Auto Demand Picks Up Slightly in March Amid Strong Wage Gains and Expected Tax Refunds

Americans' intent to purchase new vehicles accelerated somewhat this month, supported by persistently high levels of consumer confidence and anticipated tax refunds.

New vehicle demand edged higher in March, as expected tax refunds and easing credit conditions provide a boost to consumers’ spending power. After falling to a near one-year low last month, TechnoMetrica’s Auto Demand Index has picked up some speed, gaining six points, or 6.4 percent, to a reading of 100. The Index has now posted a score of 100 or higher in 10 out of the last 12 months, highlighting the continued strength in purchase intent, despite the dampening effects of rising vehicle prices and uncertainty over trade tariffs. Thus, we anticipate that auto sales will hold steady in the near term, supported by strong demand for SUVs and pickups.

TechnoMetrica Market Intelligence developed the Auto Demand Index, or ADI, as a way to measure the intent of consumers to buy or lease a new vehicle within the next six months. Raghavan Mayur, president of TechnoMetrica, explained that the ADI, which is conducted monthly, 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?

Although purchase-intent levels have increased this month, a fuller portrait of our data indicates that the recent rise in auto demand may be short-lived. For instance, recent trends in the Index’s moving averages portend a possible slowdown in consumers’ intent to purchase new vehicles in the coming months. In March, the three-month moving average lingered below both longer-term averages for the fourth consecutive month. In addition, the six-month average recorded its second straight decline in March, marking the first back-to-back drop since September 2017.     

The continuing downtrend in the Index’s momentum measure also suggests a coming deceleration in new vehicle demand. This month, the ADI Momentum reading dipped 0.1 point to a score of -1.9, the lowest since last March. This marks the sixth straight monthly decline in the indicator, the longest such streak on record. Further, the measure has recorded its first consecutive negative readings since the period stretching from February to May 2018.

Thus, while new vehicle sales should remain relatively strong in the near future, largely due to an expected stimulus from tax refunds, sales will likely slow in the long term, as sky-high prices keep an increasing share of consumers out of the market.   

“Strong demand for new vehicles has largely been supported by a booming economy that is delivering higher wages to American workers. Anticipated tax refunds, along with the Federal Reserve’s recent decision to stop raising interest rates, will likely provide added stimulus to auto demand levels in the short term,” said Raghavan Mayur, president of TechnoMetrica. “However, as sky-high vehicle prices continue to climb and the gently used vehicle market becomes a more attractive option for buyers looking for virtually new cars at a lower cost, we expect auto sales to moderate in the long term.”

Vehicle purchase intent improved among more demographic groups this month, as compared with February. Out of the 19 segments TechnoMetrica monitors on a monthly basis, eight groups showed acceleration in the Index, compared with six the previous month.

Consumers residing in the western U.S displayed the greatest positive change in auto demand. The region recorded a gain of 21 points in the ADI this month, reaching a score of 109, the highest since October 2018. Western states are leading the charge into electric vehicles, which saw record sales in 2018. U.S. consumers purchased 361,307 new electric vehicles last year, an 81 percent jump from 199,826 units in 2017, according to InsideEVs, a website that monitors the electric vehicle industry. Sales of all-electric vehicles surged by 80 percent in California alone during the same period, from 51,176 units in 2017 to 92,447 units in 2018, according to registration data collected by IHS. Further, a recent analysis conducted by Experian found that eight of the top 10 market areas for electric vehicles in 2018 were western cities, including San Diego (CA), Seattle/Tacoma (WA) and Portland (OR).

Purchase intent also climbed among those earning between $30,000 and $50,000 a year. The income cohort exhibited a 19-point bounce in the Index, from 69 in February to 88 in March. During the first tax season under the 2017 Tax Cuts and Jobs Act, which reduced individual income tax rates virtually across the board, most Americans are expected to save more in taxes compared to prior years. Low- and middle-income earners are especially benefiting from the new tax reform law, as taxpayers making between $20,000 and $50,000 a year are set to see net federal tax cuts of 10 percent or higher in 2019, per estimates from the Joint Committee on Taxation. The new law puts middle-income families at a particular advantage with the doubling of the child tax credit, from $1,000 to $2,000.

