According to Alec Gutierrez, senior market analyst of Automotive Insights for Kelley Blue Book, with some one- and two-year-old used vehicles commanding as much as 90% of original MSRP, many consumers have opted to purchase a new vehicle rather than used.  In some cases, a new vehicle actually is a more affordable proposition than an equivalent one- or two-year-old model, due to more attractive finance offers and lease opportunities for new vehicles.

This phenomenon likely only will last through the end of the year.  In fact, used-vehicle values declined 2.3% in July alone, and currently they are down close to 6% year-over-year.  As used-vehicle supply improves in 2013, Kelley Blue Book expects to see the gap between late-model used vehicles and new-car transaction prices widen.  This should prompt many buyers to look to used cars as a viable replacement, putting an additional burden on manufacturers to rely on incentives to make up for potentially reduced demand next year.

July Sales Hold Steady Despite Slowing Economic Growth

With most major manufacturers reporting July results so far, it appears as though auto industry sales will fall shy of 14 million SAAR for only the second time this year.  Although down slightly from the 14.3 million SAAR averaged through the first six months of 2012, sales remain on track to hit Kelley Blue Book’s forecast of 14.2 million for the year, an 11 percent improvement over 2011.

Weak economic headlines have done little to keep shoppers away from dealerships, although stalled job growth and wavering consumer confidence could slow sales growth in the near term.  New-vehicle sales growth has been somewhat anomalous this year considering persistently low consumer confidence and an unemployment rate that remains above 8 percent.  In fact, since 1976, new-vehicle sales have averaged just shy of 12 million units in any years where the unemployment rate averaged 8 percent or higher, giving a strong indication that sales in 2012 have been driven in large part by pent-up demand.  While demand is still playing a significant role in driving vehicle sales, it cannot carry industry growth indefinitely.

Industry Sales Growth Slowing as Economy Stalls

With domestic sales relatively flat in July and Japanese manufacturers only showing strong gains due to weak sales last year, we may be at a point where sales growth stagnates.  Although manufacturers like Hyundai, Volkswagen and Subaru continue to post double-digit gains, they may be stealing share from traditional heavyweights and redistributing sales rather than generating new sales growth.

Sales have been steady in the low 14 million unit SAAR range over the past several months and with economic growth slowing, sales growth will likely level off.  That being said, manufacturers will need to get creative to keep sales momentum moving forward.  Interest rates already are as low as they can go, and increasing incentives only benefits sales in the short term at the expense of residual values.  They also limit the ability of manufacturers to offer competitive leases in the future.

Comments by: Alec Gutierrez, senior market analyst of Automotive Insights for Kelley Blue Book