U.S. Auto Sales Moderate as Replacement Demand Peaks

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Americans’ intent to purchase new vehicles decelerated in January, as a number of seasonal factors, combined with the satiation of pent-up replacement demand, temper consumer demand. TechnoMetrica’s Auto Demand Index fell by 13 points, or 11.5%, this month to a score of 100, the most significant decline in the measure since July 2017, indicating that new vehicle sales have started the year moderately lower.

Consumer demand for new vehicles slowed down in January, largely due to seasonal factors, such as severe winter weather, and the satiation of pent-up demand, which have driven auto sales since the end of the recession. The Auto Demand Index declined by 13 points, or 11.5%, this month to a reading of 100, marking the first drop in the measure since September 2017. As a result, we anticipate that new vehicle sales, after a strong finish to a more restrained 2017, may have moderated somewhat at the start of the new year.

TechnoMetrica Market Intelligence developed the Auto Demand Index, or ADI, as a way to measure the intent of consumers to buy or lease a new vehicle within the next six months. Raghavan Mayur, president of TechnoMetrica, explained that the ADI, which is conducted monthly, is based on the response to a key question posed to more than 900 adult Americans: How likely is it that you will buy or lease a new vehicle within the next 6 months?

The sharp decline in vehicle purchase intent follows three straight months of growth in the Index. The final months of 2017 witnessed a surge in demand for new autos, largely fueled by generous discounts on outgoing models, and a brighter employment situation in the U.S. This boom in purchase intent translated into robust car sales at the end of last year, though full-year sales fell short of 2016’s record performance. However, as consumers recover from holiday spending, and vehicle incentives relax, demand for new cars has naturally tempered.

The Index is likely to moderate further into the near future, though purchase intent among Americans should remain healthy. The Index’s three-month moving average (108) weakened in January after three straight months of gains, while its 12-month moving average remained unchanged from December, at 102. In addition, the Moving Average Convergence Divergence (MACD) indicator fell 1.1 points this month to a score of 0.9, further evidence of a slowdown in momentum for new vehicle demand.

“The beginning of the year is typically a slower period for the new vehicle market, as bounteous holiday deals recede. Further, the precipitous fall in purchase intent among consumers provides further evidence of an exhaustion in pent-up demand for replacement vehicles,” said Raghavan Mayur, president of TechnoMetrica. “Thus, despite a strong economy and high consumer confidence levels, we expect auto sales to begin the year at a slower pace.”

Vehicle purchase intent eased among most demographic groups this month. Of the 19 segments that TechnoMetrica monitors on a monthly basis, 12 reported declines in the Index. Demand for new cars weakened most significantly among African Americans and Hispanics (-27), consumers residing in the Midwestern U.S. (-18), and those earning an income between $50K and $100K (-16). At the same time, however, nearly all population segments registered Index scores above 100 in January, indicating relatively strong levels of purchase intent. Young consumers aged 18 to 24 showed the greatest intent to acquire a new vehicle, surging 18 points to a reading of 145. Demand remains high among consumers making more than $100K a year (144) and parents (134), as well.

This month’s drop in overall consumer demand for new vehicles was driven by a number of seasonal elements that are typical for the beginning of the year. After offering a plethora of generous year-end deals on outgoing models, in order to clear dealer lots for new model vehicles, automakers usually ease incentive spending in January, resulting in fewer discounts available for consumers. In addition, shoppers typically tighten their own spending habits during this time, as they confront the debt accrued during the holiday season.

The severe winter weather conditions that gripped many parts of the country in January have also dented purchase intent levels. In the beginning of the month, a “bomb cyclone” storm unleashed swift snowfall and strong icy winds throughout the Eastern U.S., including typically warmer states such as Florida and South Carolina. The storm brought a foot or more of snow to eight states, and created tens of thousands of power outages across the East Coast. Soon afterward, the region was gripped by freezing temperatures as a result of a bitter Arctic blast.

Consumers are also concerned about the prospect of higher interest rates. The Federal Reserve raised rates three times last year, and expects to repeat the same frequency in 2018. Increased interest rates limit the amount of credit readily available to consumers, and lead to higher borrowing costs. Thus, taking on a car loan or lease becomes more expensive under heightened interest rates.

Above all, the deceleration in vehicle purchase intent indicates that pent-up replacement demand has reached its peak. As the economy improved following the Great Recession, consumers set out to satisfy their long-held desire to replace older vehicles that had likely been on the road for over a decade. The release of pent-up demand for new vehicles, coupled with rising incentives, drove auto sales to two consecutive years of record performances, in 2015 and 2016. However, as replacement demand is inevitably satiated, consumers’ intent to purchase new vehicles becomes less pronounced. Thus, it is not surprising that full-year auto sales for 2017 were down slightly from the year before, despite record incentive spending.                

Along with tracking levels of vehicle purchase intent among consumers, the Auto Demand Index study also gains insight into the key preferences of prospective buyers. Regarding brand choice, Chevrolet emerged as the most popular vehicle among consumers, gaining two points to record a share of 14%. Toyota remained in second place this month, holding steady at 12%. Meanwhile, preference for Ford, last month’s top choice, fell by three points in January. The American-made brand was favored by 11% of likely buyers, putting it in third place in this month’s study. Preference for Honda (9%) and Jeep (5%) remained unchanged in January, as the two brands rounded out the fourth and fifth positions for the second straight month.

Our study also explores consumer preferences for vehicle types. Sport utility vehicles (SUVS) continue to be in high demand among prospective buyers, as one-quarter would prefer either a Small SUV (18%) or Large SUV (7%) for their next new vehicle. Meanwhile, mid-size vehicles were the top choice of nearly one in five consumers (19%). Preference for pickups also remains strong. This month, 15% of likely buyers are planning to acquire a pickup truck for their next purchase, a two-point gain from December.        

Each month, TechnoMetrica uses Random Digit Dial telephone methodology to conduct live interviews with more than 900 respondents, using both landlines and cell phones. The margin of error for the survey is +/- 3.2 percentage points. In addition, recent statistical analysis has shown a strong correlation between the Auto Demand Index and actual U.S. vehicle sales.

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