Car sales show our economy isn’t motoring along
The Drum, 22 June 2015
A look at recent car sales figures suggests the economy is hardly motoring along, and that workers are yet to believe it's safe to again loosen the belt and make the big purchases.
Aside from a house, a car is the most expensive purchase most people will make in their lifetime. It's why economists look to motor car sales for a sense of how the economy is performing.
Sadly, with the near end of Australia's motor car industry, it doesn't give us much of an indicator of how production is going, but it certainly provides a sense of consumer optimism – and the optimism at the moment does not appear to be strong.
A motor car's status as an expensive but important purchase makes its sale a good indicator of economic health. Not for nothing does the salesman played by Alex Baldwin in the movie Glengarry Glen Ross explain his status by telling another salesman his "watch costs more than your car".
Regardless of all other things in the economy, be they inflation, housing affordability or GDP growth, people don't buy new cars if they are worried about their employment situation.
And of late the sales have not been great. The GFC really kicked the stuffing out of the car sales industry.
From 1994 to January 2008, motor vehicle sales grew on average by 4.4 per cent each year. In January 2008 a then record of 90,680 cars new cars were bought (in trend terms); 12 months later just 73,850 were bought – a fall of 18.5 per cent:
And although growth returned once we came out the other side of the GFC, it has never been able to make up the shortfall.
Had the trend from 1994 to 2008 continued, we would have been looking at about 106,885 new cars being sold in May – about 13 per cent more than the 94,636.
And so while the industry did recover to the point where by the end of 2012 a record 96,276 (trend) motor vehicles were sold, it would take a great amount of car buying for us to catch up to the amount we were headed prior to the GFC.
And that amount required has become even greater over the past year due to sluggish sales.
Annual growth of motor vehicles sales very much peaks and troughs. In May the annual growth of motor vehicle sales fell to 2.1 per cent from 2.3 per cent in April. If annual growth has peaked, then it has peaked at the lowest rate this century. In 2002 the peak was 8.7 per cent, it was 13.4 per cent in 2003, 6.4 per cent, in 2005, 9.5 per cent in 2007, 19.5 per cent in 2010 (on the back of stimulus measures from the GFC), and 11.1 per cent in 2012:
And the monthly growth figures do not suggest a boom is about to commence. In May in trend terms, sales increased by just 16 vehicles:
The sales of "other vehicles" also barely grew in trend terms and actually fell 0.2 per cent in seasonally adjusted terms. It would seem that we are still to see any signs of a splurge on utes under $20,000 that Tony Abbott suggested tradespersons would take advantage of due to the instant asset write-off policy contained in the budget.
But the odd thing about motor vehicles, given they are our second biggest purchase, is that unlike with housing, affordability is not an issue. Last year, CommSec's cars affordability index suggested cars were more affordable than any time since 1976. And a look at the price of cars compared to overall inflation shows this pretty clearly:
Prior to the mid-1990s, the price of cars grew in line with inflation. Once the impact of the tariff cuts really flowed through, however, the price of cars dropped away dramatically.
If we look at the situation over the past dozen years, we find that the rises in house prices of 74 per cent outstripped the 49 per cent wages growth, but that car prices in that time fell 15 per cent:
However, this decline in real prices has not caused a splurge of car buying. Indeed, in the latest series of weightings given to our average purchases to make up the consumer price index, the ABS allocated only 3.25 per cent to car purchases – the lowest weighting given to such purchases since the ABS began separately including them in 1976:
And when we include automotive fuel and repairs and insurance, the amount we spend on "private motoring" is now less of our average annual expenditure than any time since the late 1960s – a time when car ownership was much less prevalent:
So it would appear that we are not taking advantage of lower car prices by purchasing higher range cars, but rather we are buying the same level of car (e.g. mid-range) and just enjoying paying less for it relatively than we did 10 or 20 years ago.
But we have actually changed our consumption habits rather drastically over the past 20 years.
Twenty years ago 75 per cent of purchases were for passenger vehicles; now it is just 45 per cent:
The big change has been the growth in sales of SUVs. Within two or three years, sales of SUVs should outstrip passenger vehicles.
The jokes about city-slickers buying a 4WD that never sees a dirt road are rather outdated now.
And if we look at sales of cars since the record of November 2012, it's clear that SUVs are pretty much the only thing keeping the market going:
The change in spending patterns from passenger cars to SUVs has not seen a growth in overall sales. Cars remain a must-have item, for in the past three years the number of cars per 1000 people has risen from 730 to 756, but it would seem there is not enough confidence in the economy to see a surge in purchases of new cars.
Unlike houses, cars are actually more affordable than ever before, but without the limited supply that exists in the housing market, the sales of cars comes purely down to demand by consumers to buy them.
The recent employment figures have suggested things are on the improve, but they have also attracted a good deal of scepticism. The weak new car sales would suggest workers remain sceptical as well, and are yet to believe it's safe to again loosen the belt and make the big purchase.