Steel Markets

U.S. Auto Outlook Appears Promising Through 2025

Written by Sandy Williams

The U.S. automotive industry showed remarkable resiliency in 2020 despite a production shutdown in March and the most challenging year since the Great Recession. U.S. auto sales ended the year at an estimated 14.6 million units, well below forecasts of 16.7 million, yet incredibly robust amidst a pandemic, high unemployment and an economic recession.

U.S. auto sales fell 48 percent when the coronavirus hit, dropping from a peak seasonally adjusted annual rate of 17.2 million units in February 2020 to a 9.1 million vehicle trough in April. To illustrate the dramatic decline, during the 2008-2009 recession it took 18 months for auto sales to bottom at 9.2 million units in February 2009. In 2020, it only took two months, said Ford Chief Economist Emily Kolinski Morris during the Automotive Insights Symposium held Wednesday. Recovery from the last downturn was a 52-month stretch before auto sales again saw a SAAR above 16 million units. Current sales indicate the U.S. may reach that mark again in late 2021.

The unemployment rate during the February 2009 trough was 8.1 percent compared to 14.7 percent in April 2020, yet over 9.0 million vehicles were sold in both periods. Morris said several factors have contributed to this conundrum.

Sentiment on whether it is a good time to buy a new vehicle was declining heading into the crisis, but low interest rates and prices in 2020 were an incentive for consumers to buy. Lower income households were disproportionately affected by job losses and were less likely to buy new vehicles. Higher income brackets were relatively unaffected and, with COVID restrictions preventing access to other sources of consumer spending, vehicle purchases became an attractive alternative.

The pandemic also created a shift away from use of public transportation and ride sharing, resulting in a rise in used vehicle sales. Airline restrictions and consumer fears of increased risk of infection during travel made driving a safer alternative.

The auto industry will benefit from low interest rates and monetary stimulus packages despite a sluggish employment recovery, said Morris. A quicker recovery from the pandemic, increased fiscal stimulus and monetary policies, along with consumer savings cushions due to constrained services spending, could boost auto performance in the near term. A new administration and passage of an infrastructure bill may also boost employment and lift the economic recovery.

Risks to the economy and the auto industry include uncertainty regarding the pandemic. The slow distribution of vaccines is likely to delay herd immunity and continue to constrain activities for the remainder of 2021. Employment loss and a permanent shift to remote work and online shopping could reduce miles driven and new vehicle sales, added Morris. It is possible there will be less need for two vehicles per household and consumers will hold on to vehicles longer.

Haig Stoddard, Senior Industry Analyst for Wards Intelligence, estimates it will take 4-5 years to reach pre-pandemic levels with more upside than down, especially in 2021 and 2022. Sales will increase through 2023, but it will be a while until sales reach 17 million again, he said. Sales are expected to continue to increase year-over-year through 2025.

Vehicle production is expected to be back to 2019 levels in 2022 or possibly in 2021 if demand picks up more than forecast. North American production capacity is increasing with the bulk of new capacity in the United States.

Inventory is a metric to watch, said Stoddard. Sales volumes have been averaging about half of each month’s starting inventory since July. Supply chain disruptions could limit production and affect future sales.

A current shortage of semiconductors has done just that. Several auto manufacturers have been forced to temporarily halt production due to unavailability of microchips, a critical component for vehicle operation used in everything from engine controls to information display systems. During the auto shutdowns last spring, microchip makers shifted production capacity to consumer electronics, not anticipating the resiliency of auto demand.

A spokesperson for auto part supplier Continental said semiconductor lead times are six to nine months and the bottleneck is expected to continue well into 2021. If the problem is largely resolved by the second quarter, most production will be made up later in the year, said Stoddard.

Wards Intelligence said that at the end of 2021 supply of light-vehicle inventory stood at 48 days, well below the 60 days typical for a month. Highest vehicle demand remains in the truck category, which could have low inventory throughout this year, but other segments should be at comfortable levels by second quarter, said Stoddard.

Fleet sales account for low SAAR monthly rates. Sales have been down as the pandemic hit demand in the commercial and rental car sectors. Automakers are likely to default to retail production where profits are strongest, causing a pinch in supply on the commercial side.

Pricing incentives played a major role in auto sales during 2020, but will not be as prevalent in 2021. Incentives were pulled back at the end of 2020, but manufacturers still reported strong sales.

Another upside potential for the industry is the higher age of vehicles currently on the road, which generally portends increased demand for new vehicles. New products coming out in 2021 and 2022 should also energize sales, said Stoddard.

By Sandy Williams,


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