This is why ‘peak auto’ is no reason to panic

Jeep Mountain
Peaking? Jeep

After August US auto sales were reported last week, most analysts and industry observers concluded that the American market for new cars and trucks was plateauing at around a 17 million to 18 million range.

In 2015, a new US sales record was set, with 17.5 million new vehicles rolling off dealer lots, and there was some speculation in early 2016 that we might get to 18 million by the end of the year.

That’s looking less likely, primarily due to one of the main market drivers, pent-up demand, working itself out.

After the financial crisis, the average age of a car on US roadways grew to an unprecedented 11 years. But an improving economy, cheap gas, and easy credit, coupled with longer loan terms yielding lower monthly payments for buyers, has meant that old cars are being retired and new cars are getting bought.

The happy times couldn’t last forever, but we’re now entering a period of potential market misinterpretation as monthly sales through 2016 will probably level out at around 17 million. The final tally in December should match 2015’s record, although there’s a chance that the number will be exceeded. But not by much.

With monthly year-over-year sales all set to slip into a steady negative cadence, we’re going to hear all manner of dire prognostications about “peak auto” and how this means the automakers will fall back on old habits and blow the previous few years epic profits on incentives to maintain market share.

But at times like these, it’s very important to go beyond the raw monthly ups and downs, focusing instead on the mix of vehicles automakers are selling.

US Auto Sales Graphic

Peak auto with a market defined by small and mid-size cars would be a problem. Those vehicles are far less profitable than pickup trucks and SUVs. And although the natural environment would thank us for experiencing a booming US market with everyone buying fuel-efficient gas cars and hybrids, that would be an American historical anomaly. Americans favour large vehicles, and for about two decades have shifted their purchasing decisively toward SUVs.

This mix is ideal for automakers doing business in the US. As long as the market remains above 15 million to 16 million in annual sales, they will rake in the profits. Yes, they may be tempted to spend some of those profits to incentivise purchases, but that can’t be considered bad behaviour until a real recession-grade downturn kicks in.

And when that day arrives, having bolstered market share during the good times will look like a smart move.

Bottom line: Peak auto sounds bad — and under some market conditions, it could be. But not this time around.

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