James Hamilton posted a quick study of the impact of oil prices on car sales in “Oil prices and the U.S. economy” in EconBrowser. Hamilton demonstrates from recent history that once the economy has made an adjustment to high oil prices, a subsequent price run will not impact the economy until it reaches new highs. In other words, oil prices must force the economy (consumers and businesses) to make new adjustments before a significantly negative impact occurs. Auto sales already greatly favor more fuel efficient vehicles, thus blunting the traditional drag on the auto sector as consumers shun bigger, gas guzzlers.
Oil’s relative share of consumer expenditures is another factor to consider. Amazingly, energy’s overall share of consumption has declined as gas prices have soared in recent months.
For more detail and data see “Oil prices and the U.S. economy“
Ford (F) raised its average car price for a third time this year. The latest increase is extremely small, just $124. For all of 2011, CNCB reports that Ford has increased prices a total of 1.3%, or $375.
Ford is clearly reluctant to hike prices and is choosing to dribble them in the hopes they go essentially unnoticed by the average consumer.
Ford cited higher commodity prices for this latest increase.
General Motors (GM) became the latest automaker to announce a price increase. Bloomberg reports that GM is raising prices 0.4% (about $123 per car). Toyota and Ford announced comparable price hikes over the past three weeks. GM blames higher commodity prices for the increase.
The stock is currently trading at a post-IPO low.
Disclosure: author owns shares in GM
A contraction in credit has served as a firm pillar of support for those who still fear deflation is the biggest threat to the U.S. economy. It seems even that pillar is slowly but surely weakening. In “Behind a Rise in Auto Sales, Easier Credit“, the New York Times reveals that loosening credit standards and increased lending have helped boost auto sales over the past year. Michael E. Maroone, the president of AutoNation, is cited as claiming that increased credit was the most important driver of auto sales last year. The statistics from this detailed article are a vivid reminder of how fast consumer borrowing can recover under the right conditions.
Consider these statistics quoted from the article:
- Sales of new cars rose 11 percent, to around 11.4 million, in 2010 and are off to an even stronger start this year.
- More than 859,000 new cars were sold to consumers with a so-called subprime credit rating in 2010, a nearly 60 percent increase from the year before.
- [The packaged consumer loan] market stood at $36 billion in 2008, during the throes of the crisis, but by 2010 it had bounced back to almost $58 billion. Bankers and analysts project that could rise by as much as 15 percent in 2011.
- Over all, lending to subprime borrowers has risen to about 38 percent of the auto finance market, although it is still well below its precrisis highs when it made up nearly half of all loans.
As the NYTimes notes, “…the gradual expansion of credit in virtually every area except real estate is an important sign that the American economy is returning to health.” So while an obsession with housing statistics can mire one in deflationary blues, so many other corners of the economy are flashing much different signals.
As the dollar weakens, Americans are likely to pay more for goods imported from other countries. Thus, it is not surprising to learn that Toyota is mulling higher prices for autos it exports to the U.S. MarketWatch:
Toyota Motor Corp. is considering raising the prices of some of its export models in the U.S. to counter the impact of the strong yen, the Yomiuri Shimbun reported in its Wednesday morning edition. The company may raise the prices of some of its 2012 export models–including the Prius hybrid, the Corolla and upscale Lexus models–which go on sale in the U.S. from next year, the report said. But to stop the move having an overly negative effect on sales, the automaker will raise prices by only a few percent, the report added.
Related: Nintendo swings to a loss, in part because of the stronger Yen.
AP reports in “No deal: buyers will see fewer discounts for cars” that car shoppers will need to get used to paying more for cars:
“Deals are getting more scarce because automakers, newly lean and profitable, are holding the line on those profit-eating promotions. In July, they offered $1,000 less in incentives per car than a year earlier, according to Edmunds.com.”
For now, customers aren’t buying it:
“U.S. auto sales are at a standstill, with potential buyers waiting for more deals but automakers resisting. The industry expects this to be the worst August in 18 years, with sales barely over 1 million cars and trucks. Sales are expected to fall 3 percent from July, according to car-pricing website Truecar.com.”
According to the Consumer Price Index reports released by the Bureau of Labor Statistics, used car prices increased 6.1 percent in the four-month period between July 2009 and October 2009 (seasonally-unadjusted figures). Taking into account compounding, that’s an annualized inflation rate of 19.4 percent. Yes, prices will probably pull back a bit in the coming months, but anyone expecting a crash in prices will probably be waiting a long, long time.
The price increase affects all its consumer replacement tires. The increase will be felt by the company’s dealers and distributors, who buy tires directly from Goodyear. It is up to the distributors whether to pass the increase on to consumers, Davis said.
Compared with a year ago, rental prices increased nearly 50 per cent on daily rates for midsize cars booked a week in advance, according to the Abrams Travel Data Rate Index, which tracks major car rental brands. The Abrams Index found an average daily rate of US$93.06 on the fourth Monday in October this year, compared to $64.56 on the same day a year earlier.
Prices were also up more than 50 per cent for a compact car booked a week in advance, with an average weekly rate of $289.14 on the fourth Monday of October, compared to $188.46 on the same day in 2008, according to the Abrams index.
