Automakers are likely to be in for a disappointment on Tuesday as the latest monthly sales numbers are released. Industry watchers expect a 3 percent year-over-year decline for June — and a similarly weak performance for the first half of the year.
The retail numbers for the first half of 2019 — which exclude sales to daily rental companies and other fleets — are at their lowest level since 2013, when the auto industry was just emerging from the Great Recession, according to J.D. Power and LMC Automotive.
Industry analysts point to a variety of factors contributing to the downturn — which some warn could be an early signal of a coming recession. Rising prices are one key concern, with Power data estimating the typical motorist spent a record $33,346 during the first half of this year, up 4 percent, or $1,158, from the same period a year ago.
“The growth in prices has been nothing short of remarkable,” said Thomas King, Power’s director of data and analytics. “Average transaction prices set a record during the first half, which has big implications for manufacturer revenues.”
The surge in vehicle pricing is complicated by the recent rise in interest rates, said Jessica Caldwell, the director of industry analysis with tracking firm Edmunds, with the typical new vehicle loan now running more than 6 percent. That has led many new vehicle buyers to stretch out their terms to 60 months or more, while driving others out of the market.
Edmunds projects the new car market will dip to 16.9 million for all of 2019, down from 17.3 last year. Barring a surge during the second half, that would mark only the second downturn since the end of the recession. And the dip is expected to continue, with consultancy AlixPartners last week forecasting the slowdown will accelerate over the next two years, bottoming out at around 15.1 million before staging a modest recovery in 2022.
One big warning sign is the fact that the typical light duty vehicle is now nearly 12 years ago, a record, according to consulting firm IHS Markit. That’s up by about 4 percent over the past five years, showing that motorists are keeping vehicles longer, rather than scrapping them or trading them in.
That’s not necessarily a bad thing, according to Mark Seng, global aftermarket practice leader at IHS Markit. It reflects a steady improvement in vehicle quality that allows today’s cars, trucks and crossovers to run longer, he believes.
“Better technology and overall vehicle quality improvements continue to be key drivers of the rising average vehicle age over time,” he said.
The irony is that all that new technology, as well as the higher level of standard equipment in today’s vehicles, has played a key factor driving up new car prices to record levels, driving many potential new vehicle buyers out of the market.
“The used market has never been a more attractive prospect for many people,” said Jessica Caldwell, executive director of industry analysis at Edmunds.
In particular, she said, millions of motorists are turning to Certified Pre-Owned, or CPO, vehicles — relatively recent models, with like-new warranties, carrying substantially lower sticker prices. A reasonably equipped, low-mileage 2016 BMW 3-Series, according to Edmunds data, may go for $20,000, roughly half the $40,250 base sticker for a 2019 sedan.
A glut of off-lease vehicles will hit the market this year, according to Caldwell, further straining demand for new vehicles.
The downturn in sales comes at a particularly tough time for the auto industry, said Mark Wakefield, head of the automotive practice at AlixPartners. Industry earnings, on the whole, have tumbled this year, reflecting not only slower sales but also the increasing investments manufacturers have had to make in autonomous and electrified vehicles, technologies expected to dominate the industry in the coming decades.
One measure of that, according to a new AlixPartners study, is that the industry break-even point has risen sharply since the beginning of the decade. In 2010, automakers needed to sell a collective 10 million vehicles in the U.S. for most of them to turn a profit. Now, that break-even has risen to 15 million.