The negative impact from the debt ceiling debate on automotive sales may be significant even if the government decides to raise the ceiling by August 2nd, which in all likelihood will occur. The political posturing on this event may bring about some clarity on how we handle our budget deficit; however a negative short-term impact on consumer confidence will surely occur.  This situation comes on the heels of very disappointing employment numbers. Job creation only reached 18,000 jobs in June, well below the 150,000 needed to lower the unemployment rate. This alone surely will have a negative impact on consumer confidence, which has dropped 13.6 points since our high point in February. Adding any uncertainty regarding are nation’s debt and solvency will surely have significant ramifications on an already weary consumer base.

From an automotive perspective, consumer confidence has been found to have a strong correlation with new vehicle sales.  Another decline in consumer confidence will make it difficult for the industry to improve new vehicle sales above the lackluster sales we experienced during May and June.  Our conversations with dealers suggest that floor traffic is already on the decline.  Adding more uncertainty is going to exacerbate the declines in consumer confidence and put more consumers on a holding pattern for their vehicle purchase. 

The chart below shows the movement from the long-term trend for both consumer confidence and new vehicle sales.  There is a strong correlation between the two except in the cases where manufacturers lowered price significantly to keep sales strong in a low demand environment (2001-2003).  We may be facing a similar situation in the upcoming months if manufacturers attempt to drive sales from a very cautious consumer.

If the correlation between new vehicle sales and consumer confidence holds true we will have some challenging months ahead of us on the new vehicle side.  Japanese production is expected to reach normal levels in September and we will start seeing introduction of 2012 models during the same period, which is usually accompanied with incentives to clear out the current model year.  Consumer demand will undoubtedly be negatively impacted by the decline in consumer confidence, so manufacturers will have to drive sales with incentives.  This will create downward pressure on used vehicle prices above and beyond normal depreciation. 

I hope that a resolution on the debt ceiling and clarity on how we are going to handle the deficit will assuage some of the fears consumers have towards the future, however, in the short-term we will likely witness additional declines in consumer confidence, new vehicle sales, and used vehicle prices.