US - Light Vehicle Outlook - Federal Reserve Bank of …/media/others/region/midwest...US could see only limited impact – US banks are flush with cash. Bottom Line – Europe is

US - Light Vehicle Outlook

George Magliano

Senior Principal Auto Economist – Americas, HIS

January 2012

Copyright © 2012 IHS Inc. All Rights Reserved.

• Of the 27 European Union nations, 26 nations agree to the principles of the new

treaty – coordinated fiscal policy with oversight. The United Kingdom won’t agree.

• The European Central Bank cut its interest rates and buying bonds to supply

liquidity, but major problems remain – ECB won’t commit to buying ―troubled‖

government bonds.

• Euro Zone is in a recession and the UK is not far behind.

• Greece continues to miss its fiscal targets and will soon run out of room to maneuver

– borrowing at 32% interest rates. Baseline forecast incorporates a Greek sovereign

debt default in February 2012 or sooner (60% probability).

• Italy is better situated to withstand its crisis but yields are now 6% to 7%. Probability

of Italian default is 15% to 20%. Spain yields are also at unsustainable levels.

• Doomsday scenario – Euro Zone melt down, financial crisis, euro falls to parity with

dollar, US recession (25%-30% probability).

• Impact on global economy unknown. Asia is impacted by lower trade and less credit.

US could see only limited impact – US banks are flush with cash.

Bottom Line – Europe is in a recession, but Doomsday is avoided

Euro Zone Crisis Governments Scrambling to Solve Crisis – No Success Yet

Copyright © 2012 IHS Inc. All Rights Reserved. 3

US Economy – Remains on a Slow Recovery Path

• Amid global storm clouds, the US economy will grow at a modest pace.

• Business equipment investment and consumer durables, supported by

replacement demand, are driving near-term growth.

• Strained household finances will limit real consumption gains to about

2%.

• Confidence in U.S. policy-making has hit new lows, after the debt-ceiling

debacle

• There is no meaningful fiscal resolve until after the election, but there is

a QE3 in early 2012

• Fiscal policies will tighten, although the timing and scope is uncertain.

• A recovery in housing markets is key to more robust economic growth in

2013-15.

• The Eurozone sovereign-debt crisis is the biggest threat to growth; we

see a 25% - 30% risk of another US recession in 2012.


(Percent unless otherwise noted / January 2012)

U.S. Economy

-Probability of a Recession is now 30%

2009 2010 2011 2012

Real GDP Growth -3.5 3.0 1.8 2.0

Employment Growth -4.3 -0.7 1.0 1.2

CPI Inflation -0.3 1.6 3.1 1.5

Oil Prices (WTI, US$/bbl) 61.8 79.4 95.0 91.0

Housing Starts - mm 0.55 0.59 0.61 0.73

Federal Funds Rate 0.2 0.2 0.1 0.1

Dollar (Major Trading 2005=1) 0.93 0.90 0.85 0.88


-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

1990 1995 2000 2005 2010 2015 2020Current Old History & Forecast Pessimistic - 30% Optimisitc - 15%

(Percent Change)

Real Gross Domestic Product (GDP) Growth


$10

$30

$50

$70

$90

$110

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

201

4

201

5

201

6

201

7

201

8

201

9

202

0

202

1

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

Oil- WTI - ($-per barrel) - L Brent - L Retail Gasoline Price - R

Crude Oil Price vs. Gasoline Price


(Year-over-year percent change)

-20

-15

-10

-5

0

5

10

15

20

1975 1980 1985 1990 1995 2000 2005 2010 2015 2020

FHFA Index Median Existing Home Price, NAR

`

A Double Dip for Home Prices


(Millions of units)

0.0

0.4

0.8

1.2

1.6

2.0

2.4

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020

Single-Family Multi-Family

Housing Starts Will Not Rebound Until 2013


Payroll Employment

100

110

120

130

140

150

1990 1995 2000 2005 2010 2015 2020

-5

-4

-3

-2

-1

0

1

2

3

4

Total Emloyment - L Percent Change - R

`

(Millions) (Percent Change)


