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Motor vehicles, model year 1990.

Motor Vehicles, Model Year 1990 Sales of new motor vehicles in the United States declined in model year 1990 to 14.i million units, the lowest level since 1983. The 1990 decline was the third decline in the past 4 years.

From a record 16.1 million units in 1986, motor vehicle sales declined 4 percent in 1987, edged up 1 percent in 1988, and then declined 1-1/2 percent in 1989 and 8 percent--the largest decline since the recession year of 1982--in 1990. Despite the declines in 1987 and 1989, sales had remained at a relatively high level--15 million to 16 million units--throughout 1985-89; however, the 1990 decline pushed sales below this high plateau and also below the levels attained in the late 1970's (table 1 and chart 4). [1]

Sales of all categories of motor vehicles declined in 1990. [2] The rate of decline for sales of imported vehicles was greater than that for sales of domestic vehicles, and the rate of decline for sales of cars was greater than that for sales of trucks.

Factors affecting 1990 sales.--The 1990 decline in sales reflected a weakening in many of the general factors usually associated with consumer expenditures for durable goods. In model year 1990, real disposable personal income increased only 1-1/2 percent after increasing 3 percent in 1989 and 4-1/2 percent in 1988. After declining for 6 consecutive years, the unemployment rate increased in 1990. The Index of Consumer Sentiment (prepared by the University of Michigan's Survey Research Center) fell to its lowest level since 1983.

Several factors specific to the motor vehicle market that had constrained the growth in unit sales in recent years also contributed to the 1990 decline. First, the stock of consumer-owned vehicles had reached a record high in 1989 (the most recent year for which data are available), the result of 5 years of strong sales. Second, the number of vehicles per household remained very high; after increasing steadily through most of the 1980's to 1.8 in 1988, the number of vehicles per household has been unchanged since. Third, owners are keeping vehicles longer; the average age of cars on the road (estimated by R.L. Polk and Company) has remained at 7.6 years since 1986, despite the high sales rates in 1985-89.

Three factors related to the financing of new-car purchases--interest rates, the length of new car loans, and the loan-to-value ratio--contributed to the declines in sales in 1989 and 1990. Interest rates on new-car loans were generally higher in the past 2 years (chart 5). Interest rates on loans made by commercial banks, after averaging 10-1/2 percent in 1987 and 11 percent in 1988, averaged 12 percent in 1989 and 1990. Interest rates on loans made by auto finance companies, after averaging 10-1/2 percent in 1987 and 12 percent in 1988, averaged 12-1/2 percent in 5 9 and 1990.

The average length to maturity of new-car loans made by auto finance companies, which had climbed steadily through the mid-1980's, jumped sharply in 1987 and 1988 to a record 55.8 months before declining to 54.6 months in 1990. Longer loans initially boost sales because they reduce monthly payments, making new cars available to some buyers who cannot afford higher monthly payments. However, the replacement of a car purchased with a longer loan is often postponed because equity--a frequent source for the downpayment on a new car--accumulates more slowly with a longer loan (on average, equity does not begin to build until the 37th month of a 60-month loan). Thus, the sharp increase in the average length of new-car loans in 1987-88 porobably stimulated sales in those years and probably reduced replacement sales in 1989-90. The shorter loans offered in 1989-90 forced up monthly loan payments, which may have kept some potential buyers out of the market.

The decline in the average length of new-car loans in 1989-90 may have partly reflected lenders' concerns about loan delinquencies. The delinquency rate on new-car loans had increased along with the length of new-car loans in 1987-88. Lenger loans may increase delinquencies for several reasons: A customer with little or no equity in a car has less to lose if the car is repossessed; as a car ages, repair bills often compete with loan payments for a customer's dollars; and customers who use longer loans generally do so because they are financially stretched.

Although lenders encouraged buyers to use shorter loans, most buyers continued to take out 60-month loans in 1990. The manufacturers' sales-incentive programs usually offered a choice between below-market interest rates on shorter loans--for example, loans with 24- or 36-month maturities--and cash rebates. In 1990, more than four out of five new-car buyers chose cash rebates even though the below-market financing incentive was often worth more financially. One reason consumers chose rebates was that they had little equity in their trade-in cars and needed the rebates as downpayments for new-car purchases; thus, many customers were forced to take out loans at market interest rates with 60-month maturity so they could afford the monthly payments.

The ratio of the average value of loans to the value of cars purchased with loans made by auto finance companies, after peaking at 94 percent in 1988, fell to 87 percent in 1990. The declines in the ratio in 1989-90 reflect attempts by lenders to reduce delinquencies by tightening loan requiremenets and by requiring larger downpayments.

Sales in 1990 might have been even lower had it not been for usually aggressive marketing by manufacturers. First, manufacturers offered exceptionally attractive sales-incentive programs during an unprecedented three of the four quarters of the model year. Second, sales were boosted--particularly in the third quarter of 1990--by the most favorable fleet marketing programs ever offered by manufacturers; these programs may have increased sales in 1990 at the expense of sales in 1991.

