Sept/Oct 2012 Industry Report

Posted on: July 25th, 2012 by admin

Volume 13, Number 5

MARKET OUTLOOK

SEPTEMBER/OCTOBER EDITION SUMMARY

Overall Impact for September/October 2012 edition:

Total change (including expected declines and economic out­look) for the edition, on average, had an impact of -0.7 ppt in the 36-month term with some variation among segments.

Economic conditions in the United States have deteriorated slightly in recent months. Second quarter real gross domestic product (GDP) came in at an annual growth rate of just 1.5%. Nevertheless, the economy continues to slowly expand, with the second quar­ter now marking three straight years of GDP growth. Analysts have recently been revising downward their expectations for full year 2012 GDP growth, to between 1.9 and 2.2 percent. Forecasts for 2013 are equally muted, anticipating approximately 2.1 percent growth. As the European recession and debt crisis deepen, growth in China slows, and the U.S. approaches the “fiscal cliff” at the end of 2012 with no resolution in sight, the prospect of slow but steady growth in the U.S. may become increasingly appealing.

U.S. consumers remain relatively optimistic, with confidence increasing in July to 65.9 from 62.7 in June. This is still low by historical standards, but one of the highest values observed during the past four years. Personal consumption growth accounts for the majority of GDP expansion, fuelled in part by stock market gains that have recently pushed the market to four-year highs, increasing the wealth of most Americans.

MACRO ECONOMIC OUTLOOK:

The economic outlook has been updated for the September/October 2012 edition relative to the July/August 2012 edition. West Texas Intermediate oil prices declined significantly in June, reaching $82 per barrel after sitting above $100 per barrel during the first four months of the year. Prices rebounded in July to $88 per barrel, however gasoline prices continued to decline through July, reaching $3.44 per gallon. In light of recent market conditions, ALG’s expectations for gas prices have been lowered over the longer term, though prices are still expected to slowly rise. Gas prices could fluctuate in the short term due to latest hurricane activity.

Housing has been one of the most challenging aspects of the recovery to date. Typically one of the first sectors to rebound following a recession, progress continues to be fleeting. The Federal Housing Finance Agency’s home price index remains 17% below the peak, and is up just 4% from the low observed in March 2011. In the past few months there has been some positive movement in home prices, but it is clear that initial estimates for home prices in 2012 were overly optimistic. As a result, ALG has adjusted home price forecasts for the next 36 months. The expectation for a moderate recovery in prices by 2017 remains intact, but even with these gains, ALG does not expect home prices to reach their pre-recession peaks within the next five years.

HOUSING PRICE FORECAST

Improvements in the labor market have slowed in recent months. Following a sharp drop in the unemployment rate between August 2011 and January 2012 further progress has been elusive. After rising to 8.3% in July, the unemployment rate is now at the highest level since February. From April to June 2012 a total of just 219,000 new jobs were created, not nearly enough to keep pace with population growth and push down the unemployment rate. However, payroll growth accelerated to 163,000 new positions in July, a pace which, if sustained will gradually improve the employment picture. Though the recovery has been disappointing so far, there have nevertheless been 22 consecutive months of employment growth. ALG is now projecting slightly higher wage growth for the September/October edition. Wages will grow by an average of 2.6% per year through 2017, with the greatest growth occurring between 2014 and 2016 when the economic expansion finally accelerates.

USED SUPPLY:

ALG has updated its used market supply forecast for this edition. Increased sales will be impacting supply returning to the used vehicle market in three to four years. ALG has lowered residual values across all segments at a rate amounting to ~0.3 ppts on average.

INDUSTRY INSIGHTS

PRICING GAP BETWEEN NEW AND USED CLOSER THAN EVER; USED DEMAND SOFTENING

Used vehicle values have reached historically high levels, but those values are beginning to soften. In this edition’s analysis, ALG’s Market Analytics group explores the used car market in an ongoing effort to analyze the current market dynamics and their impact on future forecasts. Our analysis indicates that while used supply will continue to be limited, demand is shifting toward new vehicle purchases.

SUPPLY SIDE:

Using 1998 as a benchmark for our Used Vehicle Value Index, which represents the average wholesale condition of vehicles one to five years old, we looked at the trend from just prior to the economic recession to the current time. Not surprisingly, the economic recession starting in late 2007 clearly impacted the used market prices for vehicles, as the index dropped from 118 index points at its peak to 95 points in late 2008. Since early 2009, used market values have shown tremendous growth, first peaking at 135 points in June 2011, and then at roughly 140 points (pre-recession maximum peak was in January 2006 at 121) where they have remained through Q2 of 2012.

Additionally, using ALG’s AutoMarketPulse (AMP) data, we are able to look at days-to-turn for the new and used market. Days to turn for new vehicles have been steadily creeping up since October 2011, whereas for used vehicles they have remained relatively flat during the past two years. New vehicle days to turn peaked in the first half 2009 at over 80 days. Days to turn for used market reached highs of almost 50 days in 2009, yet returned to the ~40-day level in 2010, where they have largely stayed over the last two years. Very little movement has been observed in the last few months. Overall, new vehicle inventory has been much more sensitive and volatile throughout the challenging economic times as compared to used inventories.

ALG USED VEHICLE VALUE INDEX

Index shows used market value (average condition wholesale) of 1-5 year old vehicles

 

NEW VERSUS USED RETAIL TRANSACTIONS

New and Used Transactions as % of Combined Transactions

Luxury Sector

Mainstream Sector

Source: ALG AutoMarketPulse
Notes: Used car transactions do not include private to private sales, only 1-7 year old used vehicles included, transactions exclude fleet sales

 

Combined Retail Transactions

2009

2010

2011

2012 YTD

New Retail Transactions

8,595,584

41%

9,351,900

39%

10,502,476

43%

6,884,328

43%

Used 1-7 year old Retail Transactions*

12,550,498

59%

14,366,840

61%

14,130,627

57%

7,921,000

57%

Combined Retail Transactions

21,146,081

100%

23,718,740

100%

24,633,103

100%

14,805,327

100%

 

DEMAND SIDE:

The percentage of dealership transactions attributable to used car sales has been steadily declining since January. Since their peak of nearly 65% in 2010, dealer used car transactions have been eclipsed by new car transactions as a percentage of total vehicle sales.

In June 2009, the officially defined end to the economic recession, the percentage of used retail transactions of one- to seven-year-old vehicles hit a low of 51% of new and used retail sales combined, though the used share of transactions largely hovered around the 60% mark until early 2012. While the market has recovered during the last three years, the up-tick in new relative to used transactions has become most evident in 2012. The share of new transactions clipped the 50% mark as of August 2012, showing consistent upward movement since the lows in 2010.

This trend continues to support ALG’s forecast of a shift towards the new vehicle market. Demand for new vehicles is picking up faster than for used cars, and that trend has accelerated during the last few months. Consequently, this will have an impact on used market vehicle prices. The supply side, however is not likely to impact used prices adversely, as used inventory levels have not shown significant increases. Based on these trends, ALG expects used market prices to drift back toward historical norms.

Additionally, we explored whether the luxury and mainstream sectors showed any differentiation. Both categories showed similar trends in terms of new versus used transactions. Both sectors show a consistent upward movement in share for new transactions. Roughly 51% and 49% of transactions were of new vehicles in the mainstream and luxury sector in July 2012, respectively. Both sectors hovered around 38% new transactions in early 2009.

Short- to Mid-Term Outlook on Residual Values

ALG expects used market values to decrease by ~4 – 5% over the next 12 months on an overall industry average partially driven by used market demand softening relative to new market demand. Relatively low levels of used market supply have so far been counteracting the expected impact from weaker demand. Looking two to three years ahead, ALG anticipates overall used market values to be 8-10% lower than current prices. A combination of reduced demand and rising supply in the used market is expected to add pressure on used market prices going forward. Yet given the pre-recession used market values, the mid-term outlook is still predicted above the levels seen in 2006 and 2007 due to much mitigated used market supply.

Long-Term Outlook on Residual Values

The overall softening in the used market from a demand perspective will impact used market values. ALG believes used market values will further soften and decrease during the next few years, lowering residual values. ALG’s current 24-month residual outlook is ~4 ppts (of MSRP) lower than the current used market value of two-year-old vehicles. The 36-month residual outlook is on average ~5 ppts lower than actual 36-month auction returns at the industry level. The long-term average of 3-year-old used values is ~45% of MSRP at the industry level. ALG’s current industry outlook for the 36-month term is ~47% for the September/October 2012 edition.

