Pub. 1 2011 Issue 1

12 AUTOMOBILE DEALER NEWS ILLINOIS www.illinoisdealers.com that the number of drivers of vehicles in the country is steadily growing too. • There has not been a major shift in the country in people giving up their personal vehicles for mass transportation alternatives. Given the above, it is entirely possible that the pent up new vehicle demand generated over the past three years could easily be over 16 million vehicles ( 17.1 minus 11.7 = 5.4 times 3 = 16.2), as we enter 2011. Based on an anticipated U.S. 2011 new vehicle sales S.A.A.R of about 13 million, the pent up demand at the end of 2011 could be approaching 20 million vehicles. Many automotive manufacturers, suppliers and other industry analysts are currently forecasting that the slow and gradual improvement in the U.S automotive industry will continue through 2011 and 2012 with estimated U.S new vehicle sales levels of approximately 13 and 15 million, respectively. If this is achieved, the average growth rate in the U.S. new car and light truck S.A.A.R during the 2009 – 2012 recovery period would be approximately 12.5 percent per year. After 2012, the prevailing body of thought is that the U.S. automotive industry should ramp up fairly quickly to the pre- 2008 five year average new vehicle S.A.A.R of 17.1 million and even higher. In recent conversations with some dealers, we have heard repeated sentiments of continued cautiousness and skepticism given how slow the U.S economic recovery and the recovery in their own communities has been progressing. It is interest- ing to note that the primary reasons cited by these dealers for their caution are generally the same reasons U.S. consumers are holding back in their spending. High unemployment and residential mortgage foreclosure rates within specific dealer’s market areas are creating a drag on near term optimism for these dealers. In discussions with other dealers however, we have noted a more positive outlook and have witnessed indi- vidual dealer investments in facilities, additional franchises, etc. to support this view. The U.S. rate of economic recovery certainly has been agonizingly slow since the recession technically ended in the middle of 2009. This recession ref lected the highest job losses of any recession in the past sixty years. The unemploy- ment rate nationally has only modestly improved and many economists are predicting that a national unemployment rate of 8 percent or higher will likely prevail well into 2012. The high unemployment rate continues to hold back real im- provement in the residential housing markets and as a result, continues to aggravate the already high rate of residential mortgage foreclosures. Given these conditions, consumers are saving more, paying off debts and being cautious in their spending, especially for big ticket items like automobiles. Consumer spending comprises the majority of the U.S. Gross Domestic Product (GDP). Es- timates of U.S real GDP growth over the next couple of years are in the 2 – 3 percent range. Normally after a recession, real GDP growth is well above 5 percent and is sustained over many months as the economy regains strength. What has made the most recent recession unique has been the longevity and depth of the high unemployment combined with the very slow eco- nomic recovery rate. Many economists are of the belief that to measurably lower the current high unemployment levels, consumer spending and as a consequence, real GDP, must be significantly higher than were they are right now and must be sustained at this higher level for many months. However, frustratingly, the current high unemployment continues to foster consumer uncertainty and lower spending. What we have here is a classic “What comes first, the chicken or the egg?” It appears likely that the pressure from the growing pent up demand is going to be the force which ultimately motivates the would be new vehicle purchaser to make the decision to acquire a new vehicle. Consumers have coped temporarily in their hesitation to buy a new vehicle by holding on to their existing vehicle longer and for some, gravitating to a used vehicle purchase. This scenario cannot continue indefinitely. According to the N.A.D.A., the average age of a vehicle on the road in 2009 was 10.2 years and the vehicles scrapped were 15.3 million. With the shortage of used vehicles in the market, the rising fair market values of certain late model used vehicles has narrowed the gap between the retail cost of these used vehicles compared to the same model new. In addition, given the rapid rate of technological and gadget changes in newer models, the consumers desires to have the latest and greatest, versus hanging on longer to an older ve- hicle, is likely to try many consumers patience levels. While the recovery in the U.S economy has been slow and gradual, the recovery of the U.S automotive industry is pacing itself at what I believe is a faster clip due to the forces of pent up demand giving the industry a lift. Lets all hope that in 2011, this lift will continue and get even stronger. Not only will this cause busier showrooms and higher profits for you, but hope- fully, it will jump start other segments of the U.S economy as well, which will be good for all of us. Q Q vehicle demand — continued For more information on the subject of new vehicle pent up demand, please contact the author of this article, James Eagan CPA, Partner and Automotive Consultant, Plante & Moran PLLC, at 847.628.8865, or you can e-mail jim.eagan@plantemoran.com.