Automakers’ Shares Rise Despite Decline in Sales
US automakers reported a decline in new vehicle sales for the fourth straight month on Monday.
Experts anticipated the dip, which comes on the heels of a record-setting 2016 in which 17.55 million new vehicles were sold. Retail sales numbers, which account for the sale of used cars, remain stable, and industry stocks are rising despite the underwhelming reports.
GM’s shares increased by 1.8% Monday, despite a 5% drop in sales as compared to last June. Ford’s shares jumped 3.3%.
GM’s chief economist, Mustafa Mohatarem, notes that “key U.S. economic fundamentals clearly remain positive,” and expects “U.S. retail vehicle sales [to] remain strong for the foreseeable future.”
Notice that Mohatarem mentions retail vehicle sales, not sales of new vehicles.
A preponderance of like-new used automobiles has flooded the market, and likely will not go away anytime soon.
An increasing number of consumers prefer to lease cars rather than buying them. When the leasing term expires, many leased cars wind up back on the lot, to be sold as used vehicles. Therefore, a trend toward leasing vehicles is often accompanied by an increase in used car sales and a proportionate decrease in new car sales.
When sales of new cars drop, companies are prompted to offer attractive leasing agreements and to lease cars they would otherwise sell new. As a result, more cars are leased and more cars are sold used.
It is a self-perpetuating cycle. But with the length of the average car loan standing at a record high of 69.3 months according to edmunds.com, economists wonder how sustainable it is for the consumer.
“[Such a long lease] is financially risky,” says Jessica Caldwell, executive director of industry analysis at Edmunds, “[and leaves] borrowers exposed to being upside down on their vehicles for a large chunk of their loans.”
Another reason for the drop in new car sales is companies’ increasing reluctance to sell cars to rental agencies. Such sales yield relatively small profit, and Mohatarem says the “pullback in daily rental sales” is “industry-wide.”
Ford’s sales to rental agencies fell 13.9 percent in June, but there was no change in the company’s sales to consumers.
Another trend found in the data is consumers’ preference for large vehicles—SUVs, trucks, and crossovers—as opposed to small, passenger vehicles.
Nissan and Toyota were among the few companies whose sales increased in June 2017 exceeded their sales in June 2016. Both companies reported increases of approximately 2%. In both cases, the increases come due to huge jumps in SUV sales.
Sales of Toyota’s 4Runner, an SUV rose 16.6 percent, and sales of its more affordable SUV option, the RAV4, saw a 24.7 percent spike. Nissan sold 19.5 percent more trucks, SUVs, and crossover vehicles than it did last June, but 12.1% fewer sedans.
At the beginning of the decade, when the price of gas in the US began to climb above $3.00 a gallon, consumers were eager to ditch their gas guzzlers in favor of small, fuel-efficient alternatives. Now, with the average gas price hovering just above $2.00, Americans seem to opt for space rather than fuel economy or eco-friendliness.
Whether consumers in the US are buying SUVs or Priuses, they certainly aren’t buying new ones. Still, the health of the automotive industry does not seem to be in jeopardy. The avenues by which companies generate revenue are changing as consumers choose used cars and leases over brand new vehicles.
Moreover, it is only natural for a downturn like a 4-consecutive-month sales decreases to follow a record-setting boom. It is worth bearing in mind that all reported decreases are relative to June of last year when the industry was in the midst of a huge upswing.
Unless the entire interstate system breaks down or a personal hovercraft is invented, American consumers and automotive companies will maintain a fruitful and happy business relationship for years to come.
