Motor Vehicle & Parts Production To Slow in 2014

Car manufacturing remains strong, and while production will continue to grow, it will be at a slower rate through the end of this year, and perhaps into next.

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The 12-month total of vehicle sales has increased in straight-line fashion from 10.5 million units in November 2009 to 16.2 million in June 2014. The 12-month total vehicle selling rate has been above 16 million units for three straight months. The current annual rate of sales is at its highest since February 2008. The current annual rate of total vehicle sales was exceeded only during the period from March 1999 to February 2008 and in the month of December 1986. 

The news is also good in terms of the growth rate of total vehicle sales. After the recent financial crisis, the annual growth of vehicle sales is the fastest since July 2000. The current rate of growth has been exceeded only during three relatively brief periods since 1980. However, the annual growth rate has been decelerating at a steady clip since January 2013.
The rate of growth cannot accelerate forever. So, it’s no surprise that five years into the dramatic turnaround in total vehicle sales that the growth rate is slowing. However, there are some underlying factors that might raise some cause for concern about the future level of vehicle sales.

While total vehicle sales are still below peak levels from the late 1990s to the mid-2000s, loans outstanding are at their highest level ever, at  $900 billion. Also, the average amount financed per car and the average monthly loan payment are at all-time highs. However, real median household income has been in decline. And, real median household net worth is down 36% over the last 10 years.

How are consumers able to increase the amount of their automotive loans? Car loans used to be a maximum of three to four years. That’s not the case anymore. In the first quarter of 2014, 25% of all new cars sold had a loan of three to four years, 41% had a loan of five to six years, and 25% had a loan of six to seven years. Consequently, the average auto loan is now more than five years, which is an all-time high. To top it off, many of these new car loans are sub-prime loans, meaning there is risk they will not be repaid. So, the real question is how long can vehicle sales remain this strong when the median individual is suffering from lower real income? What happens if interest rates rise?

At this time, car manufacturing is strong. Motor vehicle and parts spending continues to grow at a reasonably strong rate. And motor vehicle and parts production is still growing at a historically strong rate, though the rate of growth in production has slowed dramatically in the last two years. It appears that production will continue to grow at a slower rate for the remainder of 2014 and perhaps into 2015.