Motor vehicles is one of the key sectors to watch for an indication that the recent gas price spike might derail the current economic expansion.
The overall sales of light vehicles for April weren’t so bad, with the number of light trucks sold down 6.8% and passenger cars down 0.2% from April 2005, according to Motor Intelligence. However, those aggregates mask the fact that Toyota (+4.5%) and Honda (+2.6%) scored gains at the expense of GM (-10.7%), Ford (-6.8%), and DaimlerChrysler(-6.2%). Moreover, the move away from SUV’s has again become dramatic. The Detroit Free Press reports that sales were down 27.9% for the Chevrolet Trailblazer, 43.0% for the Jeep Grand Cherokee and 42.1% for the Ford Explorer. Green Car Congress reports that sales of full-size SUV’s overall were down 25% from the previous year.
Plunging SUV sales may be a good thing from a long-run economic perspective, but it has the potential to make a significant negative contribution to overall economic performance in the short run. If they are large enough, shifts across models and brands can have significant macroeconomic effects even if the aggregate decline in sales is modest, since underutilized labor and capital are not costlessly shifted to the products that may be doing better.
Even so, I agree with this assessment:
David Healy, an automotive analyst with the brokerage Burnham Securities, said the overall results were not as bad as he expected, considering all the media coverage of the rising gas prices. “I thought the gas price panic would have more impact,” he said.
But don’t forget that much of the gas price increase and concern came later in the month, and so we won’t see the full effect on auto sales until the May and June figures come out.
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GM’s results are particularly odd – I know their cars suck, from personal experience as a renter, but I was still surprised to see their car sales drop disproportionately to their truck sales. There really must be a fairly large core of SUV buyers out there for whom gas prices don’t matter, which could explain the SUV results from the new line, but how can you explain the car drop-off?
Those Hummer variants say so much, no? If you can afford the 5x price tag for the item, a 50% increase in gas prices is likely to slow you down as much as that bee that strikes your windshield–I’m sure that’s what GM executives are thinking.
Like house sales, the stats don’t pay attention to the wealth spectrum and I suspect that the economy brands/models are like those immigrants: indispensible but beneath our notice.
GM car sales were down as sales to rental fleets were reduced. Don’t read too much into the Trailblazer statistic, it’s a tired old model that only sells really well when the incentives are cranked up(they weren’t in April) The full size sport Utes (Tahoe, Escalade) are selling like hotcakes and you’re right that these buyers don’t much care if gas is $2,3,4,5 a gallon. I’m sooo tired of reading everywhere about how these people in their $500,000 Mcmansions and big sport utilities are going to be in financial ruin any day now. It’s true that some are highly leveraged, but it’s not correct to generalize too much. A lot of these folks have some serious cash to flop down and aren’t living off home equity as has been proposed.
GM has been rolling out a bunch of new SUV models, with corresponding publicity. They may have stolen some SUV sales from other manufacturers, or gotten delayed sales from people waiting for the new models. I suspect that reduced the relative rate of decline in their SUV sales. It is unlikely to persist.
“GM car sales were down as sales to rental fleets were reduced.”
This would tend to conflict with your previous statements about how good the GM car lineup is. If even with very high gas prices, they have trouble selling to the consumer, how can you continue to make such a claim?
I think SUV sales may be partly driven by fashion. Perhaps high gas prices will cause SUVs to fall out of fashion, depressing their sales more than you’d think from just looking at the relative impact of gas prices. Anything that puts high gas prices and oil scarcity high on the public radar has the potential to make SUVs seem wasteful and stupid to more people.
i have read two books which, in particular, shape my view of corporate product evolution: james utterback’s “mastering the dynamics of innovation” ans clayton christensen’s “the innovator’s dilemma.”
i think they both have this idea of a “value network” that grows between a corporation and its customers, though perhaps christensen pushes the idea harder.
i think we see, as gas prices shape customer preferences, everything playing out along the value networks. people go buy honda civics because there is an existing small car culture shared between honda and its customers. on the other hand, those (few?) folks that show up at a caddilac dealer serve to reinforce the big car culture there.
that’s fine, if it is stable. on the other hand, the classic christensen scenario would be that one customer group fades (large car buyers?) and the companies without a small car culture or value network are left without an answer. they listened to their customers (what you are supposed to do) but forgot to listen to thier non-customers (in the other, growing, value network).
Auto and light truck sales have been bouncing around a flat trend since 2002 while both bulls and bears have found plenty of reasons to be disappointed. Why should the current “noise” be any different?
Could you explain the rationalization behind Healey’s concern? Here’s why I am confused.
The rising price of gasoline manifests itself for most consumers in the form of higher per mile transportation costs, all else equal. This per mile cost is actually an endogenous variable to a consumer’s budget constraint, something that is generally factored into each car purchase decision.
My gut suggests to me that if people believe gas price hikes are transitory, they will tend to suffer through the negative income effect associated with the change in price of a mile driven. Overall new sales may indeed plummet if this is the case.
If, however, gas price increases are viewed to be permanent, consumers will re-optimize, which includes selecting a new price per mile driven (and also perhaps the number of miles driven through housing relocation, etc.). One of the easiest ways to reduce the cost per mile driven is to obviously purchase a more fuel efficient car, or a cheaper car (less depreciation).
So, I guess, all of this is a fancy way of saying I totally concur with your focus on the possible negative macroeconomic ramifications of a changing mix of auto purchases. This seems like a real threat today.
