2011 Forecast 12.9 Million Still Holds
By Lacey Plache June 24, 2011May auto sales sank to 11.8 million units at a Seasonally Adjusted Annual Rate (SAAR), after a three-month run of greater than 13 million SAARs and a seven-month run of SAARs topping 12 million. A variety of economic indicators also fell short of previous months’ performances and of expectations in May, leading to cries that the much dreaded “double dip” was materializing. These events have led some auto industry observers to lower their 2011 forecasts. At Edmunds.com, we disagree and are maintaining our beginning of the year forecast of 12.9 million vehicles. Our analysis indicates that recent production disruptions and increased prices are not a cause to lower 2011 forecasts since lost sales are likely to be made up later this year.
As the chart shows, on a month-by-month basis, we are projecting SAARs as follows for the rest of 2011. The SAAR will simmer in the high 11- to mid 12-million range during June and July, then approach more “normal” levels in August. The SAAR will remain below our projected yearly sales of 12.9 million units in June and July due to inventory constraints from production disruptions and from increased demand for fuel efficient vehicles, as well as from the resulting price increases. While production is improving and should continue to improve throughout the summer, it will take time before it returns to normal and even more time before increased production affects inventories, and, ultimately, prices.
The SAAR will return to the mid to high 13-million range during September and October. As supply issues resolve, inventories replenish, and prices become more competitive, delayed demand from the late spring and early summer will emerge to bolster sales.
The SAAR will remain somewhat elevated above our yearly projection in November and December, in the low 13 millions. SAAR performance in these months will depend on fundamental demand strength, which in turn is driven by employment conditions, credit conditions, and consumer confidence.
Early Auto Sales Momentum Derailed
As shown in the above chart, January through April 2011 was a period of growing auto sales momentum, with the SAAR averaging 13 million for these four months. Several factors contributed, including continuing economic recovery and, especially, improving employment numbers. January and February also were characterized by a favorable pricing environment with General Motors, in particular, offering strong incentives. As a result, consumer confidence, which was already on the upswing due to the booming stock market, increased, and consumers were more motivated to purchase large durable goods such as autos. Indeed, early 2011 sales appear to have been bolstered by some release of pent-up demand that had accumulated during the recession and the recovery as buyers opted out of the market.
However, during March to April, a series of events occurred that shifted the traditional balance in the auto sales market from a demand-driven world to a world in which supply became a growing constraint on what automakers could sell. This shift was triggered by production disruptions caused by the March 11 earthquake and tsunami in Japan. Japanese automakers were particularly affected, and accordingly, so were the small car and hybrid segments in which the Japanese are relatively stronger. Inventory problems in these segments were compounded by rising gas prices, which resulted in increasing demand for fuel efficient vehicles. Increasing demand and tightening supply (both actual and anticipated) led to rising vehicle prices. The combination of these factors meant that auto sales took a big hit in May, falling to a SAAR of 11.8 million.
Slowly Recovering Momentum
Since April, Japanese automakers have been operating with reduced production, often half time or less, in many plants in Japan and abroad. However, recent developments indicate progress toward resolving the production disruptions. For example, Nissan’s key engine plant returned to full production in May. Toyota announced an accelerated return to full production in June for eight of the 12 models it produces in North America, including the top-selling Camry and Corolla. Honda’s North American production is slated to return to normal for all but the 2012 Civic in August. The 2012 Civic will return to full production by November.
These efforts will help inventories during this summer and early fall. However, given the lag between when a vehicle is produced and when it is available for purchase, inventories can be expected to tighten further through at least June and will remain on the tighter side even after production returns to normal levels. Moreover, there could be lingering effects for much of the remainder of 2011. Both Toyota and Honda have stated that they do not expect production for all models to return to normal levels until the end of the year. Nissan projects a return to full global production by October.
Demand for Fuel Efficient Vehicles May Decelerate
In addition to increased production, inventories also are likely to benefit from somewhat decreased demand for fuel efficient vehicles. Nationwide average gas prices have fallen each week since May 9, and consideration of small cars by users on Edmunds.com also has fallen. The U.S. Energy Information Administration currently is projecting that gas prices will remain closer to the current $3.70 per gallon (or lower), rather than return to $4 or more. Lower gas prices will be supported in part by Thursday’s announced upcoming release of 60 million barrels of oil from world reserves onto the world market. Increased supply of autos coupled with decreasing demand should result in more competitive prices, which, in turn, will spur auto sales.
