AppId is over the quota
By Lacey Plache October 12, 2011
Consumer confidence, a strong stock market and employment gains bolstered car sales momentum in the first half of 2011, but the current economic environment no longer includes these factors. Instead, several negative factors are contributing to the erosion of new vehicle demand: falling confidence; limited wealth effects; and a floundering labor market recovery. And while buying conditions are improving for consumers, Edmunds.com expects these negative economic factors to remain dominant forces in the months to come. A growing recession risk at home and the European debt crisis pose additional threats to auto sales. Edmunds.com expects auto sales to grow, but at a slower pace than previously expected.
New Economic Forces In Play
Consumer confidence fell from 59.2 in July to 45.2 in August -- its lowest level and steepest fall since the recession. The uncertain economic environment played a key role in this decline. Stock market volatility, in particular, has dragged down confidence, beginning in May, when the market dropped sharply due to earthquake-induced production issues and high gas prices. The market rebounded briefly in July, thanks to reports of surprisingly strong second quarter earnings, but the debt ceiling negotiations and the downgrade of U.S. debt erased the effect of earnings season in August. A series of daily declines of 400-500 points rocked the Dow Jones Industrial Average leading to plummeting confidence. The market stayed volatile through September, amidst rising uncertainty regarding the European debt crisis, and confidence remained low.
Wealth effects will offer little support to car sales this fall. The sinking stock market eliminates a key recent source of wealth effects, created when the Dow soared from 10,015 in August 2010 to 12,811 in April 2011. Another key source, wealth from housing, remains unreliable as well. Strong housing prices buoyed confidence and auto sales pre-recession, but at this point, home values have yet to bottom out since the end of last decade’s bubble. Data from previous recessions caused by financial crises indicate that the housing market could be years away from full recovery, which will lead to a drag on consumer motivation to buy new cars for years to come.
The lack of substantial job growth further threatens vehicle sales in the foreseeable future. To return to 2007 employment levels, the economy still needs to recover 6.5 million of the 8.6 million jobs lost from 2008 to 2010, not accounting for interim population growth. At the rate of 250,000 jobs added per month (considered a healthy rate for a recovery), the economy would not recover these jobs for nearly two and a half years. Job creation has reached that level in only a handful of months of the recovery to date. Despite strong job growth from February to April 2011, the economy added only 120,000 jobs per month, on average, through September.
September Sales Not Inevitable
Lower supply and higher prices for many vehicles have dragged down new car sales since the real impact of the Japanese earthquake hit the U.S. market in May. The used car market undoubtedly captured some sales, although tight supply and high prices for used cars would have limited this loss. Consumers accounted for other sales by “pulling ahead” in March and April in a rush to buy Japanese cars before anticipated shortages occurred. But, a significant portion of sales -- perhaps as many as 200,000 to 300,000 -- also represent purchases that consumers delayed until buying conditions improved. Edmunds.com expected this deferred demand to boost sales in late summer and early fall after Japanese production returned to more normal levels.
New vehicle sales performed in line with expectations in July, driven by increased availability. Toyota and Honda raised incentives in July to remain competitive and in anticipation of greater supply. Increased auto production generated growth in jobs and wages, and thus, economic momentum.
Then came August. The Japanese recovery moved with full steam ahead while wave after wave of uncertainty hit the U.S. economy, beginning with the prolonged debt ceiling negotiations and the threat of default by the federal government on its debt. Standard and Poor’s rating agency downgraded U.S. debt due to the contentious political environment, even though the government narrowly avoided a debt default. All the while, a debt crisis raged across Europe, further threatening the U.S. financial system. Economists proclaimed higher odds of another recession, with some even claiming the dreaded double-dip had already begun. Accordingly, consumer and business confidence plummeted. August car sales dipped just slightly from July levels, but failed to grow as expected.
July indicated one path for car sales and the economy overall for the coming months. August’s results suggested quite a different one. But even with September’s apparent success, the rebound fell below expectations from earlier this year. Although the Japanese recovery is in full swing, the economy has not followed with its own recovery, which took a toll on August and September auto sales growth. Unless the key economic factors driving sales improve in the months ahead, the economy will continue to dampen auto sales momentum.
Lacey Plache: is the Chief Economist for Edmunds.com. Follow @AutoEconomist on Twitter.
