The Party Is Over U.S. Automotive Outlooks

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

U.S. Light Vehicle Sales Percent Change YTD Through October: 2017 vs. 2016 Total -1.7% 14,240,706-243,283 Total 100% Light Trucks 9,086,724 + 384,997 Truck 63.8% 4.4% Passenger Cars -10.9% -628,280 Cars 5,153,982 36.2% -14% -12% -10% -8% -6% -4% -2% 0% 2% 4% 6% Source: Automotive News; CAR Research 2

U.S. Light Vehicle Monthly Sales January 2013 October 2017 2013 2014 2015 2016 2017 1,900,000 1,700,000 Oct, 1,356,789 1,500,000 1,300,000 1,100,000 900,000 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: Automotive News; CAR Research 3

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 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 YTD Market Share in Percentage U.S. Market Shares of Passenger Cars and CUVs/SUVs 1980 2017 YTD 90 80 70 60 50 40 30 20 10 Cars: [VALUE]% SUVs: [VALUE]% SUVs/CUVs: [VALUE]% Cars: [VALUE]% 0 Passenger Cars SUVs/CUVs Source: Wards Auto 5

Number of Light Vehicles Produced Percent Change in YTD Production North America Monthly Production October 2017 YTD % chg 2014 2015 2016 2017 1,800,000 1,600,000 [CATEGORY NAME]. 2017 [VALUE] 20% 15% 1,400,000 10% 1,200,000 1,000,000 800,000 600,000 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

2Q 2007 3Q 2007 4Q 2007 1Q 2008 2Q 2008 3Q 2008 4Q 2008 1Q 2009 2Q 2009 3Q 2009 4Q 2009 1Q 2010 2Q 2010 3Q 2010 4Q 2010 1Q 2011 2Q 2011 3Q 2011 4Q 2011 1Q 2012 2Q 2012 3Q 2012 4Q 2012 1Q 2013 2Q 2013 3Q 2013 4Q 2013 1Q 2014 2Q 2014 3Q 2014 4Q 2014 1Q 2015 2Q 2015 3Q 2015 4Q 2015 1Q 2016 2Q 2016 3Q 2016 4Q 2016 1Q 2017 2Q 2017 3Q 2017 Billion Dollars, SAAR Share of U.S. GDP, % U.S. Motor Vehicle Output and Share of GDP 2Q 2007 3Q 2017 PCE -New Vehicle Private Fixed Investment - New Vehicle Gov't Investment - Vehicles Net Exports Share of GDP 600 3.5 500 400 300 200 100 0-100 3.0 2.5 2.0 1.5 1.0 0.5-200 0.0 Source: BEA 7

New Vehicle Price Index (1982=100) Light Vehicle Sales and New Vehicle Price Index January 2004 September 2017 160 155 150 145 2004-05 2005-08 2008-10 2011-13 2014 2015 2016 2017 S1 S2 D2 140 135 D1 130 125 S1: Average sales of Jan 08 Dec 09 S2: Average sales of Jan 12 Dec 12 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 Light Vehicle Sales SAAR 8

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 1Q 2017 2Q 2017 3Q 2017 Billion $ (2009 dollar) Million Units Are Sales Peak? 1995 3Q 2017 In Spending (Billion of 2009 $) In Units 600 16.50 17.06 18 550 16 500 450 14 400 350 300 Both spending and vehicle sales exceed 2006 level 12 10 250 8 Source: BEA, Table 7.2.6B. Real Motor Vehicle Output, Chained Dollars 9

Months of Expansion US Business Cycles Months of Expansion Since 1945 140 120 100 80 Average Duration of Expansion: 58 Months 106 92 120 73 101 60 58 40 37 45 39 36 24 20 12 0 Oct 1945 - Nov 1948 Oct 1949 - July 1953 May 1954 - Aug 1957 Apr 1958 - Apr 1960 Feb 1961 - Dec 1969 Nov 1970 - Nov 1973 Mar 1975 - Jan 1980 Jul 1980 - Jul 1981 Nov 1982 - Jul 1990 Mar 1991 - Mar 2001 Nov 2001 - Dec 2007 Jun 2009 - Current Source: National Bureau of Economic Research 10

Vehicle Price, $ Vehicle Price Inflation NADA New Vehicle Selling Price 1978 2017 (Sept) NADA selling price Vehicle price inflation CPI Inflation 40,000 35,000 30,000 2004-2008 1990-1991 2017 -?? 20% 15% 25,000 10% 20,000 15,000 5% 10,000 0% 5,000-1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016-5% Source: NADA DATA; RSQE 11

NADA Dealership Financial Status $300 Net Profit Per New Vehicle Sold, U.S. $ $200 $100 $- $(100) $(200) $(300) $(400) $(500) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017* Net Profit Per New Vehicle Sold, U.S. $ *Through September 2017. Source: NADA DATA 12

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 2017 15% New Vehicle ('82-84 = 100) Used Vehicle ('82-'84 = 100) 10% 5% 0% -5% -10% -15% Source: BLS 13

Light Vehicle Sales % Chg. Of Consumer Credit Consumer Credit and Light Vehicle SAAR January 2011 October 2017 20.0 18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 Light Vehicle Sales SAAR Percent Change of Consumer Credit 12 10 8 6 4 2 0-2 -4-6 Source: Federal Reserve Statistical Release, G.19, Consumer Credit; Automotive News SAAR 14

1Q 2003 3Q 2003 1Q 2004 3Q 2004 1Q 2005 3Q 2005 1Q 2006 3Q 2006 1Q 2007 3Q 2007 1Q 2008 3Q 2008 1Q 2009 3Q 2009 1Q 2010 3Q 2010 1Q 2011 3Q 2011 1Q 2012 3Q 2012 1Q 2013 3Q 2013 1Q 2014 3Q 2014 1Q 2015 3Q 2015 1Q 2016 3Q 2016 1Q 2017 3Q 2017 Debt in Billion $ Debt in Billion $ Households are Carrying More Debt Household Non-Housing Debt* 1Q 2003 3Q 2017 1,400 Student Loans Auto Loans Credit Card 1,400 1,200 1,200 1,000 1,000 800 800 600 600 400 400 200 200 - - *Excludes mortgage and home equity line of credit Source: FRBNY Consumer Credit Panel/Equifax 15

1Q 2003 3Q 2003 1Q 2004 3Q 2004 1Q 2005 3Q 2005 1Q 2006 3Q 2006 1Q 2007 3Q 2007 1Q 2008 3Q 2008 1Q 2009 3Q 2009 1Q 2010 3Q 2010 1Q 2011 3Q 2011 1Q 2012 3Q 2012 1Q 2013 3Q 2013 1Q 2014 3Q 2014 1Q 2015 3Q 2015 1Q 2016 3Q 2016 1Q 2017 3Q 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 16.0 14.0 14.0 12.0 12.0 10.0 10.0 8.0 8.0 6.0 6.0 4.0 4.0 Source: FRBNY Consumer Credit Panel/Equifax 16

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

U.S. Electrified Sales (000 s) Percent of LV Sales (%) Real Gas Price ($) U.S. Electrified Light Vehicle Sales and Take Rate 1999 2017 YTD (October) Electrified LV Sales % of LV Sales Real Gasoline price 600 4.50 500 3.27 4.00 3.50 400 3.00 300 2.50 2.00 200 1.50 100 1.00 0.50 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 0.00 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.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 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 17.0 17.2 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Source: CAR Research, November 2017 19

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) @ 62.5% 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 Q1 2018 21

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

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, 2017 23

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

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

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