NEW PRODUCTS

2013 FORD FLEX

The Flex’s quirky styling has polarized shoppers, with most opting for more traditional-looking crossovers. For its mid-cycle redesign, Ford has given the Flex some futuristic touches, particularly in the headlights. There is also less emphasis on the Blue Oval badge and more on the Flex nameplate, which is featured prominently front and rear. Inside, the Flex gets an update to its MyFord Touch system, which promises more speed and reliability. Otherwise, the already stellar interior layout is mostly carryover. Under the hood, the Flex gets improvements to its base engine, with the 3.5L V6 getting 23 additional horses for 285 hp (and 7 more lb-ft, 255 total). Fuel economy also improves one tick in the city (17 city/23 hwy). The potent EcoBoost turbo engine continues unchanged.

ALG OUTLOOK

While the improvements are significant, it would likely take a complete redesign for the Flex to appeal to a broader audience and legitimately increase sales.

September/October 2012

24 Month

36 Month

48 Month

60 Month

Ford Flex (2013 MY)

57%

47%

39%

32%

Ford Average (2012 MY)

53%

44%

37%

30%

Midsize Utility Average (2012 MY)

56%

47%

40%

33%

 

2013 NISSAN GT-R

How does Nissan improve on an already class-leading supercar? Give it more power, of course. For 2013 the GT-R halo car gets 25 more horsepower, bumping the total to 545 (torque is now rated at 463 lb-ft). Godzilla’s 0-60 time improves even further, to a blistering 2.8 seconds. This may be only a tenth quicker, but the engine was given a flatter torque curve as well, making for a more usable performance envelope. Engineers also made re­finements to the transmission and retuned the suspension to round out the 2013 changes.

ALG OUTLOOK

Nissan keeps the GT-R ahead of the curve with continual improvement, ensuring that one of the best supercar values also remains one of the quickest cars on the planet.

September/October 2012

24 Month

36 Month

48 Month

60 Month

Nissan GT-R (2013 MY)

61%

53%

46%

40%

Nissan Average (2012 MY)

54%

45%

38%

31%

Premium Performance Average (2012 MY)

54%

46%

39%

33%

 

2013 SCION FR-S

It’s been a long while since the U.S. market last had an array of truly affordable RWD sport coupes, but two more entries will now join the Hyundai Genesis Coupe in the segment. This hot Scion is the result of a collaboration between Toyota and Subaru, and the two versions differ only slightly in terms of styling and suspension tuning. The Scion FR-S has been called the slightly sportier option, though it also takes a more affordable approach than the Subaru BRZ in terms of equipment. The rev-happy 200-hp boxer 4-cylinder has only 151 lb-ft of torque, so the 6-speed manual must be worked hard to keep the engine at a boil. The han­dling is a delight, though, with top-notch balance and a playful demeanor.

ALG OUTLOOK

Enthusiasts will welcome the FR-S with open arms, and tuner companies will have a field day, as Scion gets a boost to its sporting credentials.

September/October 2012

24 Month

36 Month

48 Month

60 Month

Scion FR-S (2013 MY)

67%

56%

49%

41%

Scion Average (2012 MY)

60%

49%

40%

33%

Sporty Average (2013 MY)

65%

54%

45%

37%

 

2013 ACURA ILX

Acura now slots the ILX into the bottom of its lineup, the spiritual succesor to the Integra sedan. Like that car, the ILX shares the platform of the Honda Civic, with sheetmetal that is completely unique to Acura. The ILX lineup will be 4-cylinder only, with a base 2.0L coupled with a 5-speed auto (150 hp/140 lb-ft) or upgraded 2.4L with a 6-speed manual (201/170). There’s also a 111-hp hybrid version, which gets 38 mpg combined. Especially in 2.4L guise, the car is satisfying to drive, with some nice chassis upgrades from the Civic, and the inte­rior is in line with the rest of the Acura lineup.

ALG OUTLOOK

The ILX is well-executed, but the low end of Acura’s lineup is getting crowded, and the styling of the small­est sedan doesn’t set it apart. Fortunately, Acura’s volume targets are modest.

September/October 2012

24 Month

36 Month

48 Month

60 Month

Acura ILX (2013 MY)

65%

53%

45%

37%

Acura Average (2012 MY)

58%

48%

39%

32%

Premium Compact Average (2012 MY)

59%

48%

40%

32%

 

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