Why U.S. auto sales are slowing down, and why investors shouldn't be worried


Recently, there have been fears that declining auto sales mean that the U.S. economy is slowing down. “Once the economy slows down significantly, the U.S. stock market will either make a significant correction or a bear market.” We want to put these fears to rest.
The decline in auto sales is normal and to be expected. It does not mean that the U.S. economy is deteriorating. In fact, the U.S. economy is growing very nicely no matter what angle you look at it from.

What has happened to auto sales over the past few years

U.S. auto sales soared from 2009 to 2015. After being flat for most of 2016, Total Vehicle Sales has fallen a little year-to-date in 2017. The following is a 40 year chart for Total Vehicle Sales.
*Ignore the 1 month spikes. Those were usually caused by government programs that temporarily boosted auto sales (e.g. Cash for Clunkers in 2009).

U.S. car sales experienced 7 consecutive years of massive growth from 2009 to 2015 (inclusive). This was the longest stretch of consecutive yearly growth since the 1920’s!

Why the slowdown in sales is normal and why investors should not be worried

After such a long period of growth, a temporary decline in auto sales is only natural and part of the economic expansion cycle. But more importantly, there are 2 specific reasons why sales are falling a little right now.
First reason
Auto sales come in waves. The average American family buys a new car every 6-7 years. When the 2007-2009 recession hit, a lot of consumers that should have bought new cars during those recession years put their big ticket purchases on hold. They started to buy cars once again after the financial crisis. So a lot of sales that should have happened in 2007-2009 were pushed to 2009-2012. That’s why  auto sales boomed from 2009-2012.
However, the current economic expansion has been exceptionally slow and sluggish compared to most expansions. This was to be expected. The histories of developed markets show that post-financial crisis economic recoveries always take a very long time.
As a result, a lot of people who normally should have bought new cars in 2010-2012 waited until 2013-2015 to buy cars, when the economy was on more solid footing.
That is why auto sales were so high over the past few years.  Right now we are seeing a little mean reversion to more normal levels for auto sales.
Second reason
Even entry-line cars are increasingly being loaded with new high tech gadgets and functions. These expensive new features mean that auto makers have increased car prices by the tune of 2% per year. Since inflation has been under 2% for the past few years, this means that car prices have gone up in real terms. This is an affordability problem.
In addition, the Federal Reserve is finally hiking interest rates, which means that real interest rates are rising across-the-board in the U.S.. The economy’s current slow growth rate coupled with rising auto financing rates and rising car prices is putting downwards pressure on auto sales.
Another minor reason
Much of new demand for auto sales tends to come from young adults who are looking to buy their first car. With a lot of millennials chained by student loans and a job market that isn’t very strong, many millenials have chosen to live in cities and not buy cars. And those who can afford to buy cars are increasingly choosing to buy used vehicles. Others are taking public transportation and using ride sharing services like Uber. So perhaps these secular trends are putting downwards pressure on Total Vehicle Sales as well.
Bottom line
There is no point in being concerned about declining auto sales unless auto sales have declined a lot. That is clearly not the case right now.

Even if auto sales have peaked…

it doesn’t mean that the economy is anywhere close to being in a recession. Auto sales often peak years before the economy stops expanding. Hence, auto sales is not a good nor timely indicator for recessions and bear markets.

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