Stagnant wages are a drag on new-car sales
One reason U.S. auto sales still aren't quite back to the 17 million-a-year pace seen during the boom years before the recession: Many consumers, including most UAW members and many other blue-collar workers, haven't gotten much of a raise since then. Stagnant wages have made buying a new vehicle more difficult as the price tags keep rising, forcing some people with tight budgets to hold off longer, browse the used-car lot instead or take out a longer loan to reduce their monthly payment. Economists and dealers say shoppers don't fear losing their jobs as much anymore but often can't afford much more than what they already were paying on their trade-in. "Although unemployment's low, I don't think we've seen much growth in wages," said John McEleney, owner of McEleney Chevrolet-Buick-GMC-Toyota in Clinton, Iowa. "That all factors into a big purchase like an automobile." Overall, the market is growing, though not as quickly as it has every year since 2009. Across the country, new-vehicle sales have risen 6 percent this year. Automakers are on track to sell at least 16.4 million vehicles for 2014, which would be the most since 2006. But retail deliveries, based on registration data from IHS Automotive through September, have fallen this year in Iowa and 12 other states. Income growth in the past year has been below the national average in all but two of those 13 states, according to the U.S. Bureau of Economic Analysis. In contrast, states in which retail registrations have increased the most this year generally had above-average income growth during the most recent three quarters for which data are available, a period ending June 30. That was true in nine of the 13 states where auto sales have grown the fastest. On average, new-vehicle registrations increased by 5 percent in the 22 states with above-average in- come growth but just 2 percent in the 28 states with below-average income growth.
Szakaly: Other factors in play
"If wages were growing, we'd be in a market over 17 million already," said Steven Szakaly, chief economist for the National Automobile Dealers Association. "I think these wage and income challenges are with us for the next several years." Szakaly expects light-vehicle sales to come in around 16.9 million next year and somewhere between 16.5 million and 17 million in 2016. The industry's best years on record were 17.4 million light vehicles in 2000, 17.2 million in 2001 and about 3,000 vehicles shy of 17 million in 2005, according to the Automotive News Data Center.
Low rates, long loans
Dealers say low interest rates and widespread availability of six- and even seven-year loans have been critical to closing deals with customers whose paychecks haven't gotten much bigger in recent years. Chrysler Group has been offering seven-year, 0 percent loans to buyers in some Midwestern states this fall, turning $417 a month on a $25,000, five-year loan into a more palatable payment of $298. McEleney, a former NADA chairman, said about 10 percent of his business lately involves customers getting a deal in which their monthly payment remains the same as it was as on the car they are replacing, even if they buy something more expensive. "There's not too many people we can't get financed," he said, noting that his dealership's sales are up about 20 percent this year, significantly better than the statewide average. "That may be offsetting some of the economic stagnation." The downside of longer loans is that while they help make a sale now, they can make buyers delay their next purchase. "As dealers, we don't think that's a good thing. We'd love to see people in 36- or 48-month loans," said Tyler Corder, CFO of the Findlay Automotive Group in Henderson, Nev. But very often, he said, "the person has a payment in mind, and you have to go to the longer-term loans to meet that."'Steady recovery'
Three years ago, Nevada, where 18 of Findlay's 28 dealerships are located, had the nation's fastest-declining incomes, highest unemployment rate and highest home foreclosure rate. In 2014, with incomes finally on the rise, vehicle registrations are up 13 percent in Nevada, which is more than any other state, according to IHS data. "We don't hear people talking about affordability as much as a few years ago," said Corder, whose company ranks No. 25 on the Automotive News list of the top 125 dealership groups in the United States, with retail sales of 22,577 new vehicles in 2013."Our sales dove much more than the nation's did, so we had further to recover from," he said, "but we've had a good, solid, steady recovery. We're seeing really strong demand in our luxury franchises."
State of pay
In general, states where incomes are growing the fastest also have seen a greater increase in vehicle registrations. Here are examples.Â Change in registrationsRank in income growth**Â Â Change in registrationsRank in income growth**Above averageÂ Below averageNevada13%22Â Mississippi1%50Idaho10%1Â Nebraska-1%49Texas9%2Â Connecticut-1%41Florida8%10Â Indiana-2%46Michigan8%13Â Iowa-2%48California6%14Â New Jersey-3%34* Through Sept., from 2013** From mid-2013 to mid-2014Source: IHS Automotive, Bureau of Labor Statistics
Declining unemployment rates tell only part of the story for the auto industry. November was the 50th consecutive month of U.S. job growth, setting a record for the longest uninterrupted stretch since government statistics began in 1939. But many of those jobs come with lower paychecks than workers had in the past, making them feel unable to afford a new vehicle vs. keeping or buying an older one. "Whatever jobs are being created are not equal to the ones that were lost," said Lacey Plache, chief economist for Edmunds.com. In particular, she added, "Millennials have struggled in terms of jobs and income," which is a big reason automakers have struggled to attract younger buyers.Employee discounts
Automakers should be quite familiar with the idea that some workers have gone long stretches without a raise. Veteran UAW members haven't received a permanent increase to their roughly $28-an-hour wages in nearly a decade, and the Detroit 3 now have thousands of workers who earn lower, second-tier wages that start around $16 an hour. Critics of the two-tier wage system, which was created in 2007, say workers on the lower pay scale don't make enough money to buy the vehicles they build. But some dealers say it's the top-tier workers who are more hesitant to buy a new car or truck because their incomes have been stagnant, aside from profit-sharing checks. Meanwhile, the newly hired workers feel upwardly mobile after leaving jobs in retail or other even lower-paying fields. "We've seen a whole fresh group of workers come through who've never had the ability to buy at employee pricing," said John Clark, general manager of Jack Wolf Chrysler-Jeep-Dodge-Ram in Belvidere, Ill. "We see more of those [second-tier] people than the older workers." The dealership is about 3 miles from the plant where Chrysler Group builds the Dodge Dart, Jeep Compass and Jeep Patriot. Its employee business all but dried up when Belvidere Assembly was down to a single shift in 2009, but with the plant running around the clock again, it now accounts for about a third of the store's sales, many of them Darts.Autos hit harder
Szakaly, the NADA economist, said lack of income growth is offset by many positive factors affecting the industry, and that's why sales have continued to rise. But the high price of a car compared with other consumer goods means people's incomes have a greater effect on auto sales. "I think it impacts all industries, but we feel it a little more in autos because we're very sensitive to that," he said. One of the factors helping to make vehicles more affordable -- interest rates that have been at or near record lows for years -- may not last much longer. Economists say rates could start rising gradually next year. Edmunds' Plache said she doesn't expect increasing rates to dampen sales significantly, especially if automakers and banks subsidize rates more as a customer incentive. She said, "If interest rates are going up for the right reasons -- that is, the economy is doing well -- that should mean people's incomes are going up."
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