On the surface, car sale numbers for last month should be a source of joy for the auto industry.
The key words there are “should be.”
The fact is, underlying the historically strong 18.2 million unit SAAR for last month is a sneaking reality: carmakers are relying on incentives to keep the assembly lines moving.
There’s a simple measure to consider when trying to determine whether financing is propelling car sales or car sales are propelling the financing. Are incentives ballooning at a greater rate than car sales?
The answer to that question for October was, alas, financing incentives are expanding at a greater rate than the SAAR. To be specific, the SAAR increased a remarkable 9.5% on a year-over-year basis to 18.2 million units, ahead of the consensus estimate of 17.7 million units. Any incentives? They climbed more than 14% last month to an average of $3,108 per vehicle, the largest increase since September 2014, according to JP Morgan Chase. That’s not just a rounding difference.
To be clear, this is not a cause for alarm. The YOY increase in average incentives per vehicle last month was $435, a nominal cause to generate a SAAR of 18.2 million units. And, in truth, incentives were actually lower than last September. But the year-over-year increase underlines a truth that cannot go unmentioned: incentives are in play. What I mean by that is, financing margin can be viewed as available for sacrifice for volume.
Here’s how JPMorgan Chase explained it in an investor note this morning:
We note that while incentives have been picking up on an absolute basis, incentive spend as a percentage of [average total purchases] remains in line with historical averages as light vehicle prices continue to show consistent gains. Still, the acceleration of incentive spend, a notable uptick in dealer groups and OEMs remarking on the “competitive” U.S. auto sales market, and promotions such as Ford’s recently announced “Friends & Neighbors” discount (which management noted would not increase total incentive spend) nevertheless give us reasons to be watchful of the trend.
Sure, there is some seasonality here, what with the raft of new model year launches introduced by a number of marques. But if these incentives continue to march higher, they imply a dwindling margin of error should the economy turn cold, and that becomes a potential “monster in the closet” for the industry. And no one wants to see that monster after all the good fortune enjoyed by the auto sector over the last few years.
