The U.S. automotive market has reached its peak and is expected to level off or decline slightly in the coming years, said analysts at the Federal Reserve Bank of Chicago’s Automotive Outlook Symposium.
More than 60 economists and analysts from business, academia and government attended the symposium, held in June in Detroit. A just-released Chicago Fed Letter summarized the findings.
Here are some of the highlights from forecasters who presented at the symposium:
Paul Traub, senior business economist, Federal Reserve Bank of Chicago, Detroit branch
Sales of light vehicles likely peaked in 2015 at 17.4 million units. Traub sees sales falling off slightly to 17.3 million in 2016 and 17.2 million in 2017, in keeping with Blue Chip Economic Indicators forecasts.
Traub mentioned several reasons for the leveling off of vehicle sales:
1. People are generally saving more than in the past (5.7% of their income in the current decade versus 2.5% in the 2000s and 4.8% in the 1990s). Traub speculated that the rise in saving could be due in part to Millennials growing up accustomed to saving during the Great Recession, making them more inclined to have a higher cushion now.
2. People who held off buying new vehicles during the Great Recession have mostly purchased their vehicles in the past five years, meaning there’s less pent-up demand now. Unless dealers find new ways to attract customers, annual sales will decline.
3. More people are working from home, decreasing the mileage and wear and tear they put on their cars, and theoretically prolonging their cars’ lives. In addition, fewer people of driving age have licenses, as a significant number of millennials have opted to live near and use mass transportation. In the first quarter of 2005, the average length of new vehicle ownership was 50 months. In the first quarter of 2016, it was 77.8 months.
4. In addition, the slowing of the growth in the labor force means a slowing of growth in new people who can afford new cars.
Patrick Manzi, senior economist, National Automobile Dealers Association (NADA)
Manzi forecasted new light vehicle sales to grow for the seventh straight year to 17.7 million in 2016, then decline to 16.7 units by 2019 and 2020.
He told the group that car prices have grown faster than wages, with car payments making up 12% of monthly personal income in 2014—more than the previous nine years.
New cars have increased in price faster than the economy because of the cost of the technology to meet higher fuel efficiency requirements and for enhanced safety features (for instance, blind spot warning systems).
Higher prices have meant extended loan terms for cars: 67 months on average in 2015, versus 54 to 55 months in 1995.
In 2014, the top 10% auto dealers had a net profit of 7%, while the bottom 10% had a net profit of -1.9%.
Kristen Dziczek, director of the labor and industry group, Center for Automotive Research (CAR)
With the 2015 UAW labor contracts approved, average hourly labor costs will reach $56 at FCA and $60 at GM and Ford.
With the new contract, layoffs are less expensive, as automakers are no longer required to give full pay and benefits to laid-off workers. At the same time, hiring more qualified workers with skills in line with new technologies may be a challenge, as the need for people with those skills with likely outpace employment growth.
Dziczek also noted the graying of the U.S. automotive workforce, with one-third of workers either eligible for retirement or soon to be eligible. She expects that Ford and GM will need to replace several thousand retiring employees over the next few years. And all three automakers will use more temp workers—especially Ford, where temps account for less than 1% of the total hours worked.
Dziczek projects the U.S. share of North American vehicle production to fall 58% in 2020, from 67% in 2014. FCA is entirely moving away from car production in the U.S. by ending certain models, while Ford and GM are shifting significant production to Mexico.