But I am utterly baffled at why a lot of media attention made Healy think there would be a negative *overall* affect on sales instead of an assault on expensive or fuel-inefficient cars. *Overall* each family now has a strong inducement to reconsider their past car ownership decisions, and this surely is a strong factor in inducing new sales. Unfortunately, these potential new sales are not the products that our domestic car manufacturers are known for. Some creative destruction is in order.
Victor:
We know from past oil shocks that car sales fell sharply.
I think Victor’s point is that those were “oil shocks” which were expected to be transitory. More and more there is a perception that today’s regime of high gas prices will be more or less permanent. Over the weekend, even the Bush administration admitted that high gas prices will prevail at least until the 2007-2008 time frame.
If people think they can tough it out and wait until prices come back down, they’ll cut back on expenditures, including new cars. But if they think the new high prices will continue for years, they’ll be motivated to look for more permanent fixes. And clearly one of those is trading in the old gas guzzler for a new high-mileage vehicle. On this basis we might expect an increase in new car sales, as the transition to a new regime of high gas prices motivates faster turnover of the fleet.
Hal,
One theory might be that while each working adult probably still ‘needs’ one vehicle, the overall number of vehicles per household will drop, as leisure vehicles (3rd cars for families with only 2 drivers), teenager’s vehicles, and stay-at-home adults’ vehicles might be replaced at a lower rate than in the past. IE, at the margins, some people probably would simply drop out of a vehicle altogether.
Our family dropped from 2 cars to 1, but it had more to do with me working from home than with gasoline prices.
On the other hand,one could argue that some car sales are taking place earlier as customers want to get more fuel-efficient vehicles and want to take advantage of desperate times for GM and Ford. Toyota sales indicate this is happening.
Hal,
Where did you get the idea that those were oil shocks which “were expected to be transitory?”
I was there in the late 70s and 80s, hanging around the energy policy studies in DC. The smart money thought then that cheap energy was at an end, and that OPEC had the whip hand. They were wrong, partly because of the alarm they set off, which triggered a lot technology development and economic studies–and–just as significant–the first futures markets in crude oil and gasoline.
For a tase, look at the National Academy of Science’s “Energy in Traansition” or any number or any number of Office of Technology Assessment.
Read Daniel Yergin’s book the Prize for a nice review of the thinking of the “smart money” then.
Mi3k
Here’s a link to further GM Sales figures
http://www.theautochannel.com/news/2006/05/02/005476.html
Note that auto retail sales were down 5% while fleet sales were down 10.5% – rental sales down 23%.
Their SUV blip will be short-lived – new models hitting their core market – they have nothing like that in the auto division.
Also – note for Ford that F-150 sales were down….
Here’s an interesting question. There has been considerable discussion recently about the CAFE mileage standards. Many people assume that these are the only mechanism by which average vehicle mileage will be increased in the U.S. I even saw an article today which boldly stated that U.S. vehicle mpg in 20XX would be YY.Y, presumably because that is what the current CAFE standards require. This commmentator just assumed that CAFE is what causes MPG increases.
My question is this: would it be possible, given these month-by-month sales figures, to estimate approximately what the average MPG is of the vehicle fleet sold in any given month? We know that hybrids are selling more, SUVs are selling less – is it enough to change the average MPG?
How much is this fluctuating from month to month, and is it correlated with gasoline prices? It would be very interesting to see if the vehicle fleet could increase its average mileage even without an increase in the mandated CAFE standards. It seems like it ought to be possible but it’s not clear if that is really happening.
Hal,
i gave the union of concerned scientists a hard time amout their cafe support here:
http://hybridblog.typepad.com/my_weblog/2006/04/now_bush_is_tal.html
and here:
http://hybridblog.typepad.com/my_weblog/2006/05/as_you_might_ha.html
was i too harsh?
If they are large enough, shifts across models and brands can have significant macroeconomic effects even if the aggregate decline in sales is modest, since underutilized labor and capital are not costlessly shifted to the products that may be doing better.
Actually, Toyota intentionally varies the mix of models produced on a single production line, so they don’t face this problem. It was necessary in the beginning when they wanted to incorporate cars into their fleet of trucks (made for the military first in WWII and then during the Korean conflict). They couldn’t afford new facilities or equipment at the time, so gradually Ohno and Shingo figured out how to quickly switch products on a single line. They turned it to a competitive advantage that GM has never figured out.
So that’s actually two strikes against GM: they have the wrong mix (I like odograph’s interpretation in terms of Christensen’s theory), and they can’t costlessly vary their mix as conditions change. A third is that they can’t design new vehicles in less than 4 years, while Toyota brought the Prius from sketch to production in less than half that.
I think GM buyers consist of a grouping of fleet buyers for whom discounts and financing (GMAC) are the primary driver, the “my daddy bought GM and it’s the only car I’ll drive” crowd, and the “only buy ‘Merican” crowd. If that last group had any idea of what percentage is actually Made in ‘Merica, and stopped to consider where most Hondas and Toyotas are currently manufactured for sale in North America, they’d switch in a second.
Odograph – I did an optimistic spreadsheet calculation assuming 25 percent/year increase in 50 mpg hybrid sales for the next 20 years, with those hybrids replacing exclusively lower (average) mileage light trucks. Total miles per car remained constant, and the total fleet size grew at 1.5 percent/year. Roughly speaking, it took 10 years to save about 10 percent in total gasoline usage, and after 20 years, total gasoline usage was cut in half. That roughly would correspond to a fleet mileage of double the present 21 mpg. Note, however, the wildly optimistic assumption of keeping up a 25 percent/year increase in hybrid production, to the point where essentially all cars produced in a given year are hybrids.