Reading the latest headlines for May sales suggests the automotive market is starting to shows some signs of decline.  However, May new vehicle sales are doing exactly what supply and demand dictated them to do.  I always find it refreshing that my Economics 101 class came in handy.  In this case, as expected, prices on new vehicles increased due to a lower supply of new vehicles caused by the production declines from the earthquake in Japan.  As we all know as prices increase quantity demanded decreases,  and presto, new car sales have declined to an expected 11.9 SAAR in May.  Gas prices are being cited as one reason for the pullback in new car sales, but recently we have seen gas prices decline, with prices today below the prices seen during the end of April. Just to refresh your memory, prices during April increased by over 25 cents compared to the end of March. Gas price increases therefore have slowed down and we may be witnessing what could be a longer term downward movement in gas prices (See last week’s blog post).  4 dollar gasoline definitely causes some concern, but as we have seen it hasn’t changed overall demand for new vehicles.  Instead, high gas prices have shifted consumers to more fuel efficient vehicles. Unfortunately, there aren’t many of these vehicles to be found consequently driving up the vehicle prices in both the new and used market. 

Other fundamentals that are believed to be correlated with new vehicle demand such as consumer confidence, unemployment rates and wage growth haven’t shown any fundamental changes to support any shifts in demand.  In fact, nothing has really changed except for a nominal increase in gas price and a lot fewer cars.  Used car prices are also providing a good indicator of the health of our industry. Consumers now own vehicles with record high trade in values due to the lower used supply which provides a catalyst for new vehicle sales by providing consumers with a down payment that doesn’t hurt their bank account. 

Our industry had a choice…keep prices flat and run out of cars, or let prices increases to lower sales and maintain some inventory.  OEM’s let prices increase with incentives reaching a 5 year low according to some analysts and the result was lower overall new car sales.  I don’t think we need to read into this any further than proving that our eccentric economics teacher from college was right.  Memorial Day should offer a clear picture of effective demand since we expect incentives to increase this week.  May should prove to be a better month than expected.