Just to Clarify

July Vehicles Sales as an Economic Indicator

Tuesday the car companies will report sales for July. Our forecast is for sales to exceed the previous highpoint for the year (achieved in March) and be the best sales result since last year’s Cash for Clunkers spike.
 
Sounds good, right? I’ll bet some of you are already wondering what’s the catch.
 
Well, there is some good news. A sale is a sale and when sales are up, that’s a good thing. The twist is that we have gotten in the habit of looking at the monthly sales—particularly their seasonally adjusted annualized rate (SAAR)—as an indicator of economic health. 
 
Here’s where it gets tricky. The SAAR is based on an algorithm that is designed to account for seasonal shifts in demand. For example, convertibles sell better in the summer than winter. Four-wheel drives show the opposite.
 
In a stable economy, SAAR does a pretty good job and the monthly SAAR numbers come in very close to the total sales at the end of the year.
 
But what SAAR doesn’t take into account is that buyer psychology shifts in times of economic distress. In very imple terms, the market can be segmented into two groups. Early adopters; buyers who what the latest vehicle and features and are willing to pay a premium. And the deal seekers; those who are willing to wait to save some money. Early adopters tend to buy in October when the most new models are introduced. Deal seekers pounce in July and
August when the summer selling season begins. 
 
When times are tough, more consumers become deal seekers and fewer are willing to pay a premium. In essence, not only are buyers fewer in number, they also tend to be more pragmatic.
 
SAAR makes no attempt to incorporate this shift in market physiology. This means that during periods with sales events, the SAAR will jump up and during times when buyers are not expecting vehicles to be on sale, the SAAR drops. 
 
Just look at June: The SAAR dropped to 11.2 and now just one month later the July SAAR will jump to around 11.8. This suggests that the economy is improving, when the reality is that nothing much has changed at all.
 
This also suggests that sales will look OK again in August, but will likely soften in September. (With some support from early adopters snapping up the new models.)
 
Moving through October to November, look for further weakness, as neither group will have a good reason to buy.
 
One last complication: July 2009 was the start of the Cash for Clunkers “stimulus.” This means the comps with last year will be meaningless. (Actually, this has been the case for the past couple months. Last year, many buyers were
waiting for the program to launch. This held back sales, making the comps this year look artificially rosy. For July and August, the opposite will be true.)
 
So what inferences can we make from the July sales numbers? More on this is the next few posts…
 

Welcome to Just to Clarify

Edmunds has a wide range of communication channels; AutoObserver, Inside Line, the Internet’s largest new vehicle research site and a host of blogs.

So why start another one?
 
First off, this is not a forum to repeat what is covered elsewhere. Instead, I would like add something extra. The auto industry, like the world at large is wrestling with complex issues. Yet attention spans seem to be shorter and
shorter. Our collective gaze flits from one “hot issue” to the next. Arguments are formulated with key points exaggerated. 
 
It has become routine to tie issues to emotive triggers as a lazy alternative formulating reasoned argument. 
 
So be it. Far be it from me to stand in the way of societal evolution. What I can do is create a small space where we can step back, look at information in an unfiltered form and engage in a discussion in what it all might mean.
 
So I will be kicking it off, but am hoping that you will respond with your ideas and comments. Let’s try to inform the discussion, to avoid any well-worn political ruts—and above all, have some fun!