Auto sales are rebounding in the U.S. Economist Jim Rounds will talk about what’s leading to the increase in auto sales.
Ted Simons: Good evening. Welcome to "Arizona Horizon." I'm Ted Simons. Arizona auto sales are expected to show a 12% increase in for June. That compares to 8% growth in the U.S. over all. Both numbers would represent the strongest showing for auto sales since the great recession. I'll talk to an economist about what's behind the spike in numbers for new car sales, but first producer Lorri Allen and photographer Scot Olson look at the used car market and how it correlates to the surge in auto sales.
Lorri Allen: Used car dealer Ace Christian analyzes the numbers. Sales are up about 15% this year. The bad news?
Ace Christian: The problem is the inventories are still short. It's going to take a long time, a real long time before they get to the levels they were five years ago.
Lorri Allen: Used vehicles are in short supply all over the state according to the independent dealers association.
Dave Warkentin: Folks that have even less inventory than we do over here, they are traveling over to Arizona buying cars and shipping them back to the east coast taking our cars out of inventory, so this is driving the price of cars up. We have dealers that are going to auction that can't believe how much they are having to pay for a car to have it in their inventory.
Lorri Allen: The demands for used cars has hiked their prices, but the rise in new car sales could help.
Ace Christian: What that means for me is that more vehicles are going to be traded in. Which means more supply at the auction.
Lorri Allen: So shoppers could have more from which to choose. And they may find a kinder, gentler used car sales staff. Christian says those who survived the recession are better dealers.
Ace Christian: They got better practices. One of their practices that I have heard over and over again is that they treat the consumer like they would want to be treated.
Lorri Allen: Sean says he liked the way he was treated. He just bought a Lincoln.
Sean Whitworth: The information that they provided to us was not just, hey, come get a car, bring this, this and this much money. It was more they did a great job explaining everything. It just showed a feeling of actually caring and not just about their bottom line but in actually helping us in obtaining another car.
Lorri Allen: Industry analysts predict more people are ready to obtain another car. Pent up demand remains a factor.
T Dave Warkentin: hey drove that car as long as they really feel comfortable with and are saying, I'm going to get a new car even if maybe nothing has changed for them. They are just saying okay, we're getting a new car or getting a replacing our car, trading it in is kind of the American way.
Ted Simons: And joining me to talk about why auto sales are increasing and how that growth impacts Arizona's economy is economist Jim Rounds of Elliott D. Pollack and company. Good to see you again.
Jim Rounds: Good to be here.
Ted Simons: What's happening?
Jim Rounds: We went through a period during the downturn where individuals were uncertain about their jobs. Their housing values dropped significantly. Their retirement portfolios fell off a cliff and they didn't feel comfortable buying a new car. It wasn't even about the current income, their paychecks, but their over all level of wealth. They felt things weren't as good, so we saw periods where we were declining on a month by month basis compared to the prior year by about 35%. What has turned around, people's stock market portfolios are in good shape. Housing values are up quite a bit over the last couple years.
Ted Simons: What about prices? Let's stick with new cars. Are prices up, down, making a difference here?
Jim Rounds: Prices are starting to go up. Looked at some data just released this past week where U.S. manufacturers are about 90% capacity in terms of their production, which is very high. The segment indicated that we might have a shortage of some of the used cars. Well, it's going to take a while for car manufacturers to ramp up to this new demand, so prices are going up but they are not going up to the point where it's going to dissuade buyers. The impact from the economic recovery will outweigh that, I believe.
Ted Simons: what about the impact of interest rates?
Jim Rounds: Interest rates are starting to go up. If you look at the different rates that put the loans together it varies a lot. Now, if a car loan goes up from % to percent, that's not that big of a deal. Add another 20 bucks to the payment maybe. But if it goes from three to 6%, which it could, that's like adding another $2,000 on to the price of the car. We probably won't see that impact, the sales as much. Probably another couple years at least.
Ted Simons: What are people buying?
Jim Rounds: A few years ago the SUVs were very popular an trucks. We're still America. We're still selling a lot of trucks but there's been a shift from the SUVs to the more fuel efficient cars. That's kind of continued. Gas prices have been somewhat stable. It's not like we went from three bucks to six bucks a gallon. The ratio of the small cars to the trucks has been relatively stable but we're seeing a little bit of movement towards the more fuel efficient cars.
Ted Simons: What about gas prices and the impact on auto sales?
Jim Rounds: If it goes up significantly and right now the forecast is for it to be relatively stable for a while, it could have an impact on shifting to some of the bigger cars again. The welt effect on the consumer so consume remembers buying more cars but you could see a dampening impact. There's a pent up demand and interest rates haven't quite hit that point where it's going to dissuade buyers.
Ted Simons: We heard about pent up demand in the package as well. How much was out there? We had cash for clunkers program, other ideas to push people to buy cars. We heard at the time if you push them to buy cars now they won't buy them later. Sounds like they bought them later.
Jim Rounds: Well, they did. The cash for clunkers was really interesting. It caused a huge spike in sales. You could see it in historical data, then followed by a trough. That wasn't the best program. We got a lot of people during the downturn that couldn't afford a new car we convinced them to buy a new car. That wasn't a good plan. People have been hanging on to that car and they are ready to buy. That growth in Arizona was around 12%, it will slow a little bit. But if the long term average is around 6% but the next couple years we go up 10, 9, 8 that's still above average.
Ted Simons: Are dealers ready to sell? Have they changed their tactics, their formulas? When you go to a car lot, are you seeing a different kind of car sale?
Jim Rounds: Dealers were very willing to work with the buyer the last two or three or four years. Now that they are seeing extra demand and seeing car manufacturers hitting 90% utilization of their factories it's more difficult to get those cars, they are going to be able to negotiate on their side a little bit more and get higher prices. Their lots are not completely filled, they will be soon. Economics is wonderful. Everything adjusts within a short period of time. So these kinks will work themselves out but expect growth to continue the next couple three years.
Ted Simons: Tell us about the impact of the auto sales numbers on Arizona's economy over all. We'll stick with Arizona here. Bit of an indicator. Which direction and how much?
Jim Rounds: 12% in terms of the rate of growth for sales from the prior year. I'm expecting that to be the same this year. Then if it falls it will maybe fall to then down to eight. Probably 20, 15--20, 16 before we see things at more normal levels, but it's adding to the community sales tax collections, to state sales tax collections, so it's benefiting the state as a whole. It's still a nice signal that things are moving in the right direction and is consistent with the other economic data that we saw.
Ted Simons: It seems as though the auto industry may be more resilient than other sectors. True?
Jim Rounds: They doing well now. We have seen significant bankruptcies before. I was trying to figure out where everybody stood in terms of paying off the bailout monies. It was difficult to put together. But most of the manufacturers have paid off the bailout money. I think Ford was listed as one of the more problematic companies in terms of paying it off but everything is working out. I'm not a big fan of government bailouts but in this particular case I don't know if it was the wrong thing to do.
Ted Simons: It's interesting. You wonder where we would be and could you still find that new car if the bailout hadn't happened. You're looking at % this year, obviously a bit of easing off. It looks like it's going to be stable for a while at least.
Jim Rounds: Yes. We're going to see decent growth. It's going to match a lot of the other economic data we're talking about, so we're moving in the right direction whether it be autos or other sales.
Ted Simons: Jim, good to have you here.
Jim Rounds: Thank you.