The tax cuts have also lifted middle-income spending power through higher take-home pay. As a result of the reduced rates established in the 2017 tax law, employers have been withholding less from workers’ pay, yielding fatter paychecks. The purchasing power of this income group should get a further boost from expected tax refunds, which typically fuel auto sales around this time of year.

After posting a steep decline in the Index last month, the 18 to 24 age cohort reported greater intent to acquire new vehicles in March, gaining 10 points to a score of 56. Research shows that wage growth among younger workers is accelerating at a faster pace than among older age groups, as well as the overall population. Workers between the ages of 16 and 24 saw wages grow at a rate of 6.5 percent in February, according to an analysis of government wage data by the Federal Reserve Bank of Atlanta. In comparison, the 25 to 54 age group reported wage gains of 3.8 percent, while those aged 55 and over saw an increase of 2.3 percent. Even more, wage growth among the younger cohort is 86 percent higher than the gains experienced by the overall worker population.

In addition, low-wage positions, which include many of the jobs that typically mark the beginning of a young worker’s career, are seeing some of the largest increases in hourly earnings, supported by minimum wage hikes across the country. An analysis conducted by Indeed Hiring Lab found that wages in low-paying industries such as department stores and food services grew at a rate of 4.4 percent year-over-year, while workers in high-wage positions saw gains of just under three percent.

Consumers between the ages of 45 and 64 and those dwelling in the suburbs have also reported significant gains in demand levels, with each group recording a positive change of nine points in the Index. Purchase intent among suburban consumers rose to its highest level since December 2018, at 108, reflecting the ongoing shift to the suburbs since the end of the Great Recession. Between 2015 and 2016 alone, suburban counties surrounding large metro areas added around 268,000 new residents via migration, while urban counties which include large cities within their borders lost 232,000 residents. Research suggests that the suburban revival has largely been driven by millennials, who are looking to escape rising living costs in cities. A recent Ernst & Young survey of 20 to 36 year-olds found that 41 percent of millennial homeowners live in the suburbs, compared with 31 percent who say they reside in urban areas.   

Meanwhile, demand for new vehicles decelerated among 10 demographic groups this month, down from 12 in February.

Midwestern Americans displayed the most significant decline in the Index, losing 22 points to a one-year low of 92. The drop in demand reflects the dampening effect of inclement weather conditions that plagued the region last month, which was the snowiest February on record for a number of areas in the Midwest. In addition, GM and Ford, the “Big Two” of the Detroit Three, are both in the process of restructuring plans that entail cutting jobs and idling plants in the Midwest. For instance, GM expects to halt production at three factories in the region and lay off close to 15,000 jobs in the U.S. and Canada.

Vehicle purchase intent also ebbed among parents with children under 18 years of age (minus 14 points), who posted their lowest Index reading since April 2018, at 118. Parents may be holding back on making an auto purchase due to concerns over recent tax changes as a result of the new law, including the cap on state and local tax deductions.

Despite a steep correction this month, demand among the African-American and Hispanic population remains strong. The segment recorded an 11-point drop in the Index, from 134 to 123, which is still the second-highest reading among demographic groups. African-Americans and Hispanics trail only those earning more than $100,000 in annual income, who lost seven points in the Index this month. Both minority communities have seen near-record low unemployment over the past year, although the jobless rate among Blacks has risen in each of the last three months.

Consumers aged 25 to 44 reported their lowest level of auto demand since May 2018, posting a reading of 109, a 10-point decrease from the previous month.

