David R. Henderson  

The Auto Boom: Healthier Economy or CAFE?

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In a post yesterday, Mark J. Perry writes:

Based on new vehicle sales during the first 16 selling days of this month, J.D. Power and Associates is predicting sales during the full month of August to increase by 20% over last year and reach the highest monthly sales of new vehicles since early 2008, more than four and one-half years ago.

Mark speculates that it could be due to the economic recovery and argues that it is evidence against the idea that there will be a dip into another recession.

Mark could well be right. But there's one other factor that could be causing the boom: intertemporal substitution due to the coming CAFE regulations. Here's what I wrote in a 2009 post titled, "The Coming Auto Boom:"

Under the Obama proposal, which is not yet a fait accompli, the new standards would kick in fully in 2016. It is unclear how they would rise between now and 2016 but it must be the case that they would be much less stringent in 2010 than they would be at their peak in 2016. The standards will cause cars to be smaller, less powerful, less safe, and more expensive. So what will consumers, who have shown what they think of these cars, do? I predict that if anything like Obama's standards get implemented, consumers will start buying powerful cars and trucks at a higher rate in the next few years. Watch for the coming auto boom. And then, of course, as the standards tighten, a major auto bust.


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CATEGORIES: Regulation



COMMENTS (13 to date)
Nick writes:

Or the fact the "sales" are really just an example of the practice of channel stuffing rather than real sales.

"In the past, GM, Ford Motor Co. and Chrysler would lease thousands of cars a month to rental-car companies for very little. They counted those vehicles as sold. Then after a few months, the car companies took the rental cars back and passed them on to dealers that sold them as used cars.

One well known case of sales inflation occurred in 1998, when GM's Cadillac brand and Ford's Lincoln division racing to claim the top spot in luxury-car sales. Cadillac was trailing but its sales suddenly surged in December and it took the crown. Months later an embarrassed GM acknowledged that the Cadillac unit had purchased vehicles itself from its dealers, boosting the reported total."

http://www.zerohedge.com/news/channel-stuffed-gdp-report

http://www.zerohedge.com/news/gm-finds-creative-new-ways-stuff-channels-get-backdoor-taxpayer-funding

Matt H writes:

Talk about wishful thinking.

How many new car owners have any idea about the new Cafe standards. None! Zip! Zilch! Maybe 1%. This the most pathetic argument I've read in a few months.

Simone Simonini writes:

This doesn't seem plausible to me. I doubt many consumers even know what CAFE is, let alone think about it enough to plan purchases around it.

Gene writes:

Might I suggest a much more plausible explanation? Many, many people who would otherwise have bought new cars since 2008 have been squeezing extra years out of their older cars due to concerns about the economy, both current and future. Sooner or later, like it or not, at some point they will suck it up and buy a car. They can't keep the old one on the road indefinitely. This, in fact, describes me to a T, even though I have been fortunate to keep my job and (mostly) keep my personal finances in good shape since the meltdown. I, in fact, plan to buy a new car w/in the next month.

MingoV writes:

I suspect that many of the car manufacturers started selling their newest models (the 2013s) earlier than in previous years. This game of advancing the model year is getting tiresome. I suspect that we'll be able to buy "2020" cars in the spring of 2019. I'd like to see all the car companies penalized for false advertising.

EHager writes:

Perhaps people are very knowledgeable about CAFE standards and their effects on auto safety and that "national aggregate statistics cannot support the assertion that increased fuel economy has led to increased traffic fatalities."

http://cta.ornl.gov/cta/Publications/Reports/Effect_of_Fuel_Economy.pdf

Jerome Turner writes:

Of the 9 people I know who bought autos this year, not one even mentioned the CAFE standards and I agree with earlier posts that they wouldn't even know they are increasing in a few years.

KLO writes:

So millions of people are buying rapidly depreciating assets with relatively short lives four years in advance of the regulations that may or may not affect what cars and trucks are available. Were this true, you would expect to see a spike in sales of the sort of high-powered or heavy cars likely to be most affected by CAFE. Have you seen this? Not at all. Through July 2012, the top 10 selling vehicles includes the same mix of full-size pickups and mid-size and compact cars that it has for a long time. The biggest year over year, year to date increases among the top ten were the Toyota Camry (up 39.7%), Honda Civic (up 32.5%) and the Honda Accord (up 27.7%). Heck, the Chevy Silverado, the third best selling vehicle in the country, actually sold fewer units in July 2012 than in July 2011, as the did the Ford Escape. What does it say about your prediction that the vehicles experiencing the greatest increase in sales are fuel efficient small and mid-size cars whereas the vehicles seeing declines in sales are larger, lower MPG vehicles?

David R. Henderson writes:

@KLO,
You’ve undercut a very good point with overstatement. I’ll address the specifics.
So millions of people are buying rapidly depreciating assets with relatively short lives
They don’t depreciate that rapidly. And the lives of cars and trucks nowadays tend to be 11 or 12 years, IIRC.
four years in advance of the regulations
I think the car companies will probably phase in their adjustment and so you will see the effects of the regulations earlier than 2016.
that may or may not affect what cars and trucks are available.
No “may not” here. If the regulations stick, they will affect what’s available. To argue otherwise is to claim that a CAFE in the 30’s is non-binding. No one who has studied it believes that.
Were this true, you would expect to see a spike in sales of the sort of high-powered or heavy cars likely to be most affected by CAFE. Have you seen this? Not at all. Through July 2012, the top 10 selling vehicles includes the same mix of full-size pickups and mid-size and compact cars that it has for a long time. The biggest year over year, year to date increases among the top ten were the Toyota Camry (up 39.7%), Honda Civic (up 32.5%) and the Honda Accord (up 27.7%). Heck, the Chevy Silverado, the third best selling vehicle in the country, actually sold fewer units in July 2012 than in July 2011, as the did the Ford Escape.
Now, you’re on to something. This is your “money” point.
What does it say about your prediction that the vehicles experiencing the greatest increase in sales are fuel efficient small and mid-size cars whereas the vehicles seeing declines in sales are larger, lower MPG vehicles?
At a minimum, it says that my prediction is suspect.

Jesse writes:

The fact that the Honda and Toyota cars are up says nothing about CAFE one way or anouther. It just says that Japan did not get hit by a Tsunami this year. What is the comparison vs. two years ago?

KLO writes:

Good point about the Tsunami. Comparing July 2010 to July 2012 sales does show that Toyota's big sellers, the Camry and the Corolla moved less units (down 14.68% and 13.55% respectively), while Honda increased sales in its two best selling vehicles, the Accord and the Civic (up 12.81% and 7.63% respectively). Among the seven vehicles that were in the top 10 in July 2010 and July 2012, the biggest sales gainer in percentage terms was the Nissan Altima. The Dodge Ram is second in total increase, but both the Ford F-Series and the Chevy Silverado moved fewer units in July 2012 than they did in July 2010. Nothing in these numbers is consistent with people stocking up on heavy or powerful vehicles out of a fear that they will be discontinued. Moreover, fleet MPG for this year is trending upward, again suggesting that people are not stocking up on low MPG vehicles.

Mike writes:

It's also been 36 months (typical lease term) since the Cash for Clunkers program ended.

Joe Cushing writes:

Mike,

The lease industry was dead 3 years ago. Lenders completely shut it down. At least one of the major auto lenders still hasn't even restarted a lease program yet. It's in plans for the future.

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