Industryweek 1741 26758plache
Industryweek 1741 26758plache
Industryweek 1741 26758plache
Industryweek 1741 26758plache
Industryweek 1741 26758plache

Analyst: Spike in Gas Prices Likely Won't Dent Vehicle Sales

March 6, 2012
While the specter of conflict in the Middle East has driven gas prices higher in recent weeks, Edmunds.com's Lacey Plache remains bullish on the auto industry's prospects.

With trouble in the Middle East comes trouble at the pump.

Since January, the average cost of regular gasoline in the United States has gone up nearly 50 cents per gallon, according to the U.S. Energy Information Administration's weekly survey, and some analysts predict that gasoline prices could hit $5 per gallon by the peak summer driving season.

That spells big trouble for a U.S. auto industry that only recently got back on its feet, right?

Not necessarily, says Lacey Plache, chief economist for Edmunds.com.

"Our view is that these assessments overlook a number of factors that indicate that auto-sales momentum could indeed prevail through a bout of higher gas prices," Plache asserted during a recent conference call.

For one thing, Plache explained, analysis of consumer behavior during recent price spikes suggests that the auto industry will weather the storm.

Plache: "We are in a different economic environment, and the auto industry itself is in a different economic environment."
"We've seen multiple studies of consumer behavior that show that when gas prices rise, what consumers do first is change their driving behavior," Plache said. "They decrease discretionary driving. And this response alone should ease pressure on consumer budgets from higher gas prices and protect the ability of consumers to buy new cars."

During temporary price spikes, consumers don't necessarily stay away from showrooms, but they do tend to shift to smaller, more fuel-efficient vehicles.

"Consumers are more likely to buy a less-expensive vehicle and/or a vehicle with lower fuel cost than they are to not buy at all," Plache said.

This isn't 2008

Sales of smaller cars typically increase in lockstep with rising gasoline prices, Plache said. There are a few notable exceptions -- one being 2011, when supply chain shortages led to a dip in small-car sales even as prices spiked.

But this isn't 2011 -- or 2008, Plache emphasized. And that's another reason why she believes that auto sales will be resilient in the face of escalating pain at the pump.

"When gas prices spiked in 2008, the economy was already heading into a recession due to the financial crisis," Plache said. "And in 2011, the effects of the Japanese earthquakes on the auto industry and on the broader economy cannot be ignored."

Today, though, there are "numerous signs of increasing strength" in the U.S. economy, from the improving job and housing markets to the resurgence of the manufacturing sector, she said, all of which "have given consumers additional firepower against a potential war on gas prices."

The recent extension of the payroll-tax cut should help as well.

"We are in a different economic environment, and the auto industry itself is in a different economic environment," Plache said.

The auto industry's February sales numbers certainly support that assertion.

Despite steadily rising gasoline prices, U.S. vehicle sales surged to 1.15 million vehicles in February, up 16% year-over-year, according to Edmunds.com. That put February's seasonally adjusted annual rate of sales at 15 million vehicles -- the highest level since February 2008.

And the automakers got there without pouring on the incentives. While spending on new-car incentives increased 2.4% over January, according to Edmunds.com, it was down 14.5% year-over-year, and incentive spending was at the lowest level of any February since 2003.

That's playing out in higher transaction prices for the automakers, despite the increasing popularity of lower-margin compact cars. TrueCar.com estimates that the average transaction price for light vehicles in February was $30,605, up $1,943 (6.8%) year-over-year.

TrueCar.com senior analyst Kristen Andersson said the higher transaction prices result from consumers adding more options to their new vehicles and from automakers cutting back on incentives.

"It paints a good picture for the automakers," Andersson said. "They're selling products that people want, so they're not having to give them away."

Pent-up Demand

Edmunds.com's Plache pointed to several factors that are driving the recent strength in auto sales, including aging vehicles, recession weariness, improving credit conditions and fortified supply as the industry recovers from the natural disasters in Japan and Thailand. She noted that there could be "several million units of sales to recover."

"So while rising gas price could deter some consumers, we believe the force of pent-up demand is too strong to easily shut off at this point," Plache said.

Even without all the pent-up demand, there's a "psychological factor" to keep in mind, she added.

The year 2008 marked the first time that average gasoline prices topped $4 per gallon nationwide. When prices spike again in 2011, the consumer response was much less pronounced, "since we had been there, done that and survived."

"And in particular, we didn't see consumers panicking and rushing to trade in their large SUVs for compact cars," Plache said.

Also working in the automakers' favor, Plache asserted, is that the current gasoline-price spikes "appear to be driven more by a fear of a supply shortage than by any actual changes in supply or demand." When the tensions in the Middle East subside, "we think that prices are likely to ease."

"When shocks are temporary, we see that consumer reactions are temporary," Plache said. "In this case, we think a permanent shock is unlikely. We do think a soft landing is likely, that there's a lot of cushion to soften the blow of higher gas prices."

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