Vehicle Demand is Booming, but is it Sustainable?

Over the last several years U. S. new vehicle sales have been gradually improving and, according to Reuters, November 2014 sales reached an annualized rate of 17.2 million, the best November since 2003.  This is in spite of a generally lackluster economy and concerns regarding consumer spending.  Not only was unit volume strong, but average price per vehicle approximated $33,750, a new record.

This is good news.  The auto industry represents a significant percentage of domestic economic activity, and strong demand boosts the industry, suppliers, dealers and the providers of ancillary services.

While it is difficult to project future demand, the industry is currently benefiting from a number of very favorable circumstances.

Interest rates are at historic lows.  As the majority of vehicle sales are financed, either directly or through leases, low interest rates reduce monthly payments.  Many new vehicle transactions ultimately depend on, “how much a month is the cash difference?”  Moreover, auto loans are generally more available than other types of credit, particularly for riskier borrowers.

Gasoline prices have come down sharply over the last year and appear to be heading lower.  Cheaper gasoline improves consumer disposable income and encourages the purchase of pricier, larger vehicles.

The fleet is old.  New vehicle sales have been below trend for more than five years, resulting in an increase in the average age of cars on the road.  Even though cars last longer than they used to, many should be replaced in order for drivers to have a reliable way to get to work, chauffer children and go on vacation.

All comments and suggestions are welcome.

Walter J. Kirchberger, CFA®