The Coming Collapse In US Auto Sales – Forbes
Automobiles are not moving off the parking lot.
That’s according to an industry report that showed a sharp decline in auto sales across all auto makers—see table. Meanwhile industry inventories have been climbing up from an average of 55 days back in April of 2015 to 70 days last month.
Coming after months of sluggish sales and generous incentives, the big drop in April sales could be a sign of an impending collapse which could parallel that of 2008-9.
There’s a compelling reason for that: pent down demand, which for years has been “stealing” sales from the future.
Now the future has arrived and pent down demand is bad for auto makers, their investors and the economy as a whole.
Source: Wall Street Journal and Finance.yahoo.com 5/3/2017
To get an idea how “pent down demand” (my own term) works, a good place to begin with is the more familiar concept of pent up demand, the lack of current demand for discretionary items like automobiles, home appliances, etc., which depresses sales of these items in the short run.
Pent up demand usually appears before a period of consumer euphoria, when consumers choose to push spending on discretionary items to a future date, due to lower price expectations, depressed consumer confidence, or a credit crunch.
And it disappears together with these conditions when that future day comes, and consumers rush to buy the items they put off in the past.
In contrast, pent down demand appears after a period of consumer euphoria when consumers choose to move spending on discretionary items from a future date into the present day, due to low cost of financing — which blurs the distinction between present and future. Why wait to buy a new car or a new home appliance next year when you can have it this year, paying a small penalty for this privilege?
Simply put, ultra-low interest rates help “steal” sales from the future, creating market saturation, and eventually depress spending on “high ticket” items when the future becomes present.
That’s what happened in the six years that preceded the 2008-9 collapse in US auto sales. Consumers rushed to take advantage of “zero percent” financing to purchase cars they would normally buy years later. That’s how automobile sales grew from an average of 15 million in the 1980s and the 1990s to 17 million in the first six years of 2000s, before they tumbled during the Great Recession.
Nonetheless, the Federal Reserve and other central bankers around the world didn’t take notice of the impact of pent down demand on future growth. They upped their ultra-low interest rate policies, refueling pent down demand again (automobile sales are above the pre-Great Recession levels).
Compounding the problem, pent down demand is exacerbated by debt — a lot of debt — amassed on top of the old debt, which fueled the bubble that preceded the Great Recession. This was documented by a McKinsey report—US auto loans have crossed $1 trillion lately.
While higher debt levels boost auto sales in the short-term, those debt levels depress them in the long-term, as debt payments chip away at spending, setting the stage for the next collapse in automobile sales.
That’s certainly a terrifying prospect for Wall Street fixated on Fed’s ultra-low monetary policy.