S&P Chief Economist, J.D. Power Executive Offer Cautious but Positive Outlooks

Two experts from Standard & Poor’s and J.D. Power offered cautiously positive outlooks for the U.S. economy and for the U.S. auto industry to some 300 auto dealers and industry participants during the recent Western Automotive Conference, sponsored by J.D. Power and the National Automobile Dealers Association (NADA).

Beth Ann Bovino, U.S. chief economist for Standard & Poor’s, said that the U.S. is in its fourth year of recovery with an average growth rate of 2%. On a global level, she cited challenges to be faced including a slowdown in China, the remaining effects of the debt crisis in the Eurozone, and spikes in global oil prices.

In addressing current conditions in the U.S., Bovino said the Fed is focusing on creating jobs and is offering incentives for businesses to invest and hire, which will lead to higher growth. She said there has been robust demand and hiring in the private sector in spite of shocks.

There’s more good news. Bovino said housing starts are starting to climb (based on the S&P/Case-Shiller Home Price Index), which translates to adding two to three jobs to the economy for every single family home built. When there is demand for homes in excess of inventory, that’s a good sign.

Housing prices are increasing and so is consumer spending, Bovino said, adding that manufacturing is returning to the U.S., partly due to cheap natural gas. Singling out the auto industry, Bovino suggested that the “Cash for Clunkers” program, low interest rates and an aging vehicle fleet leading to pent-up demand are helping bolster sales.

Bovino pointed out that consumer financing is improving because “households went on a crash diet” when the bottom fell out of the housing market. The good news today is that household net worth has passed record levels in 2007. Also the debt-to-income ratio has dropped. Consumer saving is up from 2% to between 4% and 4.5%, Bovino said.

It’s really all about jobs, Bovino stressed, noting that the jobs market drives confidence and sentiment levels. Unemployment has dropped to around 7.3% from over 10%. The U.S. is now averaging 190,000 new jobs per month. Yet, she also says that the country has only gotten back two-thirds of the jobs lost and the labor market still is at a 35-year low.

John Humphrey

John Humphrey

In remarks about the U.S. auto industry, John Humphrey, senior vice president of the global automotive practice at J.D. Power, urged automakers to be vigilant in restraining capacity and inventory so they will not repeat past mistakes of building too many vehicles and having to increase incentives and lower pricing.

Humphrey said J.D. Power’s outlook for the industry is bullish in the midterm. J.D. Power and strategic partner LMC Automotive “forecast total sales for 2013 to end at 15.6 million units, up 8% over last year and up 50% since the trough in 2009.” Looking into the future, Humphrey said forecasts call for continued growth but at a slightly slower pace in 2014 and 2015. Humphrey said he agreed with Beth Ann Bovino’s assessment that the aging vehicle fleet will still drive demand.

On a positive note, Humphrey also said that industry growth is much healthier. “OEMs have maintained inventory control and there is less subvention, while prices are increasing,” he said, noting that Power Information Network® (PIN) transaction data indicates that prices have continued to rise along with sales volume since 2008, which is noteworthy “given that the mix has shifted to smaller vehicles, but with better content.”

Modest Optimism for California with its Own Vehicle Purchase Beat

Since the conference was held in Los Angeles a day before the press previews at the Los Angeles Auto Show, Humphrey provided a thumbnail view of the California market, which is one of the largest auto markets in the country—accounting for 12% of retail auto sales in 2013. He said California was hit harder than the industry during the Great Recession, but this year retail auto sales have outperformed the U.S. pace—with a 13% improvement.

The state also has migrated faster to smaller vehicles—52% of the market in the state vs. 45% for the U.S. Although leasing is slightly higher in California—averaging 29% of vehicle deliveries vs. 24% across the U.S.—72-month loan terms are less popular in California than nationally. The dealer profile in California is different, too. Humphrey pointed out that California’s dealer count has dropped, but remaining dealers are stronger, he said.

Increase in Gen Y Buyers and Technology Impact are Trends to Watch

 Gen YHumphrey said there are two major trends to watch: a change in buyer demographics and the role that technology is playing in the auto shopping process. Gen Y’s impact is beginning to grow—Gen Y consumers are accounting for 23% of retail sales in 2013. “The way they shop is different and there are 80 million of them,” Humphrey said, noting, “In our research we see that only 23% of them return to the dealership for post-warranty service, compared with more than half of Gen X and Boomers.”

Technology also is shaping the sales process more heavily. In recent research, J.D. Power finds that sales satisfaction is much higher with dealerships that use a tablet during the sales experience. Some 10% of dealer sales staff uses a tablet, which is up from 7% a year ago and Humphrey said the percentage is even larger at premium dealerships—17% of these stores use a tablet.

 

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