US auto industry accelerating upward

I recently updated and expanded my outlook for the United States auto industry, and I am happy to report that the news is all good.

My latest forecast calls for an increase of 5 percent in the total number of motor vehicles assembled in the U.S. in 2015. This follows an expected gain of well above 6 percent in 2014. In 2013, the total number of motor vehicles assembled expanded by 6.7 percent.

As the chart illustrates, this data hit a record-low total of 5.7 million assemblies for the year in 2009, but it has climbed rapidly ever since. Careful inspection of the graph will reveal that the slope of the forecast part of the line is a bit less steep than it has been since 2006, indicating that the recovery is maturing. In terms of the actual number of units assembled, the increase in 2015 will be a bit lower than the gains in 2013 and 2014.

But what is most exciting to me is the fact that the industry will finally get back to its pre-recession levels next year. Even with the recession in 2001 included in the figures, the number of motor vehicles assembled in the U.S. averaged right at 12 million units per year from 2000 through 2006. If my latest forecast is accurate, then the U.S. auto industry will get back to the level of 12 million units in 2015. So after nine long years, the industry that once defined U.S. manufacturing will at last be fully recovered from a statistical perspective.

This forecast is based on a continuation of a number of trends that drive demand for motor vehicles.

The best indicator of market demand for automobiles in this country is the widely-reported monthly data on U.S. auto sales. Because I think of the auto industry as a major end-market for plastics processors, I focus mostly on the assemblies data because it represents the best indicator of the North American auto industry's demand for domestically produced plastics parts.

But the forecast of the future trend in the assemblies data is driven by trend in total market demand for autos. The monthly data on auto sales combines the sales of domestically produced autos with imported vehicles, so it is the best overall indicator of total market demand for cars and trucks in the U.S.

In recent months, U.S. vehicle sales have registered their best sales figures since 2006. For the year to date, the number of passenger cars and light trucks sold in the U.S. is up 5 percent when compared with 2013. In terms of units, the average so far this year is 16.4 million units (seasonally adjusted annualized rate). In 2006, total sales of just under 16.6 million units were recorded.

So the overall totals are impressive, but any car person will tell you that it's all about the mix. It is no secret that car companies garner more profit from certain types of vehicles than others. From a manufacturer's perspective, the question is, “What types of cars are being sold?” What is growth rate of passenger cars compared with that of light trucks (which include SUVs and minivans)? Are customers purchasing luxury cars or do they prefer the economy models?

So far this year the number of passenger cars sold is still a bit higher than the number of light trucks, but the light truck segment is by far the fastest growing. The data show a gain of just a bit more than 1 percent for passenger cars, but a jump of 9 percent in sales of light trucks. Gas prices have moderated a bit in recent weeks, so households could be a bit more inclined to buy a minivan or an SUV. But a large part of the demand for light trucks is likely due to steady gains in construction activity.

There is also a wide variance in the growth rates amongst the major car companies. Of the Big 3, Chrysler is the big winner so far in 2014. Chrysler's total sales are up 14 percent year-over-year, but they achieved this increase through a combination of a 16 percent drop in the number of cars sold and a 29 percent jump in their light-truck sales. General Motors has posted a moderate gain of just under 3 percent for the year to date, while Ford has struggled to stay even.

For the transplants, Nissan has registered a gain of 12 percent so far this year, and Toyota is up a solid 6 percent. The year-to-date totals for Honda are actually down slightly when compared with last year. The luxury car segment is enjoying strong demand, as sales for Mercedes-Benz and Bentley are up 9 percent, sales of Audis, Porsches, and BMWs have escalated more than 11 percent, and demand for Rolls-Royce cars has more than doubled.

So it is clear that the high-end of the market is doing well, but a more evenly distributed mix is preferable if the overall recovery in the industry is going to persist. And the trend in the economic fundamentals indicates that this should be the case in the coming months. The labor market has steadily improved this year, and the pace of growth in the employment data is expected to accelerate gradually through 2015. This will result in higher confidence levels and, more importantly, rising household incomes. There is still a large amount of pent-up demand for motor vehicles, and as the economic fundamentals improve this demand will be released.

Financing rates remain attractive, and banks and finance companies have been aggressive in their efforts to attract new customers. Automakers are attempting to rein in the number of incentives offered, but the competition amongst manufacturers and dealers is fierce and the public has grown used to these incentives.

As for cars that run on alternative fuels, the data does not indicate that market demand has shifted substantially toward these types of vehicles. Autos and trucks fueled by electricity or natural gas are available, but these markets do not seem to be at “critical mass.” It is still too early to write them off as the dominant technologies of the future, but it is not yet apparent that their time has come.

One other interesting development in recent weeks was the production of a 3-D printed car at the recent IMTS tradeshow in Chicago. In case you missed it, the goal was to print a car during the show and drive it off of the show floor. The body and chassis of the vehicle was primarily made of a carbon fiber composite material, and when it was finished it reminded me of the fiberglass dune buggies from the 1970s. Watching them make that car I could not help but wonder if this is what it was like for our great-grandparents to witness the birth of the auto industry at the beginning of the 20th century.