Consumer demand for new vehicles improved slightly in March, as tax cuts boost disposable incomes, and the popularity of SUVs continues to grow.
The Auto Demand Index rose five points, or 5.7 percent, this month to a score of 93, the first monthly gain of the year, according to TechnoMetrica. However, March marks the second straight month in which the Index has registered a reading below 100, indicating moderate to low levels of purchase intent among consumers. As a result, TechnoMetrica expects that auto sales, after starting the year on a downward trend, will grow slightly in the near term.
TechnoMetrica Market Intelligence developed the Auto Demand Index, or ADI, as a way to measure the intent of consumers to buy or lease a new vehicle within the next six months. Raghavan Mayur, president of TechnoMetrica, explained that the ADI, which is conducted monthly, is based on the response to a key question posed to more than 900 adult Americans: How likely is it that you will buy or lease a new vehicle within the next six months?
Amid fewer incentives and a rise in off-lease vehicles returning to the market, the Index began the year with two consecutive months of double-digit declines. The deceleration in purchase intent mirrors the performance of new vehicle sales in the first two months of 2018. Detroit automakers reported collective sales declines for both January and February, while auto sales throughout the entire industry have fallen by nearly 1 percent so far this year.
The current trend in auto sales is not likely to shift significantly in the long term, despite a rise in purchase intent in March, according to TechnoMetrica. For instance, the Index registered below all three of its moving averages this month, while the three- and 12-month averages both declined from February.
In addition, TechnoMetrica’s momentum indicator, the MACD, fell for the third consecutive month in March, dropping 0.6 of a point to a score of negative-1.9, marking its second straight month in negative territory. Thus, the group anticipates that demand for new vehicles will remain tempered in the months ahead.
“A tax cut-induced rise in incomes, coupled with strong levels of consumer confidence, lifted demand for new vehicles in March,” said Raghavan Mayur, president of TechnoMetrica. “However, though auto sales are likely to improve somewhat in the short-term, diminishing replacement demand and looming interest rate hikes are expected to weigh down sales in the long run.”
Purchase Intent Demographics
Nearly all demographic groups reported lower levels of purchase intent this month, largely reflecting the collective satiation of pent-up replacement demand, which had fueled record auto sales in both 2015 and 2016.
In March, vehicle purchase intent eased among 16 of the 19 segments that TechnoMetrica monitors on a monthly basis, with African Americans and Hispanics (minus 24) recording the most precipitous drop in the Index. Demand also waned among consumers residing in urban areas (minus 15), where ride-sharing services continue to grow in popularity. The purchasing plans of Northeasterners (minus 13) were hampered by several powerful winter storms throughout the month.
Consumer demand for new vehicles grew among two demographic groups in March: Americans aged 65 and over (plus 10) and whites (plus one). Meanwhile, consumers earning between $30,000 and $50,000 a year reported purchase intent levels that were unchanged from the previous month at a robust score of 101. March marks the fourth straight month in which this middle-income segment has registered an Index reading above 100.
Overall levels of purchase intent have risen as consumers see higher take-home pay in the wake of the new tax cuts. The $1.5 trillion tax overhaul approved in December reduced the corporate rate from 35 percent to 21 percent and cut individual taxes virtually across the board. Accordingly, employers are withholding less federal taxes from their workers’ pay, yielding heftier paychecks. The U.S. Treasury has estimated that nine in 10 American workers will see increases in their take-home pay as a result of the tax law.
In addition, the tax cuts have prompted hundreds of companies to offer their employees bonuses and pay raises, along with other key benefits, such as higher contributions to workers’ retirement accounts. More than 4 million employees have received tax cut-induced bonuses or raises, according to data from Americans for Tax Reform. It is not surprising, therefore, that real disposable income grew at its fastest pace in nearly three years in January, lifted by a $30 billion increase in one-time bonuses, according to TechnoMetrica.
The rise in incomes is expected to lift consumer spending in the coming months. Typically, increased take-home pay as a result of tax cuts boosts consumer demand for discretionary products, especially big-budget items such as automobiles. In fact, the prospect of more money flowing into their wallets may have already inspired consumers to ramp up their spending, according to the analytics firm. During the fourth quarter of 2017, consumer spending grew at its fastest pace in three years.
Interest Rates Hike
The prospect of rising interest rates in 2018 is compelling some consumers to expedite their vehicle purchasing plans. The Federal Reserve is expected to raise rates at least three times this year, following a similar frequency in 2017. Higher rates limit the amount of credit available to consumers, making a car loan or lease more expensive. Therefore, some consumers are taking advantage of current lower rates to buy or lease the vehicle they may have originally planned to acquire further out into the future, according to TechnoMetrica.
Thus, the share of likely buyers planning to purchase a new vehicle within the next one month increased four percentage points in March.
Consumer demand continues to be lifted by strong incentives. Discounts have averaged more than 10 percent of recommended sales prices in 20 of the past 21 months, according to research from JD Power and LMC Automotive.
Aside from measuring vehicle purchase intent, the Auto Demand Index also gains insight into other key areas of consumer preferences, such as the most desired types of vehicles. Americans remain smitten with utility vehicles, as small SUVs (19 percent) maintained the title of most preferred vehicle type for the second straight month in March, while preference for large SUVs grew by one percentage point to a share of 13 percent. Mid-size vehicles also remain popular among consumers. Nearly one in five likely buyers (17 percent) will choose a mid-size car for their next auto purchase, a one-point jump from February. Meanwhile, preference for pickup trucks declined by two points in March, to a 13 percent share of prospective buyers.
The TechnoMetrica study also identifies the most preferred automotive brands among consumers. Chevrolet took the top spot in brand choice in March, garnering a 16-percent share of likely buyers, its largest since April 2017. Honda showed the most significant growth in popularity over the past month, as preference for the brand rose five points to a rate of 13 percent. Meanwhile, Toyota fell from first to third place this month, registering a two-point drop to an 11 percent share of likely buyers. Preference for Ford vehicles also decelerated in March, falling two points to a rate of 10 percent.
Each month, TechnoMetrica uses Random Digit Dial telephone methodology to conduct live interviews with more than 900 respondents, using both landlines and cell phones. The margin of error for the survey is plus or minus 3.2 percentage points. In addition, recent statistical analysis has shown a strong correlation between the Auto Demand Index and actual U.S. vehicle sales.