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Goldman Crushes The American Manufacturing Recovery Dream - Auto Sales Expectations Are Unrealistic
Auto sales have recovered to the 16.5-17 million range, and many observers predict further gains in coming years (despite, as we previously noted, missing expectations for the last few months). But to Goldman Sachs, the current sales pace already looks high relative to the medium-term fundamentals; and their assessment of scrappage rates, population growth, licensed drivers, and vehicle ownership suggests that trend demand for autos - excluding cyclical fluctuations - is only 14-15 million units per year.
Goldman Sachs' Jan Hatzius explains...
Auto sales have recovered nicely from the crisis and now stand in the 16.5-17 million range. Many observers expect further gains in coming years. For example, the consultancy IHS Automotive Insight--a respected source of industry analysis--believes that sales will stabilize at just over 17 million through the early 2020s.
Are these predictions realistic? To answer this question, it is helpful to break down the level of auto sales into two components, the number of autos needed to replace scrappage and the growth in the stock of autos on the road.
(1) auto sales = auto stock x (% scrappage + %ch in auto stock)
We start with the scrappage rate, shown in Exhibit 1. It is quite noisy in the short term but has fluctuated around a slowly declining trend over the long term. At the moment, that trend stands at 5% or a bit less, which implies replacement demand of 12.5-13 million per year given the current auto stock of just under 260 million.
Exhibit 1: Scrappage Rate Has Gradually Trended Down and Is Now Just Under 5%
Next, we look at the change in the stock of autos on the road, which we can write as:
(2) %ch in auto stock = %ch in adult population + %ch in licensed drivers/adult population + %ch in autos/licensed drivers
The Census Bureau estimates that the adult population will grow 1% per year through the end of the decade. But this probably overstates the growth in the auto stock because the other two terms in the equation are likely to be negative.
First, the left-hand panel of Exhibit 2 shows that the share of licensed drivers in the adult population has fallen by almost 0.5 percentage point per year since 2008. The fact that the decline started in 2008 raises the question of whether it could be due to the Great Recession. This may be a factor, but the right-hand panel of Exhibit 2 suggests a more structural explanation. There has been a long-standing trend decline in licensed driver shares among younger age groups. Until a few years ago, this decline was offset by an increasing licensed share among older individuals. But that increase has now ended so that the decline among younger groups is dominating the aggregate trends. Even assuming that some of the recent weakness is cyclical, we therefore expect the licensed share to decline by 0.2-0.3pp per year.
Exhibit 2: Licensed Drivers Make Up a Shrinking Population Share
Second, the trend in the number of vehicles on the road per licensed driver has changed recently. As shown in Exhibit 3, this ratio rose sharply until the early 2000s but has declined since then. Although it is uncertain how much of the weakness is due to cyclical versus structural forces, we would pencil in a mild downward trend of perhaps 0.1 percentage point per year in coming years.
Exhibit 3: Ratio of Vehicles to Licensed Drivers Seems to Have Topped Out
These estimates imply that the stock of autos on the road is likely to increase at a trend rate of about 0.6-0.7%, or 1.5-2 million per year. Combined with our estimates for replacement demand, this implies an underlying trend rate of auto sales in the 14-15 million range, or about 2-2.5 million below the recent pace. (Longer term, the risks to these estimates are probably on the downside, especially if the "sharing economy"--exemplified by companies such as Zipcar and Uber--makes deeper inroads into the transportation sector. But that is a different story that is not central to the analysis presented here.)
How big an issue is all this for the US economic recovery? Although the GDP implications are negative, they are quite small. Consumer spending on motor vehicles and parts accounts for 2.5% of GDP, but only about half of this consists of purchases of domestically produced new light vehicles (the rest is imports, used vehicles, and parts). Moreover, because of its medium-term nature, it is natural to spread the decline implied by our analysis over a fairly lengthy period. If it occurs over the next 4-5 years, the drag on annualized GDP growth would average only about 0.05 percentage point per year.
* * *
Hatzius is careful not to entirely destroy hope though, as he concludes,
But there is also a more structural difference between housing and autos, namely that long-term population growth is likely to be much more tightly linked with housing demand than with auto purchases. After all, everyone needs a place to live, but more people are finding that they do not need a car.
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Cars are huge expenses. Not as bad a boats though.
Here is where Houziwhatever is completely wrong.
People are discovering that most often, their car is th eonly place they have left to live.
See that?
Changes the whole story!
Spacious Gas Guzzler Sales BOOOOOM straight up!
...
Sonic Cleanse, Sequence 17, deep bass recommended
https://www.youtube.com/watch?v=5BrvoWEw2J8
I want my Obama-Car NOW!
First, the only place credit is growing in the private sector is autos and education (thanks, Fed!). Forget fundamentals when the govvies are handing out cheap money. We could hit 20MM units and nobody should be surprised.
Second, the cost of an average car is up. WAY up. In any terms you want to look at it- raw price, inflation-adjusted, percentage of wages, etc. They're fucking expensive (except for the interest rate on the loan to buy it and the easy approval process to get that loan). The number of units sold may be drifting down but the dollar value of those cars being sold is still increasing.
Crap cars made by overpaid workers.
The last chart of vehicles per licensed driver mirrors the fall in 25-54 yr old population and fall in jobs among that group...(check link)...this also mirrors the fall in mortgage debt, fall in oil consumption, etc. etc.
http://econimica.blogspot.com/2015/05/veneer-of-us-growth-normalcy-has-worn.html
Everything the tribe touches ends badly.
Tragic but true.
The government is evidently not buying enough cars.....
Obama should have made us all buy cars instead of insurance.