Bloomberg: “Ford improved net pricing, transaction amounts after discounts, on its vehicles by $1.9 billion in the third quarter as it cut incentives and sold a mix of cars and trucks with more costly options…”
Sumitomo Rubber Industries Ltd. (SRI) is increasing prices for Dunlop-, Falken-, Sumitomo- and Ohtsu-brand tires it exports by 5 to 15 percent, depending on size, category and market …. SRI cited the rising cost of raw materials, including natural rubber and crude oil, as the reason for the increases.
The epicenter of sticker shock is moving from the car dealer’s showroom to the tire shop. While politicians and tire manufacturers have been battling over a 35% tariff on lower-cost Chinese-made tires that took effect last month, consumers had already been facing a run-up in tire prices that began years ago and jumped steeply even before serious talk of tariffs began. The average price of tires for passenger vehicles rose 9% in 2008 compared with a year earlier, and 24% compared with 2005, according to Modern Tire Dealer, a trade publication.
Of course, car owners can save money by replacing worn-out high-end tires with new lower-end tires. Such tires, however, are already becoming more expensive thanks to new tariffs on Chinese tires.
Buyers who have been waiting for better deals on new cars may be disappointed. General Motors Co. and Ford Motor Co., bucking decades of tradition, are weaning themselves from dependence on profit- sapping discounts after factory shutdowns curbed dealers’ supply of cars and trucks.
Incentives on GM, Ford and Chrysler Group LLC autos plunged 26 percent to $3,278 in August from a March peak, while discounts industrywide fell 22 percent to $2,474, according to researcher Edmunds.com. The U.S. automakers’ vehicles sold for an average of $2,000 more in the second quarter than a year earlier, said researcher J.D. Power and Associates….
Ford buyers paid an average of $2,000 more for each vehicle in the second quarter, according to the automaker. That translated into a $900 million increase in net pricing in North America during the period, Ford Chief Financial Officer Lewis Booth said July 23. Researcher Autodata Corp. estimated that Ford pared spending on discounts 27 percent this year.
The average price per vehicle commanded by GM, Ford and Chrysler in the U.S. rose 7.8 percent to $27,571 in the second quarter, from $25,567 a year earlier, according to J.D. Power. Industrywide, average vehicle prices rose to $26,921 in the second quarter from $25,954 a year earlier, Westlake Village, California-based J.D. Power said….
Just nine months ago, Mike (“Mish”) Shedlock predicted that “Cars are going to get cheaper, much cheaper. Auto prices will crash…It makes no sense to buy a car now, no matter how good the deal looks. The deals will get progressively better as the year rolls on.”
Mish linked to numerous photos, such as this one, showing thousands of unsold cars sitting in ports:
According to this September 30, 2009, article in the Wall Street Journal, however, used-car prices are increasing, not decreasing:
Prices for second-hand cars took a hit late last year, along with the prices of many other assets. But since the start of this year, a combination of tight supplies of both new and used vehicles and higher demand from a frugal public have pushed average used-car prices to the highest levels in years, industry watchers say. Demand seems particularly strong for used SUVs, analysts say, reflecting lower gas prices.
That should be good news if you are selling or trading in a well-tended used vehicle over the next couple of years. It might not be so welcome if you are trying to buy one.
One widely followed measure of used-car prices, the 14-year-old Manheim Used Vehicle Value Index, will likely hit a record when data for September are released in early October, says Thomas Webb, chief economist for Manheim Consulting, a subsidiary of Cox Enterprises Inc.
Update (October 3, 2009): A reader asserts that the surge in used-car prices is due to two factors: (1) increased frugality among consumers, who can no longer afford new cars; and (2) the cash-for-clunkers program. Neither of these trends, my reader suggests, should be interpreted as signs of inflation. The Wall Street Journal article , however, attributes the decline in used-car prices to a reduction in the supply of new and used cars:
“What has happened over the last couple quarters is with supply being down, we’ve seen wholesale prices continue to appreciate. It’s just a basic supply-and-demand model,” CarMax President Tom Folliard said in a conference call…
The government financed “cash for clunkers” sales bonanza tilted the car industry’s supply-demand teeter-totter heavily toward the “demand” side, helping dealers to clear out new vehicles faster than they might have otherwise. But cash for clunkers isn’t the biggest reason why the value of your used vehicle could be going up. A bigger factor is millions of vehicles you can’t see—the ones car makers didn’t make, sell, lease or dump into rental-car fleets during the past year.
Big car makers had been slashing production—or shipments from overseas—to work down bulging inventories of unsold new vehicles that clogged dealer lots as the economy tumbled last year. Demand for many big vehicles—large SUVs, pickups and big cars—cratered in mid-to-late 2008 as gas prices surged. Detroit shut SUV factories right and left.
In short, there is less excess capacity than many observers had believed. Moreover, it’s worth noting that prices of new cars have increased since January 2009 (see Table A of this Bureau of Labor Statistics news release). This undercuts my reader’s implied claim that the increase in used-car prices reflects has come at the expense of new-car prices.
By the way, I am an admirer and long-time reader of Mish’s blog. He has been right far more than he has been on wrong. But when he predicted a “crash” in auto prices, he got it wrong. And, as we shall see, the automobile market is not the only sector showing signs of inflation.