Auto Sales Cool Off as Rising Vehicle Prices Soften Demand
U.S. demand for new vehicles retreated from an all-time high reached last month, as the prospect of higher costs, due to such factors as rising interest rates, prompted consumers to postpone their vehicle purchasing plans.
RAMSEY, N.J., September 20, 2018 (Newswire.com) - Consumers tapped the brakes on new vehicle purchase intent this month, largely due to rising vehicle prices and the growing popularity of used autos. After accelerating to an all-time high last month, TechnoMetrica’s Auto Demand Index declined by 13 points, or 10 percent, in September, to a reading of 118. This marks the fifth straight month in which the measure has surpassed 100, indicating sustained high levels of vehicle purchase intent supported by a robust labor market and relatively low gas prices. As a result, although auto sales are likely to moderate in the months ahead, the industry should continue to see a solid sales pace, driven by the rising popularity of 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 6 months?
Our monthly gauge of new vehicle demand has accurately forecasted the strong performance exhibited by auto sales so far this year. In 10 of the past 12 months, the Index has posted a score of 100 or above, even hitting a record high of 131 in August. Thus, this month’s sharp deceleration in purchase intent may be an indication that new vehicle sales are cooling off after an unseasonably robust pace set during the first half of the year.
Despite this slight correction in auto sales, positive trends in the Index’s moving averages suggest that demand for new vehicles will remain strong into the near future. Each month, TechnoMetrica monitors changes in three moving averages: 3-month, 6-month, and 12-month. For the third consecutive month, all three readings posted slight gains, the longest such streak since early 2015. In addition, the Index’s 3-month average surpassed both longer-term moving averages for the fourth month in a row, signaling a potential growth in purchase intent levels in the coming months.
Our indicator for momentum provides further evidence of continued strength in auto sales. The measure improved 0.1 points in September to a reading of 4.8, marking its fourth consecutive month in positive territory.
Demand by Demographic Segments
Despite the overall decline in vehicle purchase intent, nearly every demographic group continues to report strong demand for new autos, reflecting the widespread sense of economic optimism in the country. On September 18, of the 19 segments that TechnoMetrica monitors each month posted an Index reading above 100, the most since February 2017. Purchase intent remains strongest among African Americans and Hispanics, as the segment recorded its highest Index reading on record (156). A tightening labor market is affording greater job opportunities to traditionally disadvantaged groups, including racial minorities. Black and Hispanic unemployment rates are near historic lows, brightening income prospects within the two communities.
Parents of children under 18 are also reporting a strong desire to acquire new vehicles. The segment registered its sixth straight monthly gain in the Index this month, climbing nine points to a score of 150, the highest since September 2016. Parents represent a driving force behind the shift to larger vehicles. According to data from CivicScience, nearly half of parents (45%) were driving either an SUV or a truck in 2017, compared with 33% of non-parents.
Young adults aged 18 to 24 continued to display heightened levels of purchase intent, as well. The cohort’s Index score climbed seven points in September, to a reading of 146, its 11th consecutive month above 100. Today, young Americans entering the workforce are encountering more favorable labor market conditions, including a record number of job openings. Thus, buoyed by a stronger sense of financial security, as well as the necessity of acquiring a vehicle for the commute to a new job, more Millennials are rushing into the new vehicle market. It is not surprising, therefore, that Generation Y accounted for all new vehicle sales growth in North America during the first three months of 2018, according to the credit reporting agency Experian.
At the same time, however, recent Index trends among demographic groups provide further indication of an overall slowdown in new vehicle demand. This month, 12 groups showed improvement in purchase intent levels, down from 17 in August. Consumers earning less than $30K a year (plus 12 points) and those with an income between $30K and $50K (plus 9) reported the greatest positive change in the Index this month. In fact, purchase intent among the lowest income bracket surged to its highest level since March 2017, at 112. The acceleration in auto demand exhibited by lower-earning Americans largely reflects their heightened sensitivity to the steady rise in incomes. Median household income rose to an all-time high $61,372 in 2017, per recent Census Bureau data. In addition, U.S. wages grew at their fastest pace since 2009 last month, as employers raise pay in order to attract and maintain skilled workers amid a tightening job market.