Overall demand for new vehicles has been supported by a strong labor market that has expanded rapidly over the past year. U.S. employers added 2.6 million new payrolls in 2018, up from 2.2 million in 2017 and 2.3 million in 2016. In further indication that more Americans are coming off of the sidelines and rushing back into the job market, the labor force participation rate for prime age workers rose in January to its highest level in nearly a decade, at 82.6 percent, according to the Federal Reserve Bank of St. Louis. In addition, the jobless rate fell to a near-50-year low in February, as the labor market edges closer to full employment.

The tightening in the labor market has yielded larger paychecks for many American workers, as employers raise wages at a faster clip to attract a shrinking pool of talent. Wages have grown at an annual rate of three percent or higher in each of the last seven months, hitting 3.4 percent in February, marking the largest wage gain since April 2009. Further, incomes continue to hit record highs. In January, median household income rose to an all-time high of $63,688, according to Sentier Research. Thus, armed with stronger purchasing power, consumers are more likely to allocate their earnings to the acquisition of big-budget items, such as automobiles.

The prospect of additional spending money in the form of tax refunds has also boosted vehicle purchase intent. According to the IRS, refunds averaged around $2,899 in 2018 and current data suggests that tax filers may see even larger checks this year. Through the end of February, the average tax refund was $3,143, up 1.3 percent from the same period last year. In addition, a recent survey conducted by GoBankingRates found that taxpayers expect an average refund of $3,030. The study also found that close to one in 10 tax-filers plans to use their refund to make a major purchase.      

Consumers are also anticipating relief from the central bank’s decision to pause interest rate hikes for the remainder of 2019, which should provide prospective borrowers with easier access to credit. Before halting further rate increases, the Federal Reserve had implemented nine hikes since 2015. As a result, interest rates on auto loans have climbed over the years, from an average of 4.68 percent in January 2017 to a rate of 6.19 in January 2019, the second-highest in 10 years, according to Edmunds. In addition, zero percent auto loans have become more scarce over the years, further highlighting the tighter credit conditions created by rising interest rates. It is not surprising, therefore, that new car buyers are seeing some of the highest monthly payments on record. According to Experian, the average car payment rose to an all-time high of $545 a month during the fourth quarter of 2018, a year-over-year increase of $30. Thus, with interest rates expected to remain unchanged and maybe even drop in the near future, consumers will likely save more in borrowing costs and have access to better deals on loans.

Along with monitoring consumer demand for new vehicles, TechnoMetrica also uncovers Americans’ favorite vehicle brands. The top spot was crowded this month, with Chevrolet, Toyota and Ford each garnering a 15 percent preference share. Chevrolet saw a three-point jump in market share from the previous month, while preference for Ford rose to its highest level since June 2018. Meanwhile, Honda was the choice brand of six percent of likely buyers, which is unchanged from February. Rounding out the top five was Dodge, with a preference share of five percent.     

Overall, nearly half of consumers (47 percent) plan to purchase an American brand, the largest share since February of last year. Preference for Asian and European brands declined this month to respective shares of 36 percent and nine percent. March marks the first time that demand for European brands has dipped below 10 percent since November 2018.

Regarding vehicle types, SUVs remain the style of choice among likely buyers. More than one-third of consumers (34 percent) plan to acquire either a large or small SUV as their next new vehicle purchase. The robust demand for SUVs highlighted in our report reflects the growing market share culled by the vehicle genre. Between 2012 and 2017, SUV share climbed from 32 percent to 43 percent, per an analysis by IHS Markit. Consumers continue to show strong preference for mid-size vehicles, as well. The body style was chosen by 19 percent of likely buyers, up slightly from 18 percent in February. Meanwhile, demand for pickup trucks remained unchanged at 17 percent.

Each month, TechnoMetrica uses both landline and cell phone samples to conduct live interviews with more than 900 respondents. 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.

Source: TechnoMetrica Market Intelligence


Categories: Automotive

Tags: Auto Demand Forecast, Car sales, consumer durable goods, Gas prices, SUVs


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Tom Westervelt
Senior Analyst, TechnoMetrica, Inc.
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