffic. Also pointing out that January tends to be the slowest sales month of the year, he believes that any lost sales will be postponed until February.

Fleming believes that the compact car segment will be the one to watch this year.

“One segment to watch in 2016 will be compact cars,” Fleming said. “Similar to mid-size cars, market share for these models has been declining for the past three years. While this trend could continue this year, three of the top four models in this segment (Honda Civic, Chevrolet Cruze and Hyundai Elantra) will have redesigned models on the market in the first half of the year. Much of the focus recently has been on the booming growth of small SUVs, but the new small cars on the way could spark consumer interest.”

Other than the weather, January also had fewer sales days (24) compared to last year (26). 

Jabaay: Are record new-car sales here to stay?

TAMPA, Fla. - 

In his State of the Union Address, President Obama gave a shout-out to the auto industry, touting its best year ever.

I’ve been cautiously optimistic about the return of the auto industry, but it got me thinking — can this resurgence last?

U.S. automotive sales in 2015 were the highest on record with 17.5 million cars and small trucks sold. This new standard is an increase of nearly 6 percent from 2014 and was the first time sales were close to that high since 2000.

According to the Wall Street Journal, low gas prices, around $2 per gallon nationwide, and plentiful credit were key factors in the banner-setting year and are leading auto makers to project a continuation of a healthy demand for higher-margin pickup trucks and SUVs, which fatten their bottom lines.

Similarities to last industry failure

While this is great news for Detroit, similarities between today’s high-water mark and the robust sales of 15 years ago could also be indicators of a downturn in sales similar to the one that marred the automotive market just under a decade ago.

Right off the top of my head, factors such as low interest rates, availability of product and a booming economy fueled the car-buying frenzy at the turn of the century. I also remember the economy cooling and gas prices soaring, which led to consumers seeking out more fuel-efficient means of transportation.

Auto makers started seeing a decline in sales in 2006 but seemed to view the dip as a temporary trend. Detroit continued its push of SUVs and less fuel-efficient vehicles but attempted to entice buyers with incentives such as 0 percent financing. As the economy collapsed, new-car sales plummeted. By the end of 2008, auto sales fell by 400,000 vehicles, a 37-percent decrease from the previous year.

Too big to fail

This devastating blow put the auto industry in jeopardy and necessitated an $80 billion bailout as Congress deemed the industry too big to fail. Congress helped keep the industry afloat but accused manufacturers of not operating competitively for years, choosing profits over sustainability. Legislators’ laundry list of conditions in which the bailout would be issued included a push towards making alternate-energy vehicles, eliminating ballooning executive salaries and more wage equality between union and non-union laborers.

One of the big things I remember from that bailout was when a few CEOs were forced to sell their private jets and take $1.00 annual salaries while the mess was cleaned up.

Fortunately, the bailout worked. By the end of 2014, the Treasury Department was completely paid back and made billions in profits. The icing on the cake, however, was a healthy auto industry.

With low interest rates, low gas prices and an the Great Recession in the rearview mirror, which allows lenders to offer loans to prime, subprime and nonprime buyers alike, I can see how another auto collapse could be in the cards. However, if the auto industry’s analytical experts are to be believed, a collapse is not likely.

Strong sales forecasted

In a report by the detroit news, Lacey Plache, chief economist at Edmunds.com said that a peak in the low 18-million range is “not unreasonable” and Bank of America Merrill Lynch Global Research analyst John Murphy predicted sales will hit 18 million by 2018. In that same report, Steven Szakaly, chief economist for the National Automobile Dealers Association said in January that selling 18 million vehicles by the end of the decade would be “a stretch,” but he seems to be one of the few dissenting voices.

New car sales bottomed out in 2009 at 10.4 million units sold. Since then, new car sales have increased by an average of close to one million per year. Edmonds.com predicts this trend to continue into 2016 at around 18.1 million new vehicles sold.

Following suit, IHS Automotive, a global leader in industry analytics, predicts this upward trend in auto sales will continue for at least the next few years and then level out to sales numbers similar to 2015’s throughout the rest of the decade and beyond.

I see several reasons for this perceived leveling-out. One has to do with interest rates, which have maintained for several years but are expected to increase over the next few years. Just a 2-percent increase in interest could make a difference of thousands of dollars over the course of a car loan.

Another factor is one of the reasons sales have gone up so drastically, which is sub-prime buyers being able to achieve car loans. As with the recent housing bust, many unqualified buyers have been granted loans without the means to make consistent payments. A strong economy could keep these buyers in the black, but a dip in the economy could cause an increase in the default rate.

Leased vehicles play role

Yet another factor is the percentage of leased vehicles in the market. According to Experian, as of the third quarter of 2015, over 26 percent of all new cars were leased with an average APR of 5 percent. While low lease rates are pulling in new customers, the inevitable wave of used cars flooding lots in the coming years will be quite the sight. In fact, Manheim projects nearly half a million more cars are coming off of a lease every year with 2016 predicted to see 3 million vehicles returned to dealerships.

These leased cars will not be able to be sold at their peak values, meaning dealers could potentially take losses on a high percentage of their inventories.

I believe there are several reasons to the automotive industry has every right to expect a boom for the next decade or so, but in order to maintain current growth, manufacturers must avoid the mistakes of the past in their practices and adaptability.  As long as that happens, I feel minor fluctuations in interest rates, the economy and product availability will not hurt the industry’s imminent success.

Given these factors, where do you believe the automobile industry is headed? Being that this is a presidential election year, do you see a chance for politics to play into economic factors that could either aid or hurt the economy and consequentially the industry? What are some other factors that should be considered? I open the discussion to you.

Jim Jabaay is vice president of sales at LotVantage, a SaaS Software company that provides a complete set of online inventory marketing applications for auto, powersports, marine and RV dealers. He can be reached at (866) 881-3229 or jjabaay@thatsus.com. Operators also can visit the company’s website at www.LotVantage.com.

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