New vehicle demand accelerated to its best January on record, as decades-low unemployment, strong wage growth, falling interest rates, and relatively cheap gas prices embolden Americans to continue spending on new cars, despite sky-high prices, according to this month’s reading of TechnoMetrica’s Auto Demand Index.
Why it Matters:
Americans’ willingness to spend on big-ticket items such as new vehicles is a key indicator of the health of the consumer and the broader economy. A drop in big-ticket purchases may signal an overall pullback in consumer spending, which accounts for 70 percent of economic activity.
By the Numbers:
The Auto Demand Index soared 14 points, or 12.6 percent, in January to a score of 125, the highest since September 2019. This marks the second straight double-digit gain in the Index, as the recent de-escalation in the U.S-China trade dispute and the Federal Reserve’s looser monetary policy temper fears of a looming recession. Also, the Index remains above the baseline level of 100 for the second month in a row, providing further indication that consumers will continue to open wide their wallets for new vehicles into the near future. Thus, supported by a roaring economy that is putting more money in Americans’ pockets, auto sales should start the new year off strong.
Longer-term indicators suggest that vehicle purchase intent will stay in the fast lane beyond the immediate future. All three of the Index’s moving averages posted gains this month, while the 3-month average (111) remained above the 12-month average (107). In addition, our momentum indicator, the MACD, extended its run in positive territory (above zero) to six consecutive months, climbing two points in January to a score of 3.1, signaling a continued upward trend in auto sales. However, unforeseeable developments surrounding the recent corona virus outbreak and the 2020 presidential election may impact consumer demand in the months ahead.
The Big Picture:
The resilience of auto sales, which ended 2019 above the 17 million mark for the fifth year in a row, has largely been fueled by a strong labor market still pulling Americans from the sidelines. During the fourth quarter of 2019, the share of workers entering employment from outside the labor force, rather than from unemployment, reached 74.2 percent, an all-time high. Further, the unemployment rate in the U.S. remains at its lowest level since 1969, while job openings continue to exceed the number of unemployed Americans. A tighter job market has yielded larger paychecks for U.S. workers, boosting their spending power.
Improved job and income prospects have lifted consumer confidence to elevated levels. The IBD/TIPP Economic Optimism Index rose to 57.4 in January, marking its 40th consecutive month in optimistic territory. Higher levels of optimism typically encourage consumers to spend more.
The recent surge in new vehicle demand has also been supported by lower interest rates, which are making financing a new car a more affordable option for consumers. The Federal Reserve cut interest rates three times in 2019, nearly reversing all its increases from 2018. Amid the Fed’s easing monetary policy, the average interest rate on new car loans dropped to a 22-month low of 5.4 percent this past December. Lower borrowing costs provide much-needed relief to auto consumers, as new vehicle prices continue to set all-time highs. In addition, more Americans are taking out loans with longer terms, making monthly payments more manageable.
Increased incentive spending is also allaying affordability concerns among Americans. The average discount on a new vehicle climbed to a record $4,600 in December 2019, up 7 percent over 2018, according to J.D. Power and LMC Automotive.
Under the Hood:
Vehicle purchase intent revved up across a majority (13) of demographic groups in January, compared with just two the previous month. Also, 15 of the 19 segments TechnoMetrica monitors each month posted an index reading above the 100-point benchmark.
The South reported the highest levels of new vehicle demand of all U.S. regions, with an ADI of 124, its best score since November 2016. The region holds the lowest unemployment rate in the country, according to government figures. The Northeast came in a close second, at 118, despite a 12-point drop from December. Meanwhile, demand among Midwesterners fell for the fourth month in a row, from 107 to 104. Finally, the West saw a 16-point jump in the index, to a reading of 91.
Besides tracking Americans’ willingness to purchase a new vehicle, TechnoMetrica also explores the types of vehicles consumers are likely to buy. Small SUVs remain Americans’ vehicle of choice, garnering a 22 percent share of likely buyers. Pickup trucks and mid-size vehicles were both preferred by 17 percent, surpassing demand for large SUVs, which dropped from 18 percent to 15 percent.
The Bottom Line:
Equipped with fatter wallets and buoyed by an economy firing on all cylinders, U.S. consumers feel comfortable spending on big-ticket purchases, including new vehicles. As the effects of the Federal Reserve’s rate cuts continue to trickle down, and financing becomes a more attractive option to everyday buyers, we expect auto sales to speed up further in the months ahead.
About the Index:
Each month, TechnoMetrica uses Random Digit Dial telephone methodology to conduct live interviews with more than 900 respondents, using both landlines and cell phones (Field Period: January 3rd to 11th, 2020). 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.