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The automakers are faced
with the challenge of
pushing water uphill
The influence of demographics is very
noticeable in the data for housing starts. These
are currently around the same level as in
the early 1980s, when long-term US interest
rates were above 13% and the US population
was 42% smaller at just 227m, versus 323m
today. The difference with today is that the
BabyBoomers were then inthe middle of their
“rush to the suburbs” - which not only boosted
housing starts, but also increased auto demand
due to the lack of public transport options.
Current auto sales, however, are around
2/3rds higher than in the early 1980s. This
discontinuity is quite startling at first sight,
given that sales had fallen back at the start of
the Financial Crisis to levels last seen in the
early 1980s. What is particularly noticeable
is the way that they really began to pick
up from 2012, as the auto makers began to
lengthen the term of the loans they would
offer. Currently the average loan is at a record
length of 5.6 years, and the underlying trends
have clearly worsened as Experian report:

• Total auto loans reached $1.02tn in
Q2 2016, up 22% from Q2 2014
• The average loan for a new car is now $30k
• Loans financed 87% of all new auto
sales, with 31% using leases
• Deep subprime loans are up 12% YTD,
as lenders maximise interest income
• The longest loans (up to 7 years) also
have the lowest average credit score
The problem is that the automakers are
increasingly faced with a challenge equivalent
to that of trying to push water uphill. Not
only has the average age of the US auto
fleet now reached a record 11.5 years today,
thus reducing the need to buy new cars as
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often as in the past. But the same time, the
ageing of the Boomers, plus the increasing
availability of other mobility options (carsharing, Uber etc) has reduced average
vehicle miles driven by 6% since 2014.
Another cloud on the horizon is that
new car sales now face rising competition
from the used car market, as the return of
leased cars (with typically a 3-year term)
starts to depress used car values. Prices for
these vehicles fell by 4% in 2015, and the
inflated level of sales since 2013 means that
2016 will see the number of cars coming
off-lease rise by more than a quarter.
Even more challenging is the change
underway in the millennial population,
where Federal Highway Administration
data shows that a quarter of under-35
year-olds do not have a driver’s licence, up
from 21% in 2000. People without a driving
licence are unlikely to buy cars – a clear
warning sign for the outlook for auto sales.
The underlying issue is that short-term
responses to underlying challenges can only
buy time. They cannot resolve the issues
themselves. It is therefore no real surprise
that auto sales were down 1% in Q3 versus
2015, leaving YTD sales up just 0.5% versus
last year. A further sign of likely problems
ahead is that the Q3 decline took place despite
a major increase in incentives. These rose
by $400 per vehicle to an all-time record
of $3888 – higher even than in December
2008. The need to clear unwanted inventory
meant the average car sold over the Labor
Day weekend was discounted by 10%.
We are not alone in seeing a turning-point
in the US auto market, with Ford CFO Bob
Shanks warning that 2016 volumes could
well be lower than in 2015, and adding:
“We do think the U.S. is coming down
from what we expected. We saw higher
U.S. incentives -- that was for the industry
and for us. The industry increased and we
increased in line with the industry.”
In turn, this will impact the overall
level of retail sales and US GDP. Chart 7
highlights the relative percentage of retail
and auto sales as a percentage of US GDP: