The Party Is Over U.S. Automotive Outlooks

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1 The Party Is Over U.S. Automotive Outlooks Yen Chen Senior Research Economist Center for Automotive Research Federal Reserve Bank of Chicago Economic Outlook Symposium December 1, 2017

2 U.S. Light Vehicle Sales Percent Change YTD Through October: 2017 vs Total -1.7% 14,240, ,283 Total 100% Light Trucks 9,086, ,997 Truck 63.8% 4.4% Passenger Cars -10.9% -628,280 Cars 5,153, % -14% -12% -10% -8% -6% -4% -2% 0% 2% 4% 6% Source: Automotive News; CAR Research 2

3 U.S. Light Vehicle Monthly Sales January 2013 October ,900,000 1,700,000 Oct, 1,356,789 1,500,000 1,300,000 1,100, ,000 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: Automotive News; CAR Research 3

4 Segment Breakdown U.S. LV Sales Percent Change October YTD 2017 vs October YTD 2016 Total -1.8% Middle CUV 8.3% Small CUV SUV Pickup 5.1% 4.9% 4.7% Large CUV -2.2% Small Car Luxury Car Van -9.2% -7.6% -7.7% Large Car -13.2% Middle Car -16.2% -20% -15% -10% -5% 0% 5% 10% Source: Ward s Automotive Reports 4

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

5 YTD Market Share in Percentage U.S. Market Shares of Passenger Cars and CUVs/SUVs YTD Cars: [VALUE]% SUVs: [VALUE]% SUVs/CUVs: [VALUE]% Cars: [VALUE]% 0 Passenger Cars SUVs/CUVs Source: Wards Auto 5

6 Number of Light Vehicles Produced Percent Change in YTD Production North America Monthly Production October 2017 YTD % chg ,800,000 1,600,000 [CATEGORY NAME] [VALUE] 20% 15% 1,400,000 10% 1,200,000 1,000, , ,000 5% 0% -5% 400,000-10% 200,000-15% 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec -20% Source: Automotive News; CAR Research 6

7 2Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q 2017 Billion Dollars, SAAR Share of U.S. GDP, % U.S. Motor Vehicle Output and Share of GDP 2Q Q 2017 PCE -New Vehicle Private Fixed Investment - New Vehicle Gov't Investment - Vehicles Net Exports Share of GDP Source: BEA 7

8 New Vehicle Price Index (1982=100) Light Vehicle Sales and New Vehicle Price Index January 2004 September S1 S2 D D S1: Average sales of Jan 08 Dec 09 S2: Average sales of Jan 12 Dec Light Vehicle Sales SAAR 8

9 Q Q Q 2017 Billion $ (2009 dollar) Million Units Are Sales Peak? Q 2017 In Spending (Billion of 2009 $) In Units Both spending and vehicle sales exceed 2006 level Source: BEA, Table 7.2.6B. Real Motor Vehicle Output, Chained Dollars 9

10 Months of Expansion US Business Cycles Months of Expansion Since Average Duration of Expansion: 58 Months Oct Nov 1948 Oct July 1953 May Aug 1957 Apr Apr 1960 Feb Dec 1969 Nov Nov 1973 Mar Jan 1980 Jul Jul 1981 Nov Jul 1990 Mar Mar 2001 Nov Dec 2007 Jun Current Source: National Bureau of Economic Research 10

11 Vehicle Price, $ Vehicle Price Inflation NADA New Vehicle Selling Price (Sept) NADA selling price Vehicle price inflation CPI Inflation 40,000 35,000 30, ?? 20% 15% 25,000 10% 20,000 15,000 5% 10,000 0% 5, % Source: NADA DATA; RSQE 11

12 NADA Dealership Financial Status $300 Net Profit Per New Vehicle Sold, U.S. $ $200 $100 $- $(100) $(200) $(300) $(400) $(500) * Net Profit Per New Vehicle Sold, U.S. $ *Through September Source: NADA DATA 12

13 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Changes from Jan 07: CPI New Vehicle and CPI-Used Vehicle January 2007 September % New Vehicle ('82-84 = 100) Used Vehicle ('82-'84 = 100) 10% 5% 0% -5% -10% -15% Source: BLS 13

14 Light Vehicle Sales % Chg. Of Consumer Credit Consumer Credit and Light Vehicle SAAR January 2011 October Light Vehicle Sales SAAR Percent Change of Consumer Credit Source: Federal Reserve Statistical Release, G.19, Consumer Credit; Automotive News SAAR 14

15 1Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q 2017 Debt in Billion $ Debt in Billion $ Households are Carrying More Debt Household Non-Housing Debt* 1Q Q ,400 Student Loans Auto Loans Credit Card 1,400 1,200 1,200 1,000 1, *Excludes mortgage and home equity line of credit Source: FRBNY Consumer Credit Panel/Equifax 15

