Two Cars Better Than One

An auto analyst says sales would be higher if 35- to 44-year-olds bought multiple cars.

TRAVERSE CITY, MI – Auto sales are getting better, but the speed of recovery should be faster, says industry analyst Itay Michaeli.

He points to one demographic group – people aged 35-44 – as the reason sales aren’t more robust.

It’s not that they’re not buying a car. It’s that their households are not buying two, says Michaeli, director-U.S. autos and auto parts for Citi Investment Research and Analysis.

“The question is not so much whether young persons will buy a car as much as whether the 35- to 44-year-olds will buy more than one,” he says at the Management Briefing Seminars here.

The seasonally adjusted annual rate for July was 15.6 million units, high enough to stoke optimism from industry observers who contrast that with moribund sales of 10.4 million in 2009, Michaeli says.

But one might think today’s SAAR theoretically would be 16 million units, considering that the recession is over.

Young people who are gainfully employed “are playing the game by buying a car,” he says. “But the 35-44 group is the problem. Too many of them are not willing to buy that second car.”

In the past, more 2-car garages were filled to capacity. But that’s changed. “The industry needs 35-to-44 year olds buying car No.2,” Michaeli says. “Car No.2 is not a need, it’s a lifestyle choice.”

The worry is former 2-car households that downsized to one during the recession will keep it that way. “If that happens, they might never buy a second car. It is a potential long-term threat.”

Most people who delay vehicle purchases continue to blame the economy for their reluctance, even though times are better, Michaeli says, citing a Citi survey.

The survey indicates many people on the sidelines fear a situation in which they buy a car, then become unemployed despite an improving job market.

“I still believe job-assurance programs could be the magic to unlock this,” Michaeli says, referring to offers by some auto makers, notably Hyundai, to buy back a car from a purchaser who shortly afterward unexpectedly becomes jobless.

Pent-up demand occurs when people replace old vehicles showing their age. “But going from one car to two is not pent-up demand,” he says.

Because better-built vehicles of today last longer, owners replace them less often, a relatively new consumer pattern. “It means the replacement cycle has been dramatically lengthened,” he says. “In the past, this is something we never considered.”

Citi is bullish on the auto industry “but not ignorant of demographic trends involving the 35-to-44 age group,” Michaeli says.

Other industry optimists at the conference include G. Mustafa Mohatarem, chief economist at General Motors. “I have no doubt the recovery will continue,” he says, adding that “people will continue to buy cars.”

The Center for Automotive Research’s forecast is less rosy. “It takes a long time to get back to previous peaks,” says CAR Chief Economist Sean McAlinden, referring to annual sales of 17 million units in the early years of the last decade. “It is a slow recovery.”

CAR doesn’t see auto sales approaching 16 million until about 2016, he says, citing negative factors such as sluggish gross domestic product growth and climbing interest rates. “We’re fairly pessimistic.”

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