Dick Dennis, Autorola USA’s country manager, shares his thoughts on how the American markets for new and used car and light trucks are faring under the Trump administration.

The prediction is for the US new car market to fall slightly in 2018

US well prepared for possible stormy times ahead

The USA new car and light truck market hit 17.25 million units in 2017, a 2% decline from the 2016 record year of 17.55 million sales. This sales volume was supported by big incentives from the OEMs, along with the increasing GDP (recently up 2.6% from the third to the fourth quarter 2017). Under the Trump administration’s business-oriented policies which have focused on reduced regulation and major tax reform, GDP is expected to strengthen and positively impact all segments of the economy.

However, these OEM incentive levels aren’t sustainable, with the predictions for the new car market to fall slightly in 2018 as OEMs aim to increase their profitability in place of keeping sales volumes artificially high. The current forecast is for US light vehicle sales to range between 16.7 million and 16.9 million units.

The high demand from consumers for used SUVs particularly means this sector accounts for half the car and light trucks sales. Used demand and prices also are strong, particularly for light trucks, SUVs and crossovers.

Retail lease resurgence

One trend that continues is the strength in new retail leases. Some premium brands are underwriting 60-70% of their new light vehicle sales on retail leases, but generally across the market about 30% of light vehicles sold in the USA are acquired on a personal lease.

While this trend spells good news for OEMs, it isn’t such great news for used residual values. Most recently, December’s used market values returned to their normal (i.e. post Harvey and Irma hurricane impact) to a 2.5% decline for cars, while prices for SUVs and crossovers increased by 0.3%

Off leases from the retail sector increased 23% from 2015 to 2016 and by 17% from 2016 to 2017. These high volumes coming back into the used market saw used prices fall by 3% during 2017, but predictions are that off leases will increase by just 8% year on year the feel is the used market is getting back under control.

A total of 39 million used cars were sold last year with 2018 likely to see that number approximate the 40 million barrier despite less retail off leases coming to the market. A factor influencing this higher number is due in part to the effect of the new tax reform, which increased take-home pay for many Americans.

Used fears unfounded

There were major concerns in 2016 and 2017 that there would be fields full of $99 deposit and $99 a month cars coming back from lease, but the general growth of the economy and the fall in unemployment levels have helped create a strong demand for 4-5 year old used vehicles.

On this basis it’s a pretty good time to be a new and used car retailer in the US. Technology is playing a big part in a used car retailer’s life. Up to one in three used cars are now being purchased from the physical auctions by online buyers which shows retailers are becoming more savvy than ever as they spend less time at the auction and more time selling cars to customers.

A growth in real time used vehicle insight software such as the Autorola INDICATA system means dealers can identify the cars most in demand locally and what they are being sold for. This allows dealers to buy used cars in a much more strategic fashion and ultimately sell more used cars, reduce stocking days and improve profitability.

Another focus for OEMs in the past year or two is to force fewer cars into the rental sector on buy back schemes. Volumes of buy back cars have reduced significantly, with rental companies having to buy more of their own cars, which are kept in rental service longer.

Consequently, rental companies are keeping these ‘risk’ cars up to 18 months of age before replacing them. That compares with manufacturer buybacks which can range from four months to 12 months. This move by the OEMs to restrict buyback slide has been made as they seek to not only make more profit per unit but also as a means of not distressing the used car market.

Reasons to be cheerful

A nice mix of four to 18 months ex-rental cars is a much better way of maintaining strong residuals and with used dealers looking to buy more cars these lower age and mileage cars are generally finding buyers very quickly.

The fleet sector continues to feed the used market, generally with five to seven-year old stock. Leasing companies are also using newer software tools to understand the best replacement cycles for their clients with a view on maximising disposal efficiency, reinforcing the importance of insights on the remarketing process.

So 2018 looks like another positive year for the US automotive industry with the OEMs continuing to do a volume and profit balancing act.

US economics

Consumer prices increased 0.5% from the previous month in January 2018, following December 2017’s upwardly revised 0.2% rise (previously reported: +0.1% month-on-month), coming in above analysts’ expectations of a 0.3% increase. A surge in energy prices contributed to January’s reading, with prices of gasoline and fuel oil jumping 5.7% and 9.5% on a month-on-month basis, respectively. Meanwhile, food prices rose 0.2% for the second consecutive month. Despite January’s pick-up, inflation remained stable from December at 2.1%.

Core consumer prices, which exclude volatile items including food and energy prices, rose 0.3% from the previous month in January, slightly above the 0.2% increase that markets had expected and the downwardly revised 0.2% month-on-month rise recorded in December. The print was largely driven by strong price increases for medical care, transportation and apparel. Notably, core inflation was unchanged at December’s 1.8% in January, below the Federal Reserve’s 2.0% target.

It is worth noting that prices rose in January in nearly all components that comprise the consumer price index (CPI), which analysts view as a strong sign that inflationary pressures are taking hold. January’s CPI results, coupled with the upbeat wage growth data released earlier this month, will fuel expectations of a rate hike at the upcoming FOMC meeting in March, as largely expected by FocusEconomics panelists.

Incoming data suggests that economic growth moderated slightly but continued at a healthy clip early this year. In January, employment data showed that solid hiring activity carried over from last year, which fuelled an acceleration in annual wage growth to its highest figure since June 2009.

Strong employment gains saw consumer sentiment moving further into positive territory in the month, while data continued to point to robust momentum in the domestic economy. Weak spots in January data, however, included sequential declines in retail sales and factory output. On the political front, Congress enacted a budget agreement on 9 February that increases discretionary spending caps for FY 2018 and FY 2019 and suspends the federal government’s debt limit until March 2019.

An expected increase in federal outlays resulting from the budget deal should support growth this year and the next, an effect that will be compounded by the tax rewrite approved last December. Household spending is also projected to benefit from a sturdy labor market and solid housing gains, while business investment should remain resilient on fiscal stimulus and stronger global growth. FocusEconomics panelists see GDP expanding 2.6% in 2018, which is unchanged from last month’s estimate. In 2019, growth is seen moderating to 2.2%.

Despite increased market volatility, US consumers were particularly upbeat in February as a result of solid job prospects and a more positive assessment of the economy following the Republican tax cuts. The Conference Board’s monthly consumer confidence index rose to 130.8 in February, up from a revised 124.3 in January and the highest figure since November 2000. The print came above market expectations of a more moderate increase to 126.4 and keeps the index comfortably above the 100-point threshold that separates consumer optimism from pessimism.

The solid increase in the headline reading reflected consumers’ improved appraisal of present-day conditions. Compared with the previous month, more consumers responded that business conditions are good, while the percentage that reported a deterioration in current business conditions declined markedly. Similarly, views on the labor market were robust, with the labor differential—the difference between the percentage of respondents who state that jobs are plentiful and those who say that jobs are hard to get—widening significantly to 24.7 in February from 20.9 in January.