Pub. 16 2017-2018 Issue 4

N E W J E R S E Y C O A L I T I O N O F A U T O M O T I V E R E T A I L E R S I S S U E N O . 1 , 2 0 1 8 34 new jersey auto retailer A Snapshot of National (And International) Economic Indicators BY PAUL MANZI A fter six years of consecutive growth in sales, 2017 ended with light-ve- hicle sales down by roughly 2%. Many will see this headline stat and think that dark times are ahead for the industry, but a year with 17.14 million light vehicle sales still ranks in the top five all-time best years for the industry and this sales level is indicative of a very healthy market. Looking forward to the end of 2018 and on in to 2019, we see sales levelling off at around 16.7 million units per year. The U.S. economy recently entered its ninth straight year of expansion and overall seems to be doing quite well. We believe growth will continue and the risk of a recession remains low. The recent tax legislation should add a few tenths of a per- centage point to GDP growth this year, but these effects are likely to be temporary. We expect GDP growth to be 2.6% this year, and 3.0% growth could still be possible. However, we expect growth to level off at around 2.5% in 2019. Consumer confidence measures recently hit a 17- year high, a strong indication that consumers are willing tomake large asset purchases. The January jobs report showed wage growth accelerating and this seemed to usher in the return of volatility to the high-performing equities markets. We expect the Federal Reserve to increase interest rates three or four times in 2018, pushing the federal funds rate above 2% by the end of the year. Sales have fallen slightly from back-to-back record years, but there are still bright spots for the indus- try. Transaction prices on new vehicles have been growing steadily year-after-year and this trend has been driven by several factors. Consumers continue to shift their preferences from cars to light trucks, which tend to transact at higher prices and are also more profitable for manufacturers and dealers. Consumers have also taken advantage of the low interest rate environment and have ex- tended their car loans for longer terms, which has allowed them to tick more boxes on the order sheet while keeping their monthly payments relatively flat. Over the past few years, when a consumer visited the dealership, they found that their trade-in had a higher value and this was also able to help offset the increased cost of their new vehicle. There is currently a great shift in preferences hap- pening primarily in the U.S. vehicle market. In a little under five years, the U.S. light-vehicle market has shifted from a roughly 50-50 split between cars and light-trucks to a market where light-trucks now make up nearly two-thirds of all new light-vehicle sales. Such large shifts in preferences can be diffi- cult to react to in a manufacturing environment. Most plants have some flexibility with production, but significant changes in output can take several months to implement. Furthermore, shifting pro- duction too far in either direction of consumer preference can be harmful to the business. The industry ended 2017 with 3.8 million units in inventory on the ground across the U.S., up from 3.4 million units at the end of 2013. While 400,000 units might not seem like too much of an increase, it is important to consider the sales environment at the time. At the end of 2013 we were in a market of increasing sales. Towards the end of 2017 we saw inventories rising in a market where sales were beginning to fall. This is not a good situation to be in. Manufacturers realized this as well and increased their incentive spending even more. Incentive spending has been on the rise for the past few years, with incentives hovering