TechnoMetrica Market Intelligence developed the Auto Demand Index, or ADI, as a way to measure the intent of consumers to buy or lease a new vehicle within the next six months. Raghavan Mayur, president of TechnoMetrica, explained that the ADI, which is conducted monthly, is based on the response to a key question posed to more than 900 adult Americans: How likely is it that you will buy or lease a new vehicle within the next 6 months?
After surging throughout the final months of 2017, demand for new vehicles has fallen back to earth, as the fervor of holiday spending subsides. During the month of December, U.S. consumer spending rose at its highest rate since 2011. Further, generous holiday discounts on outgoing vehicle models pulled prospective buyers to dealerships en masse, ensuring a strong end to a tempered year for auto sales. However, as incentive offers are reined in, and consumers confront credit card debt accrued during the holidays, many Americans at this time of year typically refrain from purchasing high-priced items, such as new cars, except out of necessity.
The weakening in purchase intent is likely to continue into the near future, as all three of the Index’s moving averages declined this month. In addition, our Moving Average Convergence Divergence (MACD) indicator for momentum dropped into negative territory in February, falling 2.2 points to a score of -1.3.
“After emerging from the throes of the last recession, many consumers quickly moved to replace their older vehicles. Now, as the pressing need to purchase a new vehicle diminishes, auto demand has reached a plateau,” said Raghavan Mayur, president of TechnoMetrica. “As a result, we expect that new vehicle sales will continue to slow into the near future.”
Consumer demand for new vehicles waned across most demographic groups this month. The Index declined among 15 of the 19 groups TechnoMetrica monitors on a monthly basis, with consumers earning more than $100K a year (-24), Northeasterners (-17), and those aged 25 to 44 (-17) registering the most pronounced drop in vehicle purchase intent. Demand also eased significantly among the 45 to 64 age group (-16) and parents of children under 18 years of age (-16).
At the same time, purchase intent continues to accelerate among consumers between the ages of 18 and 24, as young adults enter a strengthening labor market with increased employment opportunities. In February, this age cohort recorded a stellar 35-point gain in the Index, soaring to a robust score of 185. The 18 to 24 age group has now registered four straight months of double-digit growth in the Index.
The collapse in purchase intent over the last few months is largely the result of diminishing pent-up demand for replacement vehicles. The last recession sidelined many American drivers from replacing their older autos, a majority of which had been on the road for more than a decade. As the economy recovered, consumers went in droves to car dealerships to release their constrained demand, resulting in two consecutive years of record auto sales in 2015 and 2016. However, as a limited resource, pent-up auto demand had to eventually reach a point of satiation, leading to more reduced levels of purchase intent. Hence, even with record incentive spending from automakers, full-year auto sales for 2017 declined for the first time in seven years.
The auto industry’s post-recession resurgence has fortuitously created another roadblock for new vehicle sales: a glut of off-lease lightly-used vehicles flooding the market. Amid the recovery, automakers and dealers offered generous leasing deals, allowing many cash-strapped consumers acquire a normally out-of-reach SUV at an affordable price. It is not surprising, therefore, that lease volume reached an all-time high in 2016, according to Edmunds. However, as a result of this surge in leases, around 4 million vehicles are expected to come off their leases this year, compared to 2.6 million in 2015. Thus, the new vehicle segment is likely to face stiff competition from the plethora of near-new autos returning to the market.
The prospect of rising interest rates may also be dampening consumers’ plans to purchase new vehicles. The Federal Reserve is expected to make three or four rate increases in 2018, after raising interest rates three times last year. Higher interest rates, coupled with reduced incentive spending by automakers, have already driven up the costs of car leases and loans. According to the Federal Reserve, the average interest rate for a 60-month new auto loan had risen to 4.51 percent in the fourth quarter of 2017, up from a rate of 4.05 percent a year earlier.
The Auto Demand Index study also explores key areas of consumer preferences, including the types of vehicles that prospective buyers are likely to purchase. Demand for small SUVs (19%) continues to rise, surpassing mid-size cars (16%) to become Americans’ most preferred vehicle type. Back in September, 12% of likely buyers said they would acquire a small SUV for their next new vehicle purchase. Consumers are also showing a strong preference for pickup trucks, which garnered a 15% share of prospective vehicle buyers for the second month in a row.
Our study also gains insights into the brand preferences of consumers who are planning to purchase a new vehicle in the near future. With similar shares (13%) of prospective buyers, Toyota and Chevrolet claimed the top two spots in brand choice this month. Ford was not far behind, however, as the American-made brand was the preferred pick of 12% of likely buyers. While Honda showed the greatest negative change in brand preference this month, its popularity remains steady with an 8% share of consumers. Rounding out the top five in brand choice were Jeep and Subaru, at 5% apiece.
Each month, TechnoMetrica uses Random Digit Dial telephone methodology to conduct live interviews with more than 900 respondents, using both landlines and cell phones. The margin of error for the survey is +/- 3.2 percentage points. In addition, recent statistical analysis has shown a strong correlation between the Auto Demand Index and actual U.S. vehicle sales.
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