Concerns about the outlook for the light vehicle market (cars, sport utility vehicles and light trucks) have been growing as 2016 draws to a close. Those concerns were amplified last week when General Motors announced layoffs of nearly 1,300 workers, adding to the 2,000 layoffs previously announced in November.
The combination of layoffs with high and rising inventory levels certainly justifies concern, but it is important to maintain perspective — the U.S. light vehicle industry remains fundamentally healthy, even if it appears poised to ease off the accelerator in 2017.
{mosads}Our forecast for vehicle sales, which is based on the Michigan Quarterly Econometric Model of the U.S. Economy, calls for sales of 17.3 million units in 2017. That sales level, while a slight decrease from 2016’s likely pace of 17.4 million units, would still be comfortably higher than 2014’s sales of 16.5 million units.
The relatively healthy topline sales number we expect for 2017 masks diverging trends between light trucks and automobiles. The share of light trucks has risen as a proportion of total light vehicle sales every year since 2013, with steep increases in the last two years aided by low gas prices.
We foresee that trend continuing in 2017, but at a slower rate, with light truck sales, including sport-utility and crossover-utility vehicles, increasing from 10.5 million this year to 10.8 million next year. We forecast car sales, meanwhile, to decline from 6.8 million to 6.6 million.
Against that sales backdrop, it is not surprising that the recent increase in vehicle inventories has not been uniform across sectors, with the supply of cars rising by 10 days’ worth of sales, year-over-year, at the end of November.
Some automakers appear to have larger oversupply concerns than others, with General Motors, Fiat Chrysler, and Volkswagen topping the list. General Motors reported 168 days of supply for the Buick LaCrosse and 121 days for the Chevrolet Cruze, while Fiat Chrysler reported 139 days for the Dodge Challenger.
Those numbers are much higher than the 60-70-day range that is often considered healthy. It is no coincidence that the plants where General Motors has recently announced layoffs produce the LaCrosse and the Cruze.
General Motors and Fiat Chrysler have also announced plans to temporarily idle five and seven auto-producing factories, respectively, in order to better align production and demand. Still, in our view, overall inventory levels in the industry are not alarming in light of sales volumes that remain brisk.
We expect the Detroit Three’s (GM, Fiat Chrysler, Ford) share of U.S. light vehicle sales to rebound, partially, to 43.2 percent in 2017, after falling from 43.6 percent in 2015 to 42.9 percent in 2016.
We expect the Detroit Three automakers to benefit from labor peace, as all three are currently operating under four-year labor agreements that are in effect until September 2019.
We do not anticipate either a contract reopening or a strike in 2017. The Detroit Three should also be helped by low gas prices and the rising popularity of light trucks, a market segment that is much more favorable to them than the auto segment.
The echo of recent spectacular sales growth could put a spoke in the industry’s wheels going forward. New lease originations fueled about 40 percent of overall sales growth during 2010-2015, rising from just over 1 million units in 2010 to a record level of almost 4 million in 2015, according to Manheim Consulting.
The bulk of these leased vehicles will return to dealer lots as certified pre-owned cars and trucks with a delay of two to three years, competing with new cars sales.
A recent focus on retail sales by several manufacturers, however, is expected to put a brake on future growth of off-lease, used vehicles, potentially reducing the pressure on new vehicle sales.
Another potential headwind for the vehicle industry is higher long-term interest rates, which have climbed sharply since the election in November. The impact on auto loan rates so far has been muted, but if vehicle interest rates were to realign with higher long-term bond rates, we would expect a modest drag on sales volumes.
Some industry observers have also criticized what they see as lax lending standards in the auto loan industry, with occasional comparisons to last decade’s subprime mortgage fiasco.
We consider such comparisons overblown. Although the Federal Reserve Bank of New York’s latest quarterly report on household debt and credit indicates that the 90-day-plus delinquency rate on auto loans has inched up over the past couple of years, overall credit quality remains strong.
Credit scores in the bottom half of the distribution remained fairly stable over the past three to four years, and are significantly better than those during the 2004-08 period.
Looking beyond 2017, we see another slight decline in new vehicle sales in 2018, but the longer-term outlook for the light vehicle industry remains bright. Although recent new light vehicle sales have been impressive in absolute terms, they are still weak when measured relative to the driving-age population.
An analysis we performed earlier this year indicated that stronger household formation, and especially a rebound in the homeownership rate, would likely turbocharge vehicle sales. We do not believe that millennials’ desire to own vehicles is much lower than previous generations’.
Rather, we expect that, as the labor market continues to improve and they start to feel more economically secure, millennials will form households and buy vehicles at higher rates. That could set the stage for the next boom in U.S. light vehicle sales.
Gabriel Ehrlich, Ph.D., is the Associate Director, Daniil Manaenkov, Ph.D., is the head of the United States Economic Forecast, and Michael McWilliams, Ph.D., is a Michigan Forecasting Specialist at the University of Michigan’s Research Seminar in Quantitative Economics.
The views expressed by contributors are their own and not the views of The Hill.