Last week we learned U.S. consumer confidence hit a seven-year high in July.
But motor vehicle sales, one of the best measures of U.S. consumer health, according to Emanuella Enenajor and Lisa Berlin at Bank of America, suggests the American consumer is still on the mend.
“Higher spending on big-ticket vehicles can be a signal of rising consumer confidence and expanding credit — all important elements in a healthy economic expansion,” they write.
“And although household spending on vehicles has only directly added a few tenths of a per cent to GDP in recent years, the associated impact on vehicle production, investment and incomes is much greater.
So where do we stand now? Real spending on vehicles is still 4% below its peak, which shows “a consumer that hasn’t fully healed from the crisis.”
19 million sales by 2017
For one, consumers are holding on to their cars for longer. They are also spending more leasing vehicles, because it’s cheaper than owning and because leasing doesn’t require a downpayment.
Both of these suggest that pent-up demand could act as a tailwind for motor vehicle sales.
Moreover, if scrappage rates begin to rise auto sales could pick up. While improving quality of motor vehicles could weigh on sales, Enenajor and Berlin write that improving economic conditions mean consumers are more likely to scrap older cars for new ones.
A change in demographics, namely a rise in household formation, that should follow better employment conditions, could increase the stock of cars in operation.
“An annual increase in the stock of vehicles of 2.5%, slightly above the previous expansion average of 2.3%, would push vehicle sales to 19.1 million in 2017, even with a rock bottom scrappage rate of 4.5%.”
“Newly originated instalment vehicle loans have returned to pre-crisis levels and vehicle loans outstanding reached a high of $US875 billion in Q1,” according to Enenajor and Berlin. “We see this rebound, along with decreasing average credit scores for new vehicle loans, as a sign that credit conditions fore vehicle loans are easing.”
While Enenajor and Berlin expect a “bumpy ride,” they see a longer-term upside for vehicle sales as the U.S. economy improves.
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