16 1Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q 2017 PERCENT OF BALANCE PERCENT OF BALANCE Auto Loan Delinquent Rate Is Rising 30+ Days Delinquent Percentage by Types of Non-Housing Loan 16.0 Student Loans Credit Card Auto Loans Source: FRBNY Consumer Credit Panel/Equifax 16

17 Price Per Gallon Gasoline Prices (Real) Jun. 03 Oct. 17 $5.00 $4.60 $4.50 $4.29 $4.20 $4.00 $3.61 $3.63 $3.76 $3.94 $3.83 $3.50 $3.00 $2.60 $3.02 $3.23 $3.03 $2.91 $2.65 $2.50 $2.00 $1.50 Source: EIA $1.00 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 17

18 U.S. Electrified Sales (000 s) Percent of LV Sales (%) Real Gas Price ($) U.S. Electrified Light Vehicle Sales and Take Rate YTD (October) Electrified LV Sales % of LV Sales Real Gasoline price Note: Electrified vehicles consist of BEV, HEV and PHEV Source: Ward s Automotive Reports, HybridCars.com and CAR Research 18

U.S. LV Sales in Millions CAR s U.S. Light Vehicle Sales Forecast 2017-2022 Factors: N.A. production drop in 2017 U.

vehicle sales price inflation lower than CPI for first time in 5 years Dealership new car net loss/vehicle

rising Gasoline prices highest since Q4 2014 11.6 12.7 14.4 15.5 16.5 U.S. SALES 17.4 17.5 17.2 16.8 16.5 16.8 17.

19 U.S. LV Sales in Millions CAR s U.S. Light Vehicle Sales Forecast Factors: N.A. production drop in 2017 U.S. MV output declining share of GDP U.S. sales down in quantity and value New vehicle prices stagnant New vehicle sales price inflation lower than CPI for first time in 5 years Dealership new car net loss/vehicle highest level in a decade Used vehicle prices at a 10-year low Consumer credit slowing Auto loan defaults rising Gasoline prices highest since Q U.S. SALES Source: CAR Research, November

20 NAFTA Update 20

It s not going well NAFTA Auto Rules of Origin (ROO) already the highest of any U.S. Free Trade Agreement (FTA) @ 62.

content as part of the 85 percent RVC Including all parts, components, and materials in a light vehicle to modernize the tracing list Instituting a validation process for

21 It s not going well NAFTA Auto Rules of Origin (ROO) already the highest of any U.S. Free Trade Agreement 62.5% The Trump Administration is proposing: Raising the NAFTA Regional Value Content (RVC) threshold to 85 percent Requiring 50 percent U.S. content as part of the 85 percent RVC Including all parts, components, and materials in a light vehicle to modernize the tracing list Instituting a validation process for content, rather than the current process whereby manufacturers can deem originating for parts, components, and vehicles produced within the NAFTA region A 5-year renewal period Negotiations that were supposed to wrap up in December will now extend into Q

22 Modernizing the NAFTA Tracing List Tracing is meant to keep manufacturers from rolling up foreign content to achieve preferential trading status for imported content. 22

23 What Could Happen The Peterson Institute for International Economics outlines four scenarios for how NAFTA talks may proceed: Least Likely Most Likely 1) Canada and Mexico give in to U.S. demands; 2) U.S. gives up on demands that Canada and Mexico oppose, and focuses on modernizing the agreement (deal falls short of Trump s campaign promises); 3) Deadlock that leads to terminating NAFTA (supply chain disruptions, decline in cross-border investments); 4) Muddle through with concessions on specific products and some modernization, talks last beyond December 2017 (no one gets what they want, but each party is able to claim a win on something) Source: Hufbauer, Jung, & Kolb,

What if NAFTA Falls Apart? The risk of this happening is high. Mexico is talking with other trading partners to diversify trade and replace goods and services currently sourced from the United States.

24 What if NAFTA Falls Apart? The risk of this happening is high. Mexico is talking with other trading partners to diversify trade and replace goods and services currently sourced from the United States. Mexico and Canada are still part of TPP It is not clear how exactly NAFTA would unravel Congress would have to repeal NAFTA s enabling legislation NAFTA in place Gary Clyde Hufbauer, a noted trade expert and Professor of International Financial Diplomacy at Georgetown University, predicts five things would happen if the U.S. pulls out of NAFTA: 1) Dispute resolution systems would disappear; 2) MFN tariffs would be re-instituted; 3) Trump would need to decide whether or not to re-instate the Canada-United States Free Trade Agreement; 4) Congress would wage war on Trump through investigations and blocking his legislative agenda; and 5) There would be a lot of lawsuits. 24

25 Summary U.S. vehicle sales reached peak and is declining SUVs and CUVs are new kings, as long as gasoline prices are low Several econ conditions are weakening production, credits, interest rates, new/used vehicle price, dealers profitability, etc. Political turmoil and potential US-EXIT lead to murky motor vehicle market outlooks 25 25

26 Thank you

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