Americans’ demand for new vehicles decelerated in October, as growing uncertainty over the U.S.-China trade dispute, coupled with escalating new-car prices, compels more consumers to hold off on auto purchases. After reaching its highest level in more than a year last month, TechnoMetrica’s Auto Demand Index plunged 13 points, or 10.1 percent, in October, to a reading of 116, the largest decline since May. Despite the sudden drop, the Index remains relatively strong, as October marks the fifth consecutive month in which the gauge has surpassed the 100-point benchmark, an indicator of high purchase intent levels. Thus, TechnoMetrica anticipates that, while vehicle purchase intent may have reached its peak for the year, auto sales should maintain a healthy pace in the near term, supported by a resilient labor market, lower interest rates, and rising incentives on outgoing model-year vehicles.
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 Index has exhibited higher volatility in recent months, suggesting that shifting trade policies with regards to China, along with heightened political tensions in Washington, D.C., are weighing more heavily on new vehicle demand. August and September each saw double-digit gains in the Index, representing a cumulative increase of 28 points. However, this month’s 13-point drop in the measure has cut these gains nearly in half.
In further indication of softening demand, the share of Americans who report that they are likely to acquire a new vehicle in the near term, defined in our study as likely new vehicle buyers, edged lower in October to 19 percent, after reaching a 13-month high of 21 percent the previous month.
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Factors Behind Slowdown
The contraction in consumers’ vehicle purchase intent coincides with the latest round of U.S. trade tariffs on Chinese imports, which are expected to directly impact consumers’ finances. Unlike previous tariff hikes, which primarily targeted industrial goods, the new levies that took effect on September 1 cover 69 percent of consumer goods imported from China. As a result, U.S. consumers will likely face higher prices on items such as clothing and housing appliances, leading to a reduction in their purchasing power. In the long term, all tariffs imposed on Chinese goods will cost the average American household an estimated $1,000 a year, according to a recent study by J.P. Morgan. Thus, consumers facing higher costs for everyday items may pull back spending on big-ticket purchases, including automobiles.
Soaring vehicle prices are also sidelining consumers from the new vehicle market. Recent data shows that the average transaction price of a new vehicle reached $37,590 in September 2019, up from $33,549 in 2015, an increase of 12 percent. Further, although the availability of loans has long created a sense of affordability in terms of car-buying, the cost of borrowing has also grown increasingly expensive over the years. The average monthly loan payment on a new vehicle surpassed $550 for the first time on record during the first quarter of 2019, as per Experian data. As vehicle costs continue to climb, largely due to a shift in consumer preferences towards SUVs and pickups, a larger selection of new vehicles currently available on dealer lots are becoming out of reach for a growing share of potential customers. In fact, our study suggests that the strain of higher prices is taking a heavy toll on the vehicle purchasing plans of lower-income Americans. Households earning less than $30K a year posted an Index reading of 89 in October, compared with 110 a year ago, a 19 percent decline.
The rising cost of new vehicles has prompted more consumers to opt for lower-priced gently-used vehicles, putting additional pressure on auto sales. With a record 4.1 million off-lease vehicles expected to enter the used market by the end of 2019, consumers have been provided with a wider selection of near-new autos that offer many of the features found in new vehicles, but at a fraction of the cost. The price difference between a new model year vehicle and a three-year-old used car reached $13,535 in the second quarter, up from less than $9,000 in 2010, according to Edmunds data.
Despite the steep decline exhibited by the Index this month, longer-term indicators suggest that new vehicle demand will remain relatively strong into the near future. For instance, the Index’s 3-month moving average climbed five points in October, to a 12-month high of 120. Meanwhile, the more stable 6-month average improved by one point from September, to a reading of 109, the third consecutive monthly gain in the measure. In addition, our momentum indicator remains at its highest level of the year, suggesting that while more Americans may be hitting the brakes on new vehicle purchases, auto sales should hold steady for the remainder of the year.
"Despite the various pressures weighing on consumers’ wallets, including prolonged uncertainty over trade tariffs and near-record-high vehicle prices, new vehicle demand remains relatively strong, fueled by a robust labor market and more generous discounts," said Raghavan Mayur, president of TechnoMetrica. "However, while we anticipate that auto sales will continue at a healthy pace of growth in the months ahead, sales may have reached their peak for the year, as more consumers turn to the gently-used vehicle market for the experience of a new car at a fraction of the cost."
In the months ahead, new vehicle sales are likely to receive support from rising incentive spending, as manufacturers struggle to clear outgoing model-year vehicles from dealers’ lots. Carmakers spent a record $4,100 per vehicle on incentives during the third quarter of 2019, according to research from J.D. Power and LMC Automotive.
Consumer demand for new vehicles is also being driven by lower interest rates, which have reduced the cost of borrowing for a growing share of buyers. The average interest rate on a new car loan held at its lowest level of the year in September, at 5.7%, compared with 6.2% in January, per recent data. Falling interest rates are providing consumers with more affordable financing options, as well as lower monthly payments on new-vehicle loans. Borrowing costs should continue to ease following the Federal Reserve’s September 18 decision to cut its benchmark interest rate for the second time this year.
