Car Sales Dipped, But Expect Big Demand Ahead

(Bloomberg View) -- Auto sales "collapsed" in March, but a close look shows that this is no reason for pessimism about the economy -- or even about the auto industry.

It's true that subprime auto loans are becoming a concern to growing numbers of investors, and that self-driving cars and ride-sharing growth exist as structural threats to the industry, and that this economic cycle could be due for a dip. And yet economic activity correlated to auto sales shows no reason for concern, and a return to some pre-recession behavioral patterns suggests a country with no intention of giving up its historic love affair with cars.

At the individual level, people buy cars for all sorts of reasons, but in the aggregate they buy them for two reasons: because their old one wore out, or because they got a new job. For people buying a new car who already have a car, that trade-in cycle kicks off a game of musical chairs. (Musical drivers' seats?) Maybe the person buying a new 2018 car is replacing a car with an expiring three-year lease. And then that three-year-old car is bought by a worker whose 12-year-old car with 150,000 miles on it is having more and more maintenance problems. And then that 12-year-old car is bought by a young worker with a low-paying job hoping to nurse a few more miles out of it.

So are all these drivers driving more or less than they used to? That should affect current and future auto sales. Aggregate miles driven continue to grow slowly, meaning cars will continue to wear out and need replacement, supporting vehicle sales. The Federal Highway Administration releases data on total miles driven in the country, and by comparing that to auto sales, we can look at the historical relationship between miles driven and vehicle sales. 

This chart shows a couple things. First, the huge spike during the recession as auto sales plunged below the replacement rate. And second, the recovery since the recession, with a current relationship of roughly 175,000 miles driven for every vehicle sold. If anything, this remains a touch above levels seen during the 1990s and mid-2000s, suggesting there's room for further upside.

The other factor driving vehicle sales is jobs. In most places in the country, people with jobs need cars. Job growth means vehicle sales growth. Looking at the relationship between employment and vehicle sales historically, we find that on average there's one vehicle sold for every eight to nine employed workers. If annual employment growth continues to be in this range of 1.5 to 2 million, that should support an additional 175,000 to 225,000 vehicles sold per year.

It's also worth noting that auto sales were not uniformly weak in March. The dip is attributable to weak sales of smaller passenger vehicles. Truck and SUV sales remain robust as consumers take advantage of a strengthening job market and low oil prices to upgrade to the kinds of vehicles Americans are known for.

Migration patterns suggest more of the same as well. As noted by Jed Kolko, chief economist of the jobs site Indeed, 2016 data from the Census show that Americans are falling back in love with the suburbs. As the economy continues to strengthen, population growth is shifting from core urban areas and close-in suburbs to far-flung exurbs, just like we saw in the mid-2000s. Exurban communities lack walkability and transit options, meaning more auto dependency, more miles driven, and ultimately, more vehicles sold.

March may have been a stinker for auto sales, but stepping back to look at broader and evolving economic and behavioral trends suggests growing demand for autos in our future. More people working and more miles driven mean more cars sold, an economic reality unlikely to be disrupted any time soon.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Conor Sen is a Bloomberg View columnist. He is a portfolio manager for New River Investments in Atlanta and has been a contributor to the Atlantic and Business Insider.

To contact the author of this story: Conor Sen at csen9@bloomberg.net.

To contact the editor responsible for this story: Philip Gray at philipgray@bloomberg.net.

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