1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

1980 1985 1990 1995 2000 2005 2010 2015 2020

3

4

5

6

7

8

9

10

11

Bank Card Delinquency Rate (Left) Unemployment Rate (Right)

(Percent) (Percent)

Rising Unemployment Puts Pressure on

Consumers’ Balance Sheet


0

2

4

6

8

10

12

1980 1985 1990 1995 2000 2005 2010 2015 2020

4.0

4.5

5.0

5.5

6.0

6.5

Saving Rate Household Net Worth/Disposable Income

(Percent of disposable income)

Households will Save More in the Future


-3

-2

-1

0

1

2

3

4

5

6

1990 1995 2000 2005 2010 2015 2020

Real Consumer Spending Real Disposable Income

(Percent change)

Real Consumer Spending and Income Growth New long–term trend for consumption is 2% not 3%


• Pent – Up demand is driving the auto recovery

• Consumer confidence has plunged, but it appears as if the consumer attitude to new vehicle purchases remains favorable

• The recent sales numbers have exceeded expectations

• Retail, rather than fleet, remains the main driver

• Sales have improved, as Japanese cars return to the showrooms, but there are still some issues of availability

• Incentive spending has risen modestly, as inventories rebuild

• There has been an increase in lease activity

• Auto credit availability is improving

• The used car and truck market remains very strong

• Cost pressures will return but industry profits are good

Bottom Line – A weak economy will hurt the release of pent up demand, slowing not derailing, the auto market recovery

US - Auto Market Overview


New Vehicle Buyers Average Credit Score

650

660

670

680

690

700

710

720

730

740

750

760

770

780

Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11

6%

7%

8%

9%

10%

11%

12%

13%

14%

15%

16%

17%

18%

FICO SCORE % UNDER 670

Avg. Score

Source: CNW Marketing


5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

9.5

10.0

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Quarters

(Percent)

Federal Reserve Board

New Auto Loan Rates – Commercial Banks


12

14

16

18

20

22

24

26

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

(Percent)

CNW Marketing

Months

Incentives to MSRP


30%

40%

50%

60%

70%

80%

90%

100%

Jan-

06

Jul-06 Jan-

07

Jul-07 Jan-

08

Jul-08 Jan-

09

Jul-09 Jan-

10

Jul-10 Jan-

11

Jul-11

GM Ford Chrysler IndustryToyota Honda Nissan

Source: CNW Marketing Months

Residual Value Index

(Index = Lease contract residual value versus CNW estimate of residual at end of lease term)


20%

21%

22%

23%

24%

25%

26%

27%

28%

29%

Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11

Leases by Month

(Share)

U.S. Light Vehicle Sales — Lease Penetration

Source: CNW Marketing

Lease share to eventually return to 30%


U.S. Light Vehicle Inventory — Units

Months — Seasonally Adjusted

(Units in thousands)

1,500

2,000

2,500

3,000

3,500

4,000

4,500

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011


U.S. Light Vehicle Inventory — Days Supply

30

40

50

60

70

80

90

100

110

120

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

(Days Supply)

Months — Seasonally Adjusted

Light Trucks

Cars

There was no inventory cushion to buffer ―Japan‖


8

10

12

14

16

18

20

22

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

Jan-

10

Jan-

11

Jan-

12

Jan-

13

Acutal Forecast

Months

(Units in millions)

United States — Car & Truck Sales, SAAR


8

10

12

14

16

18

1990 1994 1998 2002 2006 2010 2014 2018

8

10

12

14

16

18

January 2012 Forecast July Forecast Pessimistic - 30% Optimisitc - 15%

(Units in millions)

U.S. Light Vehicle Sales

2008: 13.2M units

2009: 10.4M units

2010: 11.6M units

2011: 12.7M units

2012: 13.5M units

2013: 14.7M units

2014: 15.6M units

2015: 16.2M units


U.S. Sales — Major Manufacturers Market Share

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

GM FORD CHRYSLER/FIAT TOYOTA

HONDA NISSAN HYUNDAI/KIA


Auto Market – Forecast Drivers 2011 - 2016

• Average Real GDP growth from 2011-2013 of 1.8% per year, was 2.6%

in July forecast

• Economy does not start adding more than 2.0 million jobs per year until

2014

• Recovery in housing bounces along the bottom through 2012, starts

eventually return to 1.7 a year by 2016

• Gradual easing of credit

• Consumer returns but not to past historical levels – real consumption

stubborn at 2.0% per annum, higher savings, premium on value

• Recovery slowly releases pent-up demand; high level of replacement

demand in medium term

• Outbound household formation and growth in driving age population

sustain sales

• Long-term Gen Y becomes a big driver as the job market returns


(Percent)

