Remarkably Strong
November/December 2015
By David Zaslawsky
Photography by Robert Fouts
Some analysts have cautioned that annual auto sales are peaking around 17 million units, but one economist said they are wrong.
“I respectfully disagree,” General Motors Chief Economist G. Mustafa Mohatarem said. He said there are a number of factors that fuel the strong auto sales in the U.S.: gross domestic product growth, employment, gasoline prices and credit availability. “All the indicators suggest we’re in for a period of strength.
Mohatarem, who has 20-plus years with GM as the automaker’s chief economist, said that he expects new vehicle sales this year to approach the all-time record of 17.4 million units in 2000 and top it next year.
“Auto sales have been remarkably strong,” he said at the 33rd annual Economic Summit at Wynlakes Golf & Country Club. “In fact, this has been one of the best auto recoveries in the past five cycles.”
Another expert – Steven Szakaly, chief economist for the National Automobile Dealers Association – was also upbeat about new vehicle sales. His forecast calls for 17.2 million to 17.3 million units this year and a record-setting 17.6 million units in 2016 and declining slightly to 17.4 million sales in 2017.
Those assessments matter because the automotive industry accounts for 20 percent ($2.4 billion) of Montgomery’s economy, according to a study conducted by Keivan Deravi, an economics professor at Auburn University at Montgomery and dean of the College of Public Policy and Justice. He is a leading expert in economic impact modeling.
That $2.4 billion annual economic impact comes from Hyundai Motor Manufacturing Alabama’s plant in Montgomery and its suppliers in the area.
Szakaly does forecast annual vehicle sales to fall back to 16.5 million units to 16.8 million units beginning in 2018 because of demographics. He said he doesn’t see support for 18 million units a year. The average new car buyer, according to Szakaly, is 52 years old with an annual salary of $80,000. That represents just 5.3 percent of the population.
Those are the baby boomers doing the buying while Millennials tend to have below-average incomes and a lot of student debt. They are also marrying later and starting families later and adding children is a key factor in buying vehicles, Szakaly said.
“Young people aren’t buying cars because they can’t afford them,” Mohatarem said. “They don’t have jobs. Insurance costs are killing. They are still trying to deal with student loans.
As soon as the economy recovers and gets stronger and kids start moving out of (their parents’) basement they’ll buy cars and we’re seeing that now. Young people are coming back into the market.”
Another issue is that wages have not kept up with rising new car prices and that has forced dealerships to offer incentives, including low-interest rates and long-term loans.
Even at 16.5 million units to 17 million units a year – Szakaly called those annual sales numbers “strong.” Just three years ago, new car sales were 14.5 million and had fallen as low as 10.5 million during the Great Recession.
“American customers are demanding … more vehicles and they are demanding the type of vehicles that American companies are very good at producing,” Mohatarem said.
Wages
Wages will start to increase as the country reaches full employment and consumers will spend more because they will feel more confident about their own economy.
Jobs
Job growth is expected to remain strong and the economy should reach full employment by the summer. Through October, about 180,000 jobs were created monthly. In 2014, 2.8 million jobs were added and that was the most since 1999.
Job openings are at a 15-year high of 5.8 million. That is 1 million more job openings than 2014 and 2 million more than in 2013. There is now a little more than one worker competing for each job vs. seven in 2009 and 2010.
Of the 6.6 million jobs created during the recovery about 3 million are classified as good jobs paying an average salary of $53,000 with benefits including health care and retirement.
The overall national unemployment rate is 5.1 percent, but for college graduates it is 2.7 percent.
Automotive
The automotive manufacturing sector has about 875,000 jobs while the automotive retail sector employs more than 1 million. Those jobs average about $25 per hour.
The new car dealerships are forecast to sell more than 31 million vehicles this year. That includes used vehicles.
In less than 10 years, automotive manufacturers have gone from producing 69 high-fuel economy vehicles in 2006 to 492 today. That’s a whopping 600 percent increase.
Only 14 percent of new car buyers said that mileage was their No. 1 concern.
Light truck sales account for 56 percent of the market vs. 44 percent for passenger vehicles.
The key gas price point impacting car buying is $2.50 gallon.
Regions that are heavily dependent on the automotive sector because of its cyclical nature need a rainy day fund. There were no such rainy day funds for Michigan and Ohio.
Gas Prices
Gasoline prices are likely to remain low for as long as two decades, which happened from 1985 to 2005 after oil was discovered in the North Sea. U.S. shale oil producers will not go out of the market if prices remain low or if they do, will return when prices begin to rise.
Gas prices will be $2.25 a gallon in 2018.
Workplace
Millennials are going to reshape the workplace because they don’t want 9-to-5 jobs. They may even be the driving force for a four-day work week. There are not interested in staying with one company for an extended period of time.
Housing
The housing sector will surge because the current construction level is not enough to keep up with demand. Millennials will be moving out of their parents’ home and will form new households – a lot of new households – at least 1 million in the next two to four years. That’s in addition to the average of 1 million to 1.5 million new households formed annually.
Risks
Some of the headwinds weighing on the economy are stagnant wages, low commodity prices, slowdown in China, stronger dollar, political gridlock, government/municipal debt, student debt and pensions’ liability.
The next recession will probably come in 2019 because of an overheated economy.
The economies of Brazil, Russia, India and China – the so-called BRIC nations – are struggling after leading the world’s economy. Massive stimulus programs fueled those economies and now there is excess capacity that needs to be reduced.