Meanwhile, four segments showed a weakening in intent to purchase new vehicles. Demand waned most significantly among consumers aged 65 and over, an age group that typically reports lower levels of auto demand. The segment recorded a 16-point drop in the Index this month, posting its lowest since November 2015 (59). Northeasterners and those earning an income over $100K also displayed less interest in entering the new vehicle market any time soon, with both groups registering an eight-point decline in purchase intent levels. Finally, after attaining its best Index reading in nearly two years last month, the non-parent segment demonstrated a slight pull-back in the measure in September.
Key Drivers of the Recent Slowdown
Consumers’ demand for new autos has been tempered by booming vehicle costs, which may be pricing some potential buyers out of the market. According to a recent report from Edmonds, the average transaction price of a new vehicle has climbed from $31,392 in the second quarter of 2013 to $35,828 during the same period in 2018. Prices on SUVs have been particularly ascendant in recent years. Between 2017 and 2018 alone, the average cost of a new Lincoln Navigator SUV increased by $30,000, to an $84,000 price tag, according to Reuters. Vehicles have become costlier due to a diverse set of factors, including advanced in-car technological features, reduced incentive spending, and metal tariffs.
In addition, rising interest rates are making borrowing more expensive for consumers. Following last year’s three rate hikes, the Federal Reserve has raised rates twice so far in 2018 and could impose at least one more increase before the year is out. Data suggests that rising rates are already having a trickle-down effect on new auto loans. According to Experian, the average monthly loan payment for a new vehicle hit a record $523 in the first quarter of 2018. Further, interest rates on new-car loans are rising steadily, reaching a near decade high of 5.82 percent in June, compared to 4.96 percent a year back.
Concerns are growing that a potential tariff on auto imports may drive vehicle costs even higher. The Trump administration has recently raised the possibility of imposing a 25 percent tariff on vehicles and auto parts made overseas. Estimates suggest that the price of a new vehicle could grow by as much as $7,000 due to the auto tariffs.
This month’s decline in new vehicle purchase intent can also be attributed to the rising popularity of used vehicles. Amid skyrocketing new car prices, more consumers are turning to the used vehicle market, where they can purchase a near-new vehicle at a discount on the price of a new auto. Edmunds estimates that the average transaction cost of a used vehicle was 60% lower than the price of a new one during the second quarter. The industry has seen a rising supply of off-lease vehicles return to the market in recent years. Between 2014 and 2017, the number of vehicles ending their lease rose from 2.2 million to 3.5 million. Once these lightly-used vehicles re-enter the market, it is not long before they find new owners. According to Edmunds, three-year-old vehicles were on dealership lots for an average of 38 days in the second quarter of this year, the lowest level since 2005.
Consumer Preferences: Americans’ Favorite Brands and Vehicle Types
Based on our analysis of consumers’ most preferred vehicle types, SUVs continue to rev up in popularity. Utility vehicles garnered a 29% share of likely buyers this month, a gain of four percentage points from August. Encouraged by an improving economy and relatively low gas prices, consumers have been largely shunning traditional sedans in favor of larger, more spacious vehicles. In August, sales of passenger cars fell below 30% of the total market for the first time in history, while light trucks claimed a 68% market share, a record high for the month.
Meanwhile, demand for mid-size vehicles eased slightly in September. Just under one in five (18%) likely buyers say they would acquire a mid-size auto as their next new vehicle purchase, compared to 20% last month. The share of consumers planning to purchase a pickup truck improved by one point from August, to 15%, marking the first gain since May. Finally, compared to the previous month, prospective buyers showed lower levels of demand for both compact cars (11%) and full-size vehicles (10%).
The ADI also gains insight into the brand preferences of consumers. Chevrolet and Ford topped the list of Americans’ favorite brands, reflecting high demand for American-made vehicles. Preference for Chevrolet improved one point from August, to a share of 14%, the highest since March. The share of likely buyers planning to purchase a Ford vehicle remained unchanged at 13%. Meanwhile, Japanese makes Honda and Toyota were each preferred by 11% of consumers. Toyota recorded a two-point slide in preference share this month. Rounding out the top five most desired vehicle brands was Nissan (7%), which showed the most significant acceleration in demand.
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.