Auto sales look surprisingly resilient after coronavirus hit
U.S. auto sales, which tanked at the end of March amid widespread stay-at-home orders, have been steadily recovering, fueled by strong demand for trucks and generous incentives like 0% loans and deferred payments.
Why it matters: As economists debate the shape of a U.S. economic recovery, auto sales could be an important barometer. The auto industry represents about 3% of GDP, and a healthy rebound in car and truck sales could be encouraging for other consumer sectors.
What's happening: The week ending May 10 was the sixth consecutive week of improving vehicle sales at auto dealerships, according to analysts at research firm J.D. Power.
- Between May 4 and May 10, dealership sales were down 26% from J.D. Power's pre-virus forecast, an improvement of four percentage points from the week ending May 3.
- It's a far cry from the 59% plunge seen during the week ending March 29, when the pandemic was just beginning to shut down parts of the country. In some virus hot spots, like New York and Detroit, auto sales came to a virtual stop during the last week in March, according to J.D. Power.
Driving the news: With consumers confined to their homes, carmakers have bent over backwards to accommodate shoppers whose leases are expiring or who need to buy cars in a hurry.
- They've moved much of the car-buying process online and are delivering vehicles to the customer's doorstep, minimizing human contact.
- And buyers are still snapping up trucks as they were before the coronavirus hit.
Between the lines: Pent-up demand and big incentives account for much of the sales recovery.
- Some brands are offering 0% interest rates on 7-year loans, and waiving payments for buyers experiencing financial distress.
Flashback: After 9/11, GM's "Keep America Rolling" plan — 0% interest on all cars and trucks — jump-started U.S. auto sales and the entire economy.
Yes, but: incentives can be an addictive drug.
- If carmakers get too aggressive in their efforts to stimulate demand, they could cripple their pricing power for years to come, writes Boston Consulting Group's Karen Lellouche Tordjman in a new report.
- After the global financial crisis of 2008, carmakers doled out big discounts, kicking off a price war that hurt the industry's profit margins for years, she wrote.
What to watch: The biggest worry now is low inventory levels in many parts of the country.
- Factories stopped production in mid-March and are just now starting to make cars again. The ramp-up will be slow to ensure worker safety.
- GM and others say they'll focus on replenishing dealer stocks in markets where sales have been strongest, like Texas and Arizona.
The bottom line: It's clear the auto industry's 10-year boom has ended, but the landing might not be as rough as many had feared.
- J.D. Power is now forecasting auto sales of 13.5 million to 14.5 million for 2020, down from their previous forecast of 16.8 million.