2019 for the auto retail industry has come to a close and many of us have been eagerly waiting to see the final numbers. Here to give us an in-depth analysis of the key highlights and results for 2019 is NADA chief economist, Patrick Manzi. We’ll also discuss the current strength of the auto industry as well as predictions for Q1 2020 and beyond.
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Jim Fitzpatrick: Thanks so much for joining us on today’s edition of CBT News, Patrick.
Patrick Manzi: Oh, thanks for having me, Jim.
Jim Fitzpatrick: Sure. So let’s talk a little bit about 2019 and how the auto industry finished. What’s your take? What are some of the big takeaways from 2019 that jump out?
Patrick Manzi: So of course the biggest takeaway is it’s the fifth straight year of 17 million plus new vehicle sales. We finished out the year around 17.1 million new light vehicle sales. The big underlying trends, consumers can’t seem to get enough crossovers, SUVs, and pickups. Crossovers now are closing in on 41% of the whole market, which is just huge. And then when you look at the spread between light trucks and cars, light trucks are up to 72% of the total market. And that’s up from a 50/50 marketplace just 10 years ago.
Patrick Manzi: Also transaction prices continued to rise because of consumers’ choices there for those crossovers and SUVs, and that’s pushed monthly payments up to $590.00 on average. So we’re rapidly approaching a $600.00 a month average monthly payment, which I think is pretty shocking right there.
Patrick Manzi: The other kind of good news is we saw the interest rate cuts in the what was it, the third quarter of this year, and then another one in the fourth quarter. And we’ve actually started to see average interest rates fall down a little bit. According to JD Power, we’re around 5.2%, and that’s down about 90 basis points from the peak in April when we around 6.1%. So this is good news for consumers. With the lower rates we’ve also seen loan terms fall off by about half a month. We’re right around 68 and a half months where we were around 69.
Patrick Manzi: So these are all good signs. But you know, the affordability issues on the new side have been pushing many consumers to used and there has been a lot of available inventory out there for consumers, mainly in the crossover space, and they’re all going to be equipped with today’s modern safety features, all the things that consumers want.
Jim Fitzpatrick: Patrick, the affordability factor, we’ve heard a lot about in the last couple of years, obviously with the average price of a car, as you just mentioned it at $37,000.00 plus it’s absolutely crazy where this may be headed. Do you see that as an issue that dealers are going to be challenged as we move forward?
Patrick Manzi: You know, I think so. Fortunately there are still a lot of options out there in the $20,000.00 price range. If consumers have the means to, I think they may choose one of these more expensive vehicles new, but even if they desire something a new vehicle that would cost 40, there’s a three year old off lease vehicle sitting on the used lot that’s probably down to below $30,000.00. So there’s going to be the option there for consumers to get that vehicle that they want. Now I think that even people who could afford a new vehicle, maybe balk at these, such high prices and even they may choose used as well, but there’s always leasing too. Leasing remains very popular. And I think average lease payments are about a hundred dollars less than that average new financing. So for a customer who really wants to have the new car, that peace of mind with warranty, leasing is still a very viable option for them.
Jim Fitzpatrick: Sure. We have heard that that bank delinquencies and loan delinquencies have ticked up a little bit. I guess the consensus is that people are getting approved on these loans and stepping up to these expensive SUVs and such, but can they really afford it? Is that a concern of yours at all?
Patrick Manzi: It’s up a little bit, but when you think about an uptick in delinquencies, you also need to consider the growth in the total market over the past decade. We’ve just seen so many new vehicle sales that there’s bound to be an increase in delinquencies as well. And right now at this point it’s happening mainly in subprime space and those are risky loans to begin with. So the lenders know what they’re getting into when they write a contract with that customer. But as of right now, it’s nothing that I would be too concerned about, because most people are still being, or most lenders out there still being very cautious with their lending.
Jim Fitzpatrick: Sure. And as you mentioned fifth straight year of over 17 million new vehicles sold, which is an outstanding job, there’s no question. Talk to us a little bit about the strength of the economy as we move into 2020. Things will stay the same, get stronger, get weaker? What’s your perspective on that?
Patrick Manzi: So the headline overall measure that we like to use when thinking about the economy is GDP growth. GDP growth is going to cool a little bit next year to just below 2%. We’re expecting 2.3% growth this year excuse me for 2019 when the final numbers come in. And then we expect it to cool it around 1.7, 1.8% next year. This is not a bad thing, the US is still growing when many other countries across the globe have, are posting much lower growth rates, even contracting. So relatively speaking the US is still in a very good position. Other key metrics to take a look at. Consumer spending is still strong growing around 3%. Wage growth also around 3%. We still are seeing consistent job gains each month. I think the December numbers were solid yet again. And I forget the streak of job gains, but it’s a record right now, right?
Patrick Manzi: So all of those things make me think that, you know, the US economy is going to be in very good shape next year. And then when we think about interest rates, borrowing costs, the Fed seems poised to not touch interest rates this year. I think they’re going to stay at that same level between one and a half to 1.75% for the federal funds rate. And so that’s going to give more people access to credit at better rates. And when they have access to credit, they’re going to go out and continue to spend money, buy houses and cars. So from where I sit right now, I think we’re poised for another great year. We’re also going to see the ratification of USMCA shortly. Today the President is supposed to sign phase one of a trade deal.
