- 2017 auto sales slipped from 2016’s record but still came in above 17 million in total.
- The market could lose 2 million in sales in 2018 and still be relatively solid.
- Automakers have ridden out many downturns in the past.
On Wednesday, all major automakers selling vehicles in the US reported December and full-year sales.
The record years of 2015 and 2016, with well over 17 million in total sales, weren’t met or surpassed. The year came in at just over 17 million (17.2, according to Kelley Blue Book), which while a year-over-year decline for the first time since the financial crisis was nonetheless a bit of a welcome surprise after a sluggish spring and summer when it looked as if 17 million were out of reach.
Anyone at a big car company or running a dealership or making car loans will tell you that a US market above 16 million in annual sales is a very good market. They will also tell you that a market pushing toward 18 million year after year is fine for a while, but worrying long-term because it’s historically anomalous.
The so-called “replacement rate” – the churn of old cars being replaced by new – is about 15 million per year, so a market that’s two or three million above that can’t last. If it did, it would be supported by profit-sapping incentives and extremely loose credit.
Naysayers have been predicting a downturn for three years now, but the 2017 slip, coupled with moves such as Ford’s hike in December fleet sales, will fuel another round of gloom for 2018. Sure, the market will likely fail to hit 17 million by year’s end. But if it only manages 16.5, that would still be strong. (And don’t discount the effect that the GOP tax bill could have on summer sales.)
Why? Because of vehicle mix and average transaction prices. Demand isn’t infinite, so the industry expects routine cyclical contractions. But as long as consumers are buying large SUVs and pickup trucks and paying top dollar, as they are now, profit margins can survive.
Only a serious recession can clobber both sales and profits, sending everyone into hunker-down mode and making trouble for marginal participants in the market. But even in that case, analysts often forget that the US auto industry has made it through many recessions over the past century and change. Carmakers know what to do when sales are great, and they know what to do when they aren’t.
Business Insider Emails & Alerts
Site highlights each day to your inbox.