It's a Great Time to Be a Consumer

ORLANDO, FL — General Motors Corp. and Ford Motor Co. are on the ropes, but the overall U.S. economy is strong, auto sales remain vibrant, and it is a great time to be a consumer.

So say two economists, Paul Taylor and Michael Mandel, at conferences in conjunction with the 2006 National Automobile Dealers Assn. convention here.

“So much of the drama in the last months is that manufacturers are facing tough times and competition remains tough, but that has provided attractive prices, which attract more consumers,” says Taylor, NADA's chief economist.

He says the economy can support vehicle sales well above 16.6 million units, “but price matters in this market. Consumers are increasingly price sensitive.”

The industry in 2005 sold 16.95 million new light vehicles, according to Ward's data. The average transaction price was $28,000, according to NADA.

The economy and market point to another strong year for vehicle sales, Taylor says. But he forecasts a slight drop to 16.8 million units this year, in part because of an anticipated increase in interest rates.

Dealer confidence remains relatively strong, despite GM's and Ford's profit losses last year, Taylor says.

Crossover/utility vehicle sales rose 14% in 2005, compared with 2004, notes Taylor, citing Ward's data. He predicts the CUV segment will grow 15% more this year.

Yet to enter the market's mainstream are vehicles with hybrid-electric powertrains. About 205,800 were delivered last year, mainly to “early intenders of technology and people making a ‘green’ statement,” says Taylor. “It's selling to a specialized market.”

Sales will increase as more auto makers enter the hybrid-electric vehicle segment, but it will take about 1 million in annual deliveries for HEVs to enter the mainstream, says Taylor.

Difficult to predict will be HEV future values as used vehicles and their long-term service needs, because “we don't know enough about replacements of batteries in seven years,” says Taylor.

He adds, “It is terrific technology, but most engineers say the real solution is not to have two drivetrains. It becomes complicated. But it is a tremendous time to be a technician with advanced electronics training. That will be a big opportunity.”

While sales of truck-based SUVs fell 13%, to about 2.4 million units in 2005 compared with the previous year, “it still is an important segment with relatively strong sales,” Taylor says.

Considering that, GM was well-advised to introduce a new line of fullsize SUVs, even though some critics have questioned the auto maker doing that in light of increased gasoline prices, he says.

This is the year luxury car sales will show significant sales gains, a reflection of household incomes climbing back up from a drop after a 1999 stock market peak, he says.

Mandel, chief economist for Business Week magazine, tells dealers and others at a J.D. Power and Associates conference here, that he is bullish on the economy because “people in the U.S. adjust, adapt and take chances — and, with all the opportunities whirling around, that is a benefit.”

But Mandel expects domestic auto makers' market shares to continue to slide. Taylor calls it “a 3-decades-long issue.”

Last year, Mandel predicted auto sales had peaked. “I think I was pretty much wrong on that one,” he admits.

He predicts the housing boom will end in 2006, which will be “the biggest economic event of the year,” as real estate prices drop and consumers cut back on spending heavily on home renovations. (“People don't bat an eye spending $50,000 for a new kitchen,” says Mandel.)

The impending housing bubble break could benefit other segments of the economy, such as the auto industry.

“The housing market has been sucking in money that people now will spend elsewhere — like on cars,” says Mandel. “Short-term, it will be a painful time in the housing market, but good times for consumer spending and investors.”

He says the people that will be hurt the most are young home buyers who entered the market in 2000-2002 and who bought high in a seller's market that is now ending.