A strong labor market yielding higher wages has also contributed to elevated demand levels. The unemployment rate in the U.S. fell to its lowest level in more than 50 years in September, according to a recent household survey by the Bureau of Labor Statistics.
Recent demographic trends in the Index provide further indication of sustained growth in new vehicle sales. In October, a majority (11) of the 19 segments that TechnoMetrica monitors on a monthly basis exhibited gains in the Index over September. Meanwhile, 17 groups posted readings above the reference level of 100, up from 15 the previous month.
In terms of region, the Northeast displayed the most significant rise in purchase intent levels over the past month, likely fueled by an unseasonably warm September across portions of the East Coast. The region logged a 24-point gain in the Index this month, posting a score of 129, the highest since September 2018.
Consumers residing in the Western United States also reported accelerated demand for new vehicles. In October, the region’s Index score improved by 9 points from the previous month, to a reading of 134, the highest of any region. This marks the West’s third consecutive monthly gain in the Index, its longest streak of the year. The elevated purchase intent levels exhibited by Western consumers reflect a growing demand for electric vehicles in the region, particularly on the West Coast. In California alone, sales of new electric vehicles surged by nearly 64 percent in the first half of 2019. In addition, according to a recent TechnoMetrica study assessing consumer attitudes towards EVs, Western consumers are more likely than those from other regions to express interest in acquiring a pure electric-powered vehicle.
Purchase intent among Southerners improved for the third straight month in October, as the region posted its highest Index reading of the year, at 109.
Meanwhile, new vehicle demand receded in the Midwest, amid a national strike by the United Auto Workers union against General Motors. After three straight monthly gains, purchase intent levels among Midwesterners fell by five points in October, to a score of 117. Research suggests that the UAW-GM strike, the longest national strike against the automotive giant since 1970, may be taking a toll on the finances of thousands of auto workers. According to an analysis by Anderson Economic Group, workers at GM and its suppliers have lost more than $835 million in wages since the strike began.
Regarding area type, Rural America reported the highest levels of purchase intent this month, with an Index reading of 129, a 12-point jump from September. Not to be outdone, urban dwellers gained 24 points in the Index, posting a score of 123. Meanwhile, new vehicle demand eased among U.S. adults residing in the suburbs, from a reading of 118 in September to 113 this month.
Our study finds that purchase intent levels decline by age, with younger consumers showing a greater propensity to acquire a new vehicle. In fact, the youngest cohort, consumers aged 18 to 24, reported the highest Index reading of any demographic group for the month, at 149. Heightened demand among young adults has likely been driven by rising wages. According to data from the Federal Reserve Bank of Atlanta, the 12-month average of median monthly wage growth for Americans aged 16 to 24 increased by 7.6 percent in September, compared with a growth rate of 3.9 percent among 25-to-55 year olds, and a 2.5 percent rate exhibited by consumers aged 55 and over.
The 25-to-44 age cohort displayed the largest gain in the Index among all age groups, improving from a score of 115 in September to a one-year high of 137 in October. Meanwhile, consumers aged 45 to 64 and those 65 and over exhibited a softening in auto demand.
In addition to monitoring Americans’ intent to purchase new vehicles, TechnoMetrica also gains insights into the vehicle preferences of likely buyers. Regarding vehicle type, SUVs remain the most preferred choice among likely new vehicle buyers. This month, more than one-third say they are likely to acquire a small SUV (21 percent) or a large SUV (15 percent) as their next new vehicle purchase. In fact, demand for large SUVs is at its highest level since April. Consumers also report a strong demand for pickups, the vehicle of choice for 16 percent of likely buyers.
The growing shift towards larger vehicles appears to have come at the expense of smaller types. For instance, preference for mid-size vehicles declined for the third straight month in October, to 15 percent, down from 20 percent back in April.
Our study also uncovers the most desirable vehicle brands among U.S. consumers. Ford again topped the list of America’s favorite car brands, despite seeing its preference share decline for the third month in a row, to 13 percent in October. Toyota and Chevrolet tied for second place this month, with each garnering an 11 percent share of likely buyers. Meanwhile, demand for Honda ebbed over the past month, from 9 percent in September to 7 percent in October. Rounding out the top five were Nissan and Subaru, each being the preferred choice of 5 percent of likely buyers.
While consumers continue to prefer American brands over Asian and European makes, our study finds that demand for U.S. auto brands is near its lowest levels of the year. The share of likely buyers who plan to acquire an American brand for their next new auto purchase dropped by two points in October, to 41 percent, compared with 51 percent back in March. Preference for Asian brands remained unchanged from the previous month, at 39 percent. In contrast, U.S. consumers reported a stronger demand for European brands this month. In October, 10 percent of likely buyers say they plan to acquire a new vehicle from a European brand, up from 7 percent the previous month.
The growing preference for European brands may be driven by rising consumer demand for luxury vehicles. This month, close to one in five (18 percent) likely buyers cited a luxury brand as their next new vehicle purchase, compared with 11 percent in September. This is the largest share of likely luxury vehicle buyers recorded in our study since January.
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 +/- 3.3 percentage points. In addition, recent statistical analysis has shown a strong correlation between the Auto Demand Index and actual U.S. vehicle sales.