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10 reasons why auto sales are dropping (besides the economy and fuel prices)
Think of it as the Carsumer Price Index; new car sales are under pressure from other factors besides fuel prices and economic slowdowns, much like the Consumer Price Index strips out the price of fuel and food and then makes a proclamation about the economy. At least that's the theory that Pinny Cohen posits. Who's Pinny Cohen? As far as we know, he's an average joe with an internet rostrum and a budding web entrepreneurship who makes some salient points. He's also an Autoblog reader and he's got something to say, so we thought we'd share.
If it's not $4/gallon gasoline or economic stagnation that's putting the brakes on car sales, what else could it be? Cohen posits that the better construction of cars these days, a glut of leases that have led to a tsunami of used cars, and online shopping and telecommuting keeping people home are all contributing factors, says Pinny. Something's got to give for consumers, and new car sales seem to be the weakest link. Every automaker will eventually accept these facts, but the question is whether some will have to close up shop in order to realize that it's a brand new day of decreased production. Check the link to read Cohen's thoughts and let us know if you agree or think of more reasons why besides the crappy economy and high gas prices that new vehicle sales are down.
[Source: PinnyCohen.com, Photo: DealerConnection.com]
Reader Comments (Page 1 of 2)
FSM 7:37PM (8/14/2008)
Sounds like a reasonable argument. Although I wouldn't discount $4 gas and the weak economy. As much as Americans love cars, I think people are getting smarter with their money, and new cars are the absolute worst thing to buy with your money due to depreciation.
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t 8:39PM (8/14/2008)
"I think people are getting smarter with their money"
That's the most ridiculous thing I've ever heard. People may be getting more careful with their money if they have less of it but why, after 5000 years of civilisation would people suddenly be getting smarter with their money *this year*?
Flashpoint 11:45PM (8/14/2008)
THE NUMBER ONE REASON is because the election is coming up. I trade in oil.... take a look at any oil stock for the past 4 years from an American oil company/. When elections come around, those prices DROP.
July's lows always equal June's highs.
mj 7:55PM (8/14/2008)
Here's the thing about both cars and houses: RECORD LOW INTEREST RATES. Everyone who needed/wanted a new house has pretty much bought one in the last few years, and while cars churn more, the same applies. People pretty much are already driving pretty good cars. Given a good economy, OF COURSE they will buy new ones OR better ones, but that isn't the case. Yes, interest rates for new cars are low again, but people don't need to buy.
What about wanting lower fuel economy cars? Most people ALREADY HAVE ONE. Many people have two or three cars, and one or two of those were suitable for commuting or they found a bargain car since then for commuting and they don't want to 'upgrade' until the economy/ fuel prices stabilize.
The late 90s/early 00's were the golden era of auto sales, a perfect tsunami of demographics, high employment and low interest rates, but no one wanted to curb growth so now we must go bust.
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fm 8:11PM (8/14/2008)
I think it's also the creeping average base price of all cars (because of numerous factors like price of raw materials) and the fact that car companies feel an obligation to always increase proffits ie make more cars with a higher proffit margin. Those aren't $15000 cars but like everyone knows is $30000 to $50000+ vehicles. So the mix of a bad economy, high gas prices, a financial infrastructure in difficulty and reluctant to give out loans, fewer lease options, AND a somewhat reduced choice in "affordable" new cars leads to a slowdown in car buying. I've never understood how a car with more then 100 thousand miles and 3-4 years could only be 5-10 hundred less then a new model. The industry has been shooting themselves in the foot for a while now imho.
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Aetius 8:12PM (8/14/2008)
Logically? Yes. But as soon as anyone starts earning real money, the very first instinct is to buy a new car. And logic has little to do with that decision ;)
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riskylogic 8:17PM (8/14/2008)
Yeah, just because there is one good reason doesn't mean there aren't others (although they do tend to be intertwined). So here's one more: The Mexican economy is doing a little better, so they aren't as willing to take our old junk off our hands.
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AngeloD 8:24PM (8/14/2008)
It's possible that people are simply re-evaluating their need for any car at all.
In Japan, a significant factor in reduced auto sales is a trend amongst younger people to simply shun ownership of any automobile as unnecessary.
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Randall Halcomb 8:38PM (8/14/2008)
So, yea, I think what we forget is that PEOPLE buy cars. People have feelings and emotional factors that play a big role in making a new car purchase (because if it was completely logical, far fewer would buy them).
A great leading indicator of consumer behavior (especially with respect to durable goods) is actually the consumer confidence index (CCI). Along with interest rates, one could get very close to predicting automotive sales. A few months back, I built a regression model using this variables with an extremely high Rsquare. Out of my peers, my model was the only one that actually predicted the downturn as we see it today... and this was in November 07.
The reason? Because your confidence in your future situation has a HUGE impact on whether you purchase a car or not (and so do interest rates). The CCI is the only metric out there that measures this confidence.