Net prices rose in nearly all segments following the earthquake, with minivans a key exception. Not surprisingly, small cars and hybrids experienced the sharpest price effects. Average discounts from Manufacturers Suggest Retail Prices, including incentives, fell from 14.9 percent in February to 9.8 percent in April to 7.7 percent in May for compact cars and from 9.5 percent to 8.0 percent to 7.3 percent for subcompact cars. For hybrids, the average discount fell from11.8 percent in February to 3.9 percent in April, where it remained in May. Net prices appear to have peaked, however. As shown in Figure 3, net prices remained stable or slightly rose from April to May in a number of segments, including large cars, large SUVs, luxury cars, and luxury SUVs. Initial pricing data for June show that even for the hardest hit segments, including compact, subcompact, and midsize cars, weekly transaction prices have been dropping.
Nonetheless, we expect auto sales to remain depressed until late summer due to the expected pace of inventory replenishment (and, therefore, price declines). Our June forecast, based on the month-to-date rate of sales and current inventory levels, indicates a SAAR of 11.9 million vehicles. Since neither inventory levels nor prices has yet demonstrated significant turnaround, the likelihood is small that these factors will gain enough traction in the remainder of the month to result in a SAAR greater than 12 million. We do expect SAARs approaching the mid 12 million range in July and approaching our annual forecast of 12.9 million in August. Of course, if prices take longer to decline from recent highs, sales will not rebound until later in the year.
Appearance of Deferred Demand
Although relief for automakers in terms of improved sales should materialize as summer progresses, we expect even more improvement in early fall, once Toyota and Honda both have largely resumed production and inventories have begun to replenish, and prices have become more competitive. In addition to contemporaneous demand returning to more normal levels, the potential should then arise for deferred demand to boost sales. That is, as market conditions become more favorable to buyers, we expect consumers who were ready to buy a new car but then chose not to do so in late spring or early summer, due to vehicle prices and/or availability, to return to the market when these factors improve.
We estimate deferred demand to total well over 2 million units at a seasonally adjusted annualized rate. In May, the SAAR of 11.8 million units fell short of the 2011 forecast of 12.9 million by 1.1 million units. We anticipate that June’s SAAR will underperform by another million vehicles, and July by less than that. We expect these lost sales to be largely made up by late fall. In particular, we expect the Japanese automakers to benefit from deferred demand. Buyers of Japanese cars are notoriously loyal, with some 75 percent of Japanese car owners who trade in their Japanese vehicle purchasing another Japanese vehicle. Recent data on trade-ins show decreased trade-ins recently by owners of Japanese vehicles, suggesting that these owners are likely deferring purchases until availability and pricing improve.
Of course, it is possible that automakers will not be able to recover some lost sales if these sales represent lost demand but the amount of lost demand is likely to be minimal in this case. Typically, lost demand for new cars would occur from buyers defecting to the used car market. In recent months, however, used cars also have been subject to tighter inventories and higher prices resulting from increased demand for Japanese and fuel efficient cars by consumers and dealers.
Possible Return of Early Momentum
We expect the sales lost from deferred demand to be recovered during the fall of 2011. How the year finishes, and in particular, whether sales return to a pace consistent with 12.9 million units for the year, or whether they reach or surpass the 13 million mark as occurred earlier this year, depends in large part on the factors driving demand.
Pre-earthquake, a key driver of auto sales was consumer confidence, which in turn was supported by the rising stock market. As stocks gain value, consumers feel wealthier and are thus more motivated to make large durable goods purchases such as autos.
One factor supporting the stock market’s recent bull run was the government’s quantitative easing program (QE2). In this program, the Federal Reserve purchased Treasury securities, thereby driving the prices of such securities up and their yields down. As Treasury yields fell, stocks became relatively more valuable and investment in the stock market increased, raising the market’s value. However, this program officially ends this month. While it is still unclear how quickly the government will sell its Treasury holdings, the potential exists for stock values to stagnate or even fall during the remainder of this year as the government decreases its holdings.
If the stock market weakens as a driver of confidence, the question arises as to whether other economic factors will take its place. Improving employment conditions earlier this year likely contributed to confidence, and thus to auto sales. Job creation slowed substantially in May, however, amidst rising fuel prices and the uncertainty surrounding their future. We expect that as fuel prices decline and stabilize, hiring will resume at a higher rate. Thus, the potential exists for a strengthening labor market recovery to bolster confidence and thus motivate auto sales momentum later this year.
In the end, however, the crucial link for generating auto sales momentum is likely to be a more favorable pricing environment. As supply rises once again, prices can be expected to become more competitive and draw consumers back to the auto market. Accordingly, we expect the sales momentum displayed earlier this year to resume by the end of the year. With these forces expected to be in play, we see no compelling reason to lower our 2011 forecast at this time.
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