7%

9%

11%

13%

15%

17%

19%

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020

Non-farm Payroll

U.S. Light Vehicle Sales:

Relative to Employment


U.S. Light Vehicle Sales — Car Segments (54%)

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

SMALL - 6.5% COMPACT - 15.5% LOWER MID - 15% U. MID & LRG. - 4% PREMIUM - 8% SPECIALTY - 4%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Units


0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

4,500,000

5,000,000

CUV - 26.5% SUV- 3% VANS - 5% FULLSIZE PUPS - 11% SMALL - PUPS 2%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Units

U.S. Light Vehicle Sales

— Light Truck Segments (46%)


14%

16%

18%

20%

22%

24%

26%

28%

30%

32%

34%

36%

38%

1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021

TRANSPLANT IMPORT

(Market Share)

Foreign Manufacturers:

Share of U.S. Market — Sales


• Lost volume due to

Japan & Thailand

disasters temper growth

in 2011

• Broader market volatility

creates some downside

risk in 2012

• Mixed signals from

some fundamentals

• Low growth outlook

• Lean inventory

• Fleet volume to ease

• Production localization

efforts bearing fruit

Pro

du

ctio

n in

Mill

ion

s

Short-Term Outlook North American Light Vehicle Production


Production Outlook North American Produced Vehicle Exports Bolster Prospects

• Greater use of global

platforms allows for more

―export ready‖ product

• Free trade agreements

have made Mexico a

particularly strong export

player

• European sovereign debt

crisis poses a headwind

to export growth,

although other regions

are growing (e.g. South

America)

• Economic downgrade

tempers export prospects

No

rth

Am

erica

n V

eh

icle

Exp

ort

s (

Mill

ion

s)

North American Vehicle Exports by Region

0.74

1.05

0.82

0.99

0.92

1.17

1.38 1.35


4.9 4.2

1.93.1 3.5

0.0

4.4

2.9

1.9

2.73.0

0.0

2.9

2.5

0.9

1.92.0

2.0

2.4

4.6

3.2

4.1

6.3

6.4

0.50.8

0.5

1.0

1.4

1.4

0

3

6

9

12

15

18

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

Millio

ns

31

Production Outlook North American Light Vehicle Production by OEM

• Downward revisions to production outlook, yet inventory position and export activity offset

some of the impact

• BMW, Hyundai, VW, Toyota & Honda drive additional capacity expansion

• Ford tweaks sourcing – on GM’s heels; Chrysler/Fiat potential, yet hurdles remain

15.6 15.1

German 3

Asian 4

Chrysler/

Fiat

Ford

General

Motors

Others

8.6

13.0

16.6


Autos - The Bottom Line

• The auto industry is in its best shape to withstand economic adversity

• Auto credit quality is outstanding, availability will improve this year

• Industry pricing power will continue to improve

• Leasing is on the way back

• Small cars will gain market share but crossovers will remain very popular

• Higher fuel economy standards are the next big challenge (opportunity)

• The industry has done a great job reducing capacity and cost, but we can’t

rest on our laurels

• Initially replacement demand drives volume, longer term demographics

sustain sales

• Forecast assumes one vehicle per diver, two per household

• Eventually the economy will support volume levels that are more normal for

the auto industry

• The industry has become more profitable and once volume returns, it will

become even more so

Thank You for Your Participation!

George Magliano

Senior Principal Automotive Economist, Americas

212 -884 -9509

[email protected]

January 2012

Documents

US - Light Vehicle Outlook - Federal Reserve Bank of …/media/others/region/midwest...US could see only limited impact – US banks are flush with cash. Bottom Line – Europe is