Also, as far as car prices are concerned. For years, the REAL price of car has fallen. That means, adjusted for inflation, the price of a car today is significantly cheaper than it was in previous years.
Now, gas prices have a huge impact on WHAT people buy IF they buy a new car.
The question is, does this guy have any hard data to back up his assumptions?
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Randall Halcomb 8:40PM (8/14/2008)
Funny Picture, btw!
Alero forever!
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SPG 10:11PM (8/14/2008)
First there was the car, and then there was the Alero!
Now we're just back to cars.
MajorGeek 8:41PM (8/14/2008)
Im sorry, car companies are at a record loss in sales and it is quite simply because of $4 a gallon gasoline and every house in the burbs needing a 15 MPG SUV. Yes, cars last longer then ever before, THAT is not new in the past few years. Most average Joes I know either buy used or replace new every 5 years depending on their finances. Again, depending on their finances.
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Throwback 9:07PM (8/14/2008)
As others have said there are many factors at work. Like a perfect storm if you will. The economy, consumers fears for their jobs, great used car prices (check out the prices on 2-3 year off lease cars). The other major point is the negative equity most people who are trading in cars find themselves in. When you have 72 month loans with no money down, you will be so under water that the dealer can't make a deal. The last thing I would add is the number of people with poor credit who where able to get loans now can't.
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Itsuru 9:11PM (8/14/2008)
$4/gallon is nothing really, look at what is paid in the UK.
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BoxerFanatic-formerlyMK 9:46PM (8/14/2008)
Look a the value of the pound, look at british household wages, and look at british labor party policies that charge much more tax on a comparable unit of liquid volume, for fuel.
Look at the population density, commuting patterns, and square mileage differences between the small british isles, and the large american expanse.
Just because it happens in place B, doesn't mean it should in place A.
People in other comments seem to have put a good finger on it... consumer confidence in the economy, outlook, and view of economic trends.
The price of cars are historically down, but other things have taken up that loosed purchasing power. Computers, and other technology being one.
Also, wages have been flatter than inflation over time since the late 1960s. A single income household is almost unheard of, and even by my own budget calculations, on my near-national-average income, can't make much headway, if not in the red.
When food and fuel are stupidly left OUT of government inflation figures, how can we trust them when they claim less than one percent quarterly growth. If food and fuel, something EVERY american pays for, directly or indirectly, were factored back in, this would in fact be classified as a recession. A recession that needs to happen to correct the market from almost a decade of shifting bubbles in the economy.
July's inflation was TWICE as high as "experts" (who are always wrong, yet still experts) predicted, and the highest inflation in 17 years. Just reported today.
Oil price may be a bit down, but geo-political unrest is not going to be doing the energy market any favors. We need to solidify our energy supply, and our economic standing, and now, before the hybrid totalitarian/newly wealthy false-capitalistic asian powers back us into a corner that we have no way out of. Russia and China are shaping up to be forceful, and adversarial.
With income buying less, new high-ticket purchases get put down, for necessities, and keeping existing systems working. Looking out the window at geo-politics, and looking at our own mess to clean up, now isn't the time to be leveraging debts with assumptions of always being able to pay back that debt. The housing crisis is serving as a lesson that debt isn't free, even if you think you can pay it one day, you can find ourself in deep later.
Harsh lessons don't make people smarter than the past, but they do repeat the lessons of history, and remind people, over and over again.
MajorGeek 10:32PM (8/14/2008)
That is not relevant, in the UK my understanding is that it is all taxes. I think we made it clear we will not pay that.
Noidor 9:15PM (8/14/2008)
I buy used cars, and rent my house. Best way, tons of flexibility, nothing to worry about. But I bet you GM is still going to be chasing volume with silly looking cars such as the Craxx
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Rob 9:27PM (8/14/2008)
Obviously the weak economy is a huge factor, but the glut of used cars isn't helping either. Why spend $22K for a new Mazda 6 when I can get a used one with less than 20,000 miles on it for about $16K. Is the new one really worth $6,000? Hardly. And $6,000 will buy at least 1500 gallons of gas.
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doug 9:30PM (8/14/2008)
From my daily experience selling cars: there are plenty of people wanting to buy cars. Why can't they?
#1 reason is bad credit. If people can't pay their cellphone bill, why would they expect a bank to loan them $20k? And a hint: a repo on your credit report is a BAD THING.
#2 reason is negative equity. People don't bother to save a down payment and buy a car with no money down. 2 years later, they get bored or their circumstances change and they buy a new car with no money down and refinance the negative equity. A year later, same scenario, but oops you can't bury that much negative equity and you're out of the market. Hint #2: If you are refinancing $5k of negative equity, don't be a dummy and say you want a lower payment!!
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ryan 10:43PM (8/14/2008)
i'd have to concur on these two points, i see it daily too.