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As Jittery Consumers Calm Down, Car Sales Could Take Off

Gary Hoffman
01/19/2011

Some good omens are showing up in the consumer confidence indices and other economic indicators, spurring speculation about a big increase in car sales for 2011 -- perhaps even to 14 million units.

There are certainly no shortage of indicators to consult these days. They range from the obvious to the unusual, everything from the Dow Jones Industrial Average to the typical age of a vehicle on the road. Economists, analysts and market researchers use these measurements to figure out which way the economic winds are blowing and then estimate total vehicle sales for the coming year.

None is more aptly named than the Jitters Index. Published by CNW Marketing Inc., of Bandon, Oregon, it measures the level of consumers´ concern about financial issues affecting their households, including gas prices, the cost of a child´s education, and the state of their investments. Between November and December, the Jitters Index fell 1.8 points, suggesting that consumers are relaxing a bit about financial issues. It was the largest decline in more than three years.

By contrast, during the comparatively carefree month of January 2007, the index stood at just 3.84 points, more than three points lower than today. If the trend continues, CNW predicts that auto sales could be near 13 million units in 2011. That level would be up substantially from the abysmal 10.6 million in 2009 and the somewhat better 11.5 million in 2010.

The University of Michigan´s Consumer Sentiment Index is roughly in line with CNW´s analysis. It rose to 74.5 points in December, up from 71.6 in November and 67.7 in October. U of M researchers meanwhile forecast auto sales of 12.7 million units in 2011. Financial services firm Morgan Stanley is betting on 14 million, based on consumers´ improved credit situations.

Auto Sales Still Lower Than Normal

But Sean McAlinden, chief economist for the Center for Automotive Research, in Ann Arbor, Michigan, isn´t ready to celebrate yet. "Let´s not get giddy here." He notes about 15.2 million would be normal right now, given the age of the typical vehicle on the road and other factors.
"We are a long, long way from that, in the average 13 million sales forecast for 2011," he said in an email interview.

Nor is consumer confidence anything to brag about right now. Tim Nash, an economics professor at Northwood University in Midland, Michigan, says consumer confidence is a far cry from its level three or four years ago. For example, the Consumer Confidence Index compiled by the nonprofit Conference Board was in the 90s when the auto industry was selling 16 to 16.5 million vehicles a year in 2006 and 2007. Its current figure of 52.4 "has a long way to go as a basic indication of consumer confidence," he said.

The national unemployment rate is another obvious indicator to watch. It´s declining, although a bit sporadically. "The unemployment situation is slowly, slowly getting better," said Charles Ballard, economics professor at Michigan State University.

Noting that the current 9.6 percent unemployment rate has already dropped below the psychological barrier of 10 percent, Ballard said it doesn´t need to get back down to the 5 percent level from a decade ago to start having a positive effect on consumer confidence. It will promote at least some car sales as it continues on its course. "Any improvement in the unemployment situation will probably be reflected in small and steady improvements in the way people view the economy," Ballard said.

The stock market is another key indicator and its direction has been unequivocally positive in recent months. The Dow Jones Industrial Average has climbed 1,500 points since September, up from about 10,000. Economists are crediting the rising market for the increase in luxury car sales during 2010. For example, BMW was up 8.5 percent in 2010, Mercedes-Benz 14 percent, and Cadillac nearly 10 percent. "The folks who come in and write the check for the big Mercedes, they´re concerned with the stock market," said David Blitzer, chairman of the index committee at Standard & Poor´s in New York.

Real Estate Troubles

By contrast, the middle-class families rely mostly on their homes as their store of wealth and they have seen their net worth decline as prices have fallen. That has kept many of them out of the new car market, economists say. The S&P/Case-Shiller Home Price Indices are painting a dismal picture of the housing sector right now. The rebound in home prices is decelerating in 18 of the 20 metro areas that the indices cover, according to the latest report. Prices in six markets -- Atlanta; Miami; Charlotte, North Carolina; Portland, Oregon; Seattle and Tampa, Florida -- have hit their lowest levels since the national real estate meltdown started in 2006 and 2007. The housing industry will be on the mend once housing prices start rising faster than the rate of inflation, according to Blitzer. He would like to see a 2- to 2.5-percent annual increase in housing prices to help keep stagnant or falling home values from throttling the recovery.

"Clearly, for the majority of people the home is the biggest factor in their financial situation," Blitzer said. "One of the reasons that we still have unemployment between 9 and 10 percent is that we still haven´t had a big housing recovery."

Incentives Declining

On the other hand, the current buyer´s market in the retail car industry could become a distant memory once auto sales reach the 15-million level that many analysts are predicting for 2012. From the consumer´s standpoint, perhaps, an automotive recovery won´t be an unalloyed blessing. Even with the moderate improvement in sales recently, incentives are already on the decline. In the most dramatic examples, the drop for GM and Chrysler vehicles averaged hundreds of dollars between December 2009 and 2010.

"The more the recovery moves forward, the more pricing power businesses are going to feel that they have," Ballard said. "So automakers aren´t going have to offer deep discounts to sell their vehicles."

The lesson for the consumer: even silver linings don´t last forever.

 

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