US Auto Sales Have Room to Run

By Peter Horn - May 14, 2012 | Tickers: F, GM, TM | 0 Comments

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US Auto sales are rolling along, with sales reaching levels we haven’t seen since before the fiscal crisis.  Through Q1, light vehicle sales are up 10.3% versus a year ago, with 9 of the top 10 makers showing sales gains.  The US Seasonally Adjusted Annualized Rate (SAAR) reached 14.7 million units in April, falling slightly from the recent high of 15.4 million in February (April light vehicle sales came in at 14.4 million SAAR).  Some of the stragglers in the top ten led the sales gains, most notably Chrysler and Volkswagen, with sales rising over 30%.  Toyota (NYSE: TM), Nissan, Subaru and hard charging Hyundai booked sales gains in the teens.  From their high perch, General Motors (NYSE: GM) has been flat this year, while #2 Ford (NYSE: F) is up 5% year to date, losing a little share due to reduced fleet sales.  (see Table 1 below for sales data)

The strong sales momentum is also showing up on the bottom line.  Ford posted another solid quarter in North America with double digit US operating margins.  Unfortunately, European operations continued to drag on results and EPS was blunted by losses in Europe and Asia.  GM reported a similar story in Europe for Q1 as global companies struggle with the crisis and the impact of austerity measures.  Perhaps most notably, Chrysler is back from the dead, posting its largest quarterly profit since 1998 on surging North American sales.  Strengthening sales and expanded margins after reorganization have been a great formula recently for the Detroit three.   Despite the progress, there’s still reason for concern.  Just as sales begin to turn in North America, Europe’s fiscal mess threw the global Auto industry a changeup.  The key question seems to be, can North American sales overcome poor European performance?  Is there room to go up from here in North America?

A peek back at past sales data, gives more context to our current pace.  Despite the recent recovery, the US market is actually still rather slow.  A chart of the Light Vehicle SAAR from 1967 to the present is shown in Figure 1.  While sales cycled with the economy, they also trended upward in a channel over the last 50 years (blue trend lines in the figure).   Over that time period, the US SAAR grew considerably, with highs in the 15 million range in the 1970s, growing to all-time highs of around 18 million from 2000-2001.  Since we often look back on 2007 as “loose and fast”, first impulse is to speculate that a return to pre-crisis levels is unlikely. 

Figure 1.  US Automotive SAAR from 1967 to present.  The upwardly trending sales channel is bracketed by blue lines.  A pre-recession downtrend is highlighted by a red arrow and the recent recovery by a green arrow.  The dashed orange line highlights an apparent market top that wasn’t broken until the late 1990s.  Data source is the US Bureau of Economic Activity.

You need to consider though, that Auto sales in North America were already in a downward trend before the recession.  If you look closely at Figure 1, you’ll notice sales progressively slowing from 2001 through 2007 (Red arrow in Figure 1).  Industry sales were actually already circling the drain, even before the recession pushed the handle and flushed the industry.  The end result of the crisis was the lowest SAAR since the double dip recession of the early 1980s.  It’s significant that we were already in a downtrend before we hit the steepest sales decline in a half century.  Despite what one might expect, the housing market excesses of 2007 simply were not mirrored in Auto sales.  While numbers from 2007 may feel out of reach, that 16 million SAAR was actually already trending toward the bottom of the sales channel even before the credit crisis struck.

It’s also important to consider how deep we fell during the crisis.  Sales rates in Q1 of 2008 ran just shy of 15.5 million versus the current rate of 14.4 million.  If we set 15 million as the cut off for the beginning of the sales trough, there were 46 sequential months below that sales rate.  February of 2012 temporarily broke that unpleasant string.  That’s almost a four year span.  The average SAAR over that period was 12 million units, 3 million below our cutoff.  Overall, that’s roughly 11.5 million units of potential pent-up demand.  That’s close to a year’s worth of sales missing from the industry.   Looking at it another way, sales actually dipped below the so-called “crush rate” (the rate of scrappage; approximately 12 million units annually) for 24 months, dropping the number of vehicles in service.  The average age of a vehicle in the US ballooned and now exceeds 10 years.  There’s a lot of pent-up demand that we haven’t really tapped yet.  Those sales will eventually come back.

That’s the Bull argument for a rise from here.  What about the Bear argument?  Is 15 million just our true normal rate?  After all, we were running hot and heavy pre-crisis, with all that loose money and poor lending standards in 2007...  Did the boom set an unrealistic standard for the Auto industry just like it did for the housing industry?  Looking back at Figure 1, a 15 million SAAR can also be viewed as a market top over the last half century (see the orange dashed line in Figure 1), with penetration of that level resulting in corrections.  Peaks in the 70s, 80s and even the early 90s cluster around that 15 million mark, making the late 90s and early 2000s sales rates look aberrantly high. 

While that certainly is a reasonable alternative interpretation of the data, it’s not one I favor.  The big hole in the irrational exuberance argument is that on a population corrected basis, sales rates in the 90s and 2000s were not really all that high.  Using US census data, I normalized the SAAR data reported by the Bureau of Economic Activity to population.  The data appear in Figure 2, below.  As before, the pre-2008 downward trend and recovery are indicated by red and green arrows.  When corrected for population changes over the last half century, Auto sales in the US cycle in a fairly tight range from 0.05 to 0.07 units per person with little fluctuation in maxima from decade to decade.  For perspective, think about that 0.07 number for a minute.  Statistically, between 5 and 7 out of every 100 people annually purchase a new vehicle in the US.  That includes personal vehicles, as well as commercial and government fleet vehicles.  That sales rate doesn’t sound absurdly high to me.  Similarly, the apparent binging of the late 90s through 2007 looks much less overdone on a population adjusted basis.  That 18 million SAAR of 2000 sits well within the historical range and the 16 million SAAR of late 2007 is actually somewhat low when compared to historical per capita sales rates.  Finally, the unprecedented depth of the drop in US sales is even more striking on a per capita basis.  Only the double dip of the early 1980s generated sales rates remotely close to this low.  In fact, we fell roughly twice as far below trend, and the duration below trend has been longer (the 80s double dip saw 37 months below par, compared to 52 and counting for the current downturn).  Now consider that we’re still below trend on a per capita adjusted basis. 

Figure 2.  US Auto Sales on a per capita basis.  To smooth the population data, census figures from 1960 to 2010 were fit exponentially, and interpolated yearly estimates of US population were then used for normalization of SAAR data.  The sales channel, running between 0.05 and 0.07 units per person is highlighted by blue lines.  The pre-recession sales drop from 2000-2007 is indicated by a red arrow and the subsequent recovery by a green arrow.  Note the deeper depth and longer persistence of the 2008 sales drop when data are corrected for population differences.

I think there’s upside from here and the industry seems to agree.  Several manufacturers recently announced production increases to meet demand.  Last month Chrysler canceled their summer shut down.  Ford made a similar move a few days ago, shortening its summer retooling shut down to one week and expanding shifts at some facilities.  And Hyundai, which made strong gains throughout the recession by stealing share from its Japanese counterparts, announced a third shift at its Alabama assembly plant.  Everyone is positioning themselves for expected sales gains.  With the issues in Europe hurting the industry in the short term, it remains to be seen how fast we see a true rebound globally.  But, given the depth and extreme length of the US sales drop, a large rebound in North American sales seems inevitable.  There’s room to run.

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