Since when did the Goldman Sack take an anti-bullshit pill?
Since I guess they figured they needed to put their finger on the scales to make sure the FED did QE4. Because, you know, real unemployment of 23% just isn't sufficient to mention in polite conversations, or CNBC.
Screw this wonkish assessment...it's all about middle-class consumers KEEPING THEIR JOBS and ACCESS TO CREDIT. Both about to disappear...
You mean NOT in the labor force can't keep climbing forever? It's amazing that so many can believe endless money printing can offset that and that we have a bright future ahead of us.
Some things really are unsustainable.
Won't be me buying a new car. Ever. The cost is far higher than the vehicle is worth. Huge waste of money.
Grimaldus
was a good customer dutifully getting a new car every two years and taking it to the stealership for all maintenance.
now under the hood myself trying to squeeze another 100k miles out of a 10 year old used car.
not having 60 financial suicide monthly payments plus not having the financial suicide balloon payment is the new luxury.
1. Why would buy a new car every 2 years?
2. Why would you take it to a dealership and inevitably pay at least a 10-20% markup for hourly labor if not more (ditto parts and likely get raped for 'factory-certified' parts which have an even much higher markup)?
Never understood the American mentality of buying a new car anytime less than every 8-10 years let alone leasing (one of the single dumbest things Americans repeatedly do and incredibly large numbers).
I'd be more interested in knowing what the resale market is doing. How many used cars are changing hands? Not just from used car dealers, but peer-to-peer sales.
New car sales, as sales of all new retail goods, are, I believe, being artificially 'juiced' somehow. Figures are being manipulated to make it SEEM like sales are still strong. How many of these cars are being bought up in bulk by companies that lease them out, as opposed to being bought by your neighbor next door? Like home sales...how many are being bought by folks to live in, and how many by corporate landlords to rent out?
The retail consumer market is NOT what it may appear to be. The difference between what I HEAR, and what I SEE, is getting wider and wider. I go with what I SEE.
And I do NOT see people buying. Not like they used to. The malls are dead, everyone has a "Going Out of Business" sale banner outside. For Rent signs are everywhere, and many local shops have closed down altogether. And unlike times past, these closing businesses are NOT relocating, they are closing, period. At our local Home Depots/Lowes you see people buying more "repair" items than art buying new appliances. The wagons are full of stuff you use to fix something existing, you don't see the people in the contractors section picking up orders for new construction. They're replacing a window or two, adding outlets, they are refinishing existing cabinetry instead of ordering new.
Sure, there is spending going on, there always will be. But this is 'hunker-down' spending, not consumer confidence.
One thing that is juicing new car sales is finance companies giving loans to anyone and everyone. I know people who can't keep a job more than a few weeks that are driving new cars. One of them cancelled the insurance a month after buying it and then totalled it driving drunk. He complains that he can't get a loan for another new car. Just part of the new normal.
I will drive my 1200 dollar 1996 Toyota Turcel till it dies. I have had it for 5 years now. Then I will buy another 1200 dollar old car with low mileage because I'm a cheap son of a ....that doesn't need to look good.
Yeah but the problem with buying cars at this low end of the market is that they are highly prone to have a mechanical issue that if it occurs will force you to junk the car and buy a new car right away. Always the tricky part of trying of trying to use vehicles this old especially if they have to use them everyday to get back and forth to work/commute longer distances
US auto market is becoming less and less important though globally as it shares of new auto sales fall. You pretty amazing though how you can correlate the decline in America from the 50s until now with the parallels in the auto industry including what has happend more recently since NAFTA and free trade have gone into effect. US now runs huge trade deficits on auto parts in every category and increasingly the US is seen as an 'assembly hub' because of the cheap labor wages and overall cost of production here vs say 30 years ago when the Japs had to put assembly factories in the US to deal with American backlash & actions by Congress back when they actually gave a shit about US-based manufacturing.
Bought a 68 Chevy C10 for 3,200 bucks 5 weeks ago. Didn't these cost like 4,000 brand fucking new.
Yeah but the gas for it is only 10 cents a gallon.
Just got a 2015 merc e350 for $320/month, 6K down. Was billed as used since it was a corporate car even though it had 500 miles only.
Every single auto dealership ive dealth with is trying to pull in their leases so they can sell them as used since no one is buying new anymore. The amount of new cars sitting idle on these lots is staggering. Especially if you look at the American car dealers. Never seen so much wasted sheet metal in my life...
The auto manufacturers dont seem to understand how to tame overproduction.IMO all QE did was prolong the crash/reset, so these auto manufacturers keep looking at the bright side since things havent gone completely batshit insane yet. Well, when QE in China is realized and doesnt do what everyone expects (at least not long term), the reverberations will be felt here two fold, and then the market will crash as money floods out of the system and China starts selling their share of our bonds. Hopefully that will finally kill the grotesque monster that is GM.
"all QE did was prolong the crash/reset"
Thats exactly what it did, by design.
GM started making shitty cars -> Hit a financial wall -> Taxpayers bail them out -> Keep making shitty cars. Sounds perfect. /s
Passed by the ritzy river houses yesterday and the traffic jam was new, luxury vehicles stacked up. Had a big smile in my 06 truck with the kayak and 6er on ice in the back.
Of course it's unrealistic, you're already exhausting the low income buyers that needs 10+ year loans... Who else is left?
Unsafe at Any Speed started it all. CAFE standards have totally f'd the auto marketplace up. The steel and paint on my 2012 are thin to the point of absurdity. All because some people who think they are the elite don't want the majority to have cheap transportation and the liberty it brings.
Isn't Goldman a big ABS player...?
What's their angle here?