Automakers Buoying US Growth With Highest Sales Since 2006

Thursday, 04 Sep 2014 07:45 AM

 

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When the U.S. economy tanked six years ago, Detroit led the way, as auto chieftains trooped to Washington to ask for a bailout. In a reversal, the car industry is now driving the growth.

The latest evidence came when automakers reported August sales that reached an annual pace of 17.5 million vehicles, the highest since January 2006, blowing away a forecast of a 16.6 million rate. That followed a Commerce Department report released Aug. 28 showing motor vehicle production climbed by about $20 billion at an annualized rate last quarter, contributing half a percentage point to gross domestic product growth, the most in nine quarters.

Buyers are being lured to showrooms by a combination of low interest rates, moderate fuel prices and new models packed with technology that render obsolete most cars on the road, which are more than 11.4 years old on average, according to researcher R.L. Polk. Fuel-saving engines, Internet-connected cockpits and no-interest, 72-month loans are convincing tire kickers to buy now instead of later.

“As long as you’re going to give money away, people are going to take it,” said Kevin Tynan, auto analyst for Bloomberg Intelligence. “You’re also seeing that next generation of technology, which got delayed in 2008 and 2009 by the recession. So if your vehicle is 11 years old, there’s really no better time than now to roll over into something new.”

Factory Work

That has automakers cranking up the factories to meet the growing demand. U.S. assembly of cars and light trucks surged 13.2 percent in July to a 12.85 million annual pace, the highest production since May 2000, data from the Federal Reserve show.

“We’re going to close out the year with the highest production plan we’ve had in seven years,” Bill Fay, Toyota Motor Corp.’s U.S. sales chief, said on a conference call today. “Consumer confidence is up, spending growth is out there in the marketplace, interest rates are stable, fuel prices are stable. It’s pretty darn close to ideal.”

U.S. auto sales rose 5.5 percent to 1.59 million last month, from 1.5 million a year earlier. Toyota, Chrysler Group LLC, Nissan Motor Co. and Ford Motor Co. all beat analysts’ estimates on growing sales of trucks and sport-utility vehicles.

“Autos are one of the bright spots out there,” said Diane Swonk, chief economist at Mesirow Financial Inc. in Chicago. “One reason is that we’ve got to replace these old cars we’re driving because many of them were destroyed by this winter we went through.”

Sedan Pressure

While light trucks led the way, selling cars has gotten somewhat harder. Pricing “pressure” in family sedans helped to lower Ford’s average prices by $450 per vehicle to about $31,000, Erich Merkle, the company’s sales analyst, said on a conference call with analysts and reporters today. Ford’s sales rose 0.4 percent last month.

“As baby boomers continue to become empty nesters, they seem to naturally flow into these small” SUVs, Merkle said. “Unfortunately, it pulls something from cars and that’s where you’re seeing some of the weaker pricing.”

The easy money lubricating auto sales now could eventually slow buyers’ return to the market, Swonk said. To make vehicles affordable for ever-riskier buyers, automakers’ finance arms are extending loans terms to as long as 84 months — 7 years.

“The length of these loans is disturbing,” Swonk said. “With a seven-year loan, you’re under water pretty quickly.”

Sedans are a tougher sell now in part because today’s SUVs no longer are the gas guzzlers of the turn of the century, said John Krafcik, president of TrueCar Inc., an auto-buying website. Modern SUVs, also known as crossovers, are built on car chassis, which make them more nimble and fuel efficient.

“Consumers are going from a 25 mile-per-gallon mid-size sedan into a 25 mpg crossover and they’ve got more stuff and more room and a higher seating position,” said Krafcik, former chief executive of Hyundai Motor Co.’s U.S. sales unit. “It feels very different from the halcyon days of Explorers and Expeditions.”

Profitable Models

For automakers, the switch is padding their bottom lines because consumers are willing to pay more for SUVs than for sedans, which are becoming “commodity products,” Krafcik said.

“Consumers are willing to spend $5,000 more to get that flexibility, but it’s only costing the manufacturer an extra $1,000 to make that” SUV, Krafcik said. “You can afford to have these commodity products in your lineup — which are loss-leaders at worst and net-zero profit generators at best — because you’re more than compensating for it with the profitability you’re seeing” in modern SUVs and trucks.

Auto lending for new and used cars are at a record high thanks to low interest rates and easy credit, Swonk said. Since their government-financed bankruptcies in 2009, General Motors Co. and Chrysler have rebuilt the ability to lend to subprime consumers, she said.

“It’s a lot easier to get a car loan than a mortgage,” Swonk said. “We don’t have record vehicle sales, we have record vehicle loans.”

Feeling Better

Consumers are using that easy money to move up into SUVs. Ford had record August sales of its Escape SUV. GM saw sales of its Cadillac Escalade SUV rise 89 percent and GMC Yukon sales more than double. Chrysler’s Jeep line of SUVs jumped 49 percent.

“The consumer is starting to feel better about the economy,” said Jeff Schuster, an analyst with researcher LMC Automotive in Southfield, Michigan. “People are looking at low gas prices and saying, ‘Maybe I will buy that truck or SUV.’”

GM, despite a strong SUV showing, experienced a 1.2 percent sales decline last month, worse than the 0.1 percent slip predicted by analysts, according to the estimates. The Detroit-based automaker reported decreases for three of its four brands, including an 18 percent drop by Cadillac.

Chrysler had the best August among major automakers, as sales rose 20 percent, extending its streak of gains to 53 months, or almost 4 1/2 years.

“Our Jeep brand continued its torrid sales pace recording its best August sales ever and our Ram Truck brand contributed with a massive 39 percent sales increase,” Reid Bigland, Chrysler’s head of U.S. sales, said in a statement.

© Copyright 2014 Bloomberg News. All rights reserved.

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