The American auto industry reported that sales for August, 2014, of new cars and light trucks reached an annualized level of 17.4 million. That is the most since 2006. All three domestic auto makers saw increases in monthly sales, with GM experiencing the greatest increase. Two questions come to mind: why? and for how long? In other words, why are sales increasing, and how long will sales hold at the 17 million plus level?
With respect to the “why?” question, analysts point to several factors. First, some argue that the dramatic drop in new car sales after 2008 created an aging fleet of vehicles on the road that needed to be replaced; that replacement process continues. Second, some argue, as a Wall Street Journal article contended, that the recent growth in sales is part of a long-term trend (albeit a waning one) that experienced a short interruption from 2008 to 2010. The trend has been driven by, initially, the entry of baby boomers into the market; by the entry of women in the workforce; and by increased disposable income, making cars more affordable. Finally, some analysts argue that recent growth in auto sales is primarily finance-driven. Super-low interest and lease rates have made cars very affordable. Drivers are choosing newer cars at lower cost.
Answers to the “how long?” question tie back to the perceived reasons for the growth. Those that view new vehicle sales as a result of a need to replace old vehicles predict that sales will taper off in a somewhat predictable way. Those that view recent increased sales as part of a long term trend anticipate some additional growth in sales, followed by a leveling off and a demographically-driven drop-off. Finally, those that view new vehicle sales increases as the result of financial tinkering anticipate the (continued) growth of the sales bubble, with a dramatic “popping” of the bubble sometime soon.
For the auto industry, a slow reduction in sales over the next few years will not be good news, but will not create major problems. On the other hand, a sudden reduction comparable to 2008-2010 could create a crisis in the industry also comparable to 2008. While no one is predicting the bankruptcy or demise of the auto companies, the fallout among the Tier 1 and Tier 2 suppliers could be just as dramatic.