Memorial Day Sales Stoke Demand

- Alec Gutierrez, senior market analyst of automotive insights, Kelley Blue Book

Sales in May are on pace to improve more than 25 percent with Toyota, Ford, Chrysler, Nissan, VW, and GM reporting at least preliminary results so far.  So far, the industry appears to be headed for sales of around 14 million SAAR, slightly below our forecast of 14.2 million.  Although sales came in slightly below most analyst forecasts, it appears as though the recovery remains alive and well. 

As projected in Kelley Blue Book’s May 23 report, sales in May were particularly strong due to an uptick in demand during Memorial Day weekend.  Consumers traditionally flock to dealerships during the holiday weekend to take advantage of low interest rates and attractive incentive offers, especially on those vehicles expected to be redesigned later this year such as the Ford Fusion and Nissan Altima.  Although incentives were only slightly above offers already available in April, savvy buyers opted to to take advantage of still record high trade-in values. 

The timing couldn’t have been better for those that bought in May since used-car values have started to dip in recent weeks due to falling gas prices and the relative affordability of a new vehicle versus used. 

Fuel-Efficient Vehicles Remain a Priority despite Fuel Price Declines

Of particular interest this past month was continued demand for fuel-efficient vehicles despite a close to $0.30 per gallon decline in fuel prices since early April.  In fact, Volkswagen, which reported a 28 percent year over year increase in sales, stated that TDI trims accounted for 21 percent of their total sales volume.  Ford reported similar interest in their fuel-efficient vehicles.  The Ford Focus was up 13.2 percent year on year while the Fiesta, although down 14.6 percent versus last year, still reported a solid 6,000 sales overall.  Even the F-150 saw a jump in their more fuel-efficient ecoboost V6.  Through May, F-150 ecoboost sales were up 153 percent versus sales last year, a testament to the need for fuel-efficiency even in fuel-thirsty full-size pickups. 

Even with fuel prices falling since April, Kelley Blue Book agrees that fuel prices will likely continue to trend upward in the long term and consumers seem to share this sentiment.  Fuel prices are always fairly volatile but with long-term expectations still pointing to higher prices down the road, expect to see fuel-efficient vehicles remain a top priority.

Weak Economic Progress Could Slow Sales in the Months Ahead

Weak news on the economic front did little to deter shoppers in May, although if the pace of the economic recovery slows any further, we could see a dip in the pace of auto sales recovery.  The unemployment rate increased to 8.2 percent in May due to weak job growth and an increase in the labor force participation rate with thousands of new college grads in May. 

Consumer confidence also took a sizable hit due to a slide in the stock market that was triggered by the European Debt crisis and fears that troubles in Europe could slow the pace of the US economic recovery.  In fact, the Eurozone unemployment just hit a record high of 11 percent in May, indicating that the current recession could persist for some time. 

Conclusion
As it stands, we believe that auto sales will continue to surpass year-ago levels, however we would not be surprised to see SAAR dip into the high 13 million unit range in the coming months.  We stand by our forecast of 14.2 million units for the year, but if economic conditions degrade further, there is the potential that sales could miss that target.