Patrick Manzi: And really what those two things are going to give us is more certainty. That’s kind of been the wild card in the past two years, trade related uncertainty. Businesses aren’t sure what the policies are going to be, so they may have held back on their investment and once we get this certainty, I think we’re even going to be beginning to see business investment tick up again too, which bodes well for GDP growth down the road.
Jim Fitzpatrick: Sure. In the spring and summer we heard a lot about tariffs and and obviously everyone was talking about tariffs and it was at the top of most the automotive executives minds. Has that now subsided and not as big a concern?
Patrick Manzi: I know I’ve talked about tariffs on this program several times before.
Jim Fitzpatrick: Right
Patrick Manzi: It’s not a concern really anymore. I think the window has closed on that. It seems like with the passage of USMCA, we can put that in the rear view mirror. Now who knows what may happen with this administration, we could be woken up with a surprise, but I think that’s a very low probability occurrence.
Jim Fitzpatrick: Yeah, for sure. And talk to us a little bit about the EV market. Where do you see that going?
Patrick Manzi: So EVs, I think they’ve gained about two tenths of a point of market share. They’re 1.4% of the whole market.
Jim Fitzpatrick: It gained two tenths of a market share.
Patrick Manzi: Yeah, I know, right?
Jim Fitzpatrick: That’s so negligible.
Patrick Manzi: So it’s still slow trickle to adoption. If you even add in plug in hybrids, it’s still less than 2%. And what I do expect is, there are a lot more entrants now, EV entrants, but they’re going to be in popular segments. So we’re going to see more EV crossovers and that’ll kind of be the test. Right? You know, maybe you didn’t buy an EV now because it’s just a car, cars aren’t cool right now. So you held off. I think in the next year or two we’ll see if consumers really, if it’s a powertrain issue or if it’s a design issue. Right?
Jim Fitzpatrick: Right.
Patrick Manzi: One of the things I think personally, I think a plug in hybrid is a nice step along the way. Right? You get to experience what it’s like to drive an EV vehicle every day because some of these are getting 40, 50 miles of range.
Jim Fitzpatrick: Right.
Patrick Manzi: So for your day to day life you can be an EV driver, but if you need to go take that long trip to see your family, you can still make use of gasoline stations and quick refuel time. So I’m going to be paying attention more to the adoption of plug in hybrids because I think that’s an easier jump for a lot of consumers. But certainly there’s going to be a lot of EVs coming onto the market next year. And so it’s really just will consumers buy them? I’m not sure at this point. Gas prices are still low, but there’s some really cool stuff out there. So I’d be surprised if you know, if it went unloved completely.
Jim Fitzpatrick: Yeah, for sure. Not to continue to bring up some of these negative points, but that’s my job here, right?
Patrick Manzi: Yeah.
Jim Fitzpatrick: We heard in the summer talk about a recession looming. Some of the media out there were bringing up the R word every chance they could get, for whatever reasons. And obviously you’re an economist. Is that off the table now? Are we all convinced that there’s no recession looming?
Patrick Manzi: Well it’s hard to say that there’s no recession looming ever, right? But what triggered that last year, we saw the yield curve inversion.
Jim Fitzpatrick: Right.
Patrick Manzi: And we saw the Fed tightening lending policy there, right? And those are typically two of the signs you look for before a contraction begins. Right? Since then the yield curve has returned. Longer term bonds have higher yields than short term bonds. And then we also have seen the Fed lower interest rates. So those two recession signals have now gone away and we are still expecting an economy with solid growth around 2%, job gains out there. There is really nothing on the horizon right now that that would lead me to believe we’re going to have a recession this year.
Jim Fitzpatrick: That’s great. Great news for dealers. Another great year. Having said that, what’s your prediction with regard to a SAAR for 2020?
Patrick Manzi: I’m going 16.8 million for 2020.
Jim Fitzpatrick: 16.8?
Patrick Manzi: Yeah. I think with the demographic changes, mainly more millennial people, millennials coming into their prime earning years, starting families, moving to the suburbs, there’s going to be enough demand from that segment and Generation Z right behind it. We could sustain a 16.5 to 17 million unit SAAR each year for the next several years. So I’m confident in the strength of this market. And there’s also at least from a dealer perspective, even if we see a little bit of decline on the new side, there’s a lot of opportunity in used and there’s a lot of opportunity in fixed operations to help our dealer members stay profitable.
Jim Fitzpatrick: Yeah. That’s for sure. Those are two areas that can be very profitable for a dealer. As you know, with margin compression, 17 million new vehicles sold are great, but there’s not a whole lot of money being made these days on the sale of a new vehicle, right? It’s all of the other departments that seem to be doing very well, used cars and fixed ops, obviously two of them. So well Patrick, Patrick Manzi, I want to thank you so much for joining us on CBT News. I know that our dealers get a lot out of your visits here on our stations, so thanks so much and hopefully we can catch up with you at NADA in just a few weeks.
Patrick Manzi: Sounds good, Jim. Thanks for having me.
Jim Fitzpatrick: Thank you.