I love cars, both new and old. I like to drive them, talk about them, watch them race and just about anything involving them. I also think cars can tell us a lot about people, investors and the economy. Last week, the monthly auto sales data were released and there were some interesting trends that tell us something about secular demographic trends, the impact of falling gas prices and how workers are feeling about their prospects.

There were 1,455,242 cars sold in April. That was 4.6% more than sold in April of 2014. There have been 5,411,707 cars sold since the beginning of the year, 5.4% more than during the same four month period in 2014. It is interesting to note that truck sales were up 11% while car sales actually slipped 1.6% during April. The increase in truck sales is almost certainly a function of lower gas prices and higher incentives.

There are many different types of car owners. Those that lease, buy new, buy used, drive forever, obsess about maintenance or fill the back seat with fast food wrappers. Cars say a lot about their owners and represent each owner’s personality. If we look at sales in the aggregate, they tell us something about consumer sentiment and the economic condition.

We know that consumer sentiment has risen and remains near recent highs. The SAAR (Seasonally Adjusted Annualized Rate) of sales, seen in the chart below, indicates that this stronger sentiment has turned into car and light truck sales. However, you can see that the annualized sales rate has hovered between 16 and 17 million for the last twelve months.

Light Vehicle Sales

Keep in mind that the economy’s growth rate has been moderating for the last six months. In fact, last week we received a report showing that the U.S. economy grew by only 0.2% during the first quarter of 2015, well below the 3.55% growth rate of the prior six months.

Luxury and Crossover Sales

Car sales are reported by manufacturer. The April figures provide some insight into what’s selling and if we dig a little deeper into the demographics of buyers. As an example, luxury car makers like BMW, Mercedes, Lexus and Infiniti all saw sales rise by anywhere from 6.9% to 13%, well above the average growth rate for all makes during the month. The domestic luxury brands of Cadillac and Lincoln fared even better with growth rates averaging 16.7%. The year-to-date sales growth average for the foreign luxury brands is near 9%. Because I’m a Porsche fan, they deserve a category unto themselves. Their monthly sales were up 28.1% while the first four months of the year were 17.2% better than the previous year’s four month period. Obviously, many people recognize a good thing when they see one.

This increase in luxury car sales suggests that while economic growth has slowed, some are feeling more confident about their future prospects.

Crossover SUV sales have also risen dramatically. This trend seems to be a combination of aging boomers looking for something flexible for getting away to the cabin for the weekend, and the older millennial generation forming families and wanting some extra room for kids and a trip to Home Depot. Vehicles like the Honda CRV, Ford Fusion and Jeep Renegade saw significant increases in sales since the beginning of the year.

Lower gas prices and higher incentives continue driving the SUV and light truck market growth rate above that of cars.

Economic Impact

The average financing term on a new vehicle is 67.8 months, the longest in history, according to Edmunds.com. Despite the average incentive of near $2,700, car prices have continued to climb and remain high. The average selling price of a car is over $33,000. In order for sales to reach 17 million units per year, consumer sentiment has to be high. People need to feel pretty secure in their jobs and income potential to feel comfortable with a long-term financing commitment. We also received wage growth figures last week and they indicated that year-over-year wages are up 2.6%. The improvement in unemployment, wage growth and sentiment should help the consumer with big ticket item purchases like an automobile.

While the economic slow-down reported for the first quarter will give auto manufacturers something to fret about, most are feeling very confident about future sales prospects.

Car sales, economic growth and consumer sentiment represent a few of the items we track to understand the health of the economy and future for asset prices. Given the mixed data points described herein, we need to view future economic growth with a cautious eye.

© Cleary Gull

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