Two additional factors--a moderation in driving costs (the cost of owning and operating a car) and a continuation of small increases in new-car prices--may have somewhat mitigated the decline is sales in 1990. According to a study by the American Automobile Association, driving costs increased 7.8 percent in 1990 after increasing 12.1 percent in 1989 and 10.1 percent in 1988. A smaller increase in insurance expenses was the main reason that driving costs decelerated; expenses for depreciation, financing, taxes, maintenance, tires, gasoline, and oil increased at rates similar to those in 1988 and 1989. Increases in new-car prices remained small in 1990; the consumer price index for new cars increased 1-1/2 percent in 1990 after increasing 2 percent in 1989. although sticker prices on many domestic cars increased sharply with the introduction of 1990 models, sales-incentive programs held down the increases in purchase prices; by comparison, increases in thicker prices on foreign models were more modest, as were the incentive programs offered by their manufacturers. The average expenditure per new car increased 5-1/2 percent, to $15,866, in 1990 after increasing 6 percent in 1989. (3) These increases were well above the increases in the consumer price index for new cars, indicating that consumers purchased more expensive models or selected more optional equipment.

Industry developments.--Economic conditions within the motor vehicle industry reflected the 1990 decline in sales. After 7 years of profits, the motor vehicle and equipment manufacturing industry recorded a loss in model year 1990. In this industry, employment fell to 815,600 in 1990 from 867,800 in 1989, and average weekly hours of production workers declined to 42.6 from 43.4. In contrast, some motor-vehicle-related industries benefited from the increased time owners kept their vehicles; consumer spending for motor vehicle tires and parts and for motor vehicle repairs both accelerated in 1990.

One long-term development that has had major implications for the motor vehicle industry and its contribution to the U.S. economy is the increased number of vehicles manufactured in the United States in foreign-owned factories, known as transplants. Sales of vehicles manufactured at transplants are included in sales of domestic venicles; most models manufactured at transplants are the same as those that previously had been manufactured overseas and then imported.

Sales of foreign models--transplant cars and imports--have gained in recent years at the expense of domestic nameplates (chart 6). (4) From 1985 to 1990, sales of transplant cars increased nearly threefold, and their share of total car sales increased from 2-1/2 percent to 11 percent. Sales of imported cars declined 1-1/2 percent; their share jumped sharply from 24 percent in 1985 to 30-1/2 percent in 1987 and then declined--as foreign manufacturers shifted production to transplants--to 28 percent in 1990. In 1990, Japanese models accounted for 83 percent of all sales of foreign models in the United States and for a record 30 percent of total car sales. Sales nof domestic nameplates fell 29 percent in 1985-90, and their share dropped from 73 percent to 61 percent.

Transplant cars accounted for nearly 20 percent of the cars manufactured in the United States in 1990; they had accounted for only 3 percent in 1980. The increase in foreign investment in the United States associated with transplants can be seen in data collected by BEA surveys: For foreign-owned U.S. companies, fixed assets used in motor vehicles and equipment manufacturing jumped from $2 billion in 1980 to $9 billion in 1988 (the most recent year for which data are available), and sales of these companies increased from $7 billion to $16 billion.

New Cars

Sales of new cars declined 8-1/2 percent to 9.4 million units in model year 1990 from 10.3 million in 1989. Car sales had declined 5-1/2 percent in 1987, 1/2 percent in 1988, and 1-1/2 percent in 1989.

Reflecting slumping sales and an attempt by the industry to keep leaner inventories, domestic car production fell to 6.2 million units--the lowest level in 7 years--from 7.1 million in 1989.

Domestic and import car sales

Sales of domestic cars declined 8 percent to 6.8 million units in model year 1990 from 7.4 million in 1989. Dommestic car sales had increased 1/2 percent in 1989 after changing little in 1988.

Domestic car sales might have been lower in 1990 had it not been for fleet sales. Fleet sales--sales of 10 or more vehicles to businesses for rental, leasing, or commercial use--increased sharply in 1990, reflecting the most aggressive fleet marketing programs ever undertaken by manufacturers. The programs reduced the age and mileage required on cars before manufacturers would repurchase them; the lower requirements probably encouraged companies with fleets to purchase new cars in the third quarter that otherwise would have been purchased in the fourth quarter or later. According to data published by the National Automobile Dealers Association, fleet sales' share of total car sales had increased throughout the 1980's--from 13-1/2 percent in 1979 to about 20 percent in 1989. Rental and commercial fleets consist almost exclusively of domestiic nameplates because, in part, these fleets include mostly larger cars than are available from foreign manufacturers; leasing fleets, in contrast, contain a mix that is about the same as that for total car sales. (The recent introduction of larger foreign models means that future rental and commercial fleets could contain more foreign models.)

Sales of all size-classes of domestic cars declined in 1990. Sales of domestic intermediate cars declined for the sixth consecutive year, to 1.7 million units, and their market share (percent of total domestic and import car sales) slid to 18-1/2 percent from 19 percent in 1989. Sales of domestic luxury and full-size cars declined for the first time since 1987, to 1.5 million, and their market share declined to 16 percent from 16-1/2 percent in 1989. Sales of domestic compact and subcompact cars also declined for the first time since 1987, to 3.5 million; however, their market share increased to 37-1/2 percent--the highest level since 1981--from 35-1/2 percent in 1989.

Import car sales fell 10 percent to 2.6 million units in 1990--the lowest level since 1984--from 2.9 million in 1989. Sales of imported cars had declined 7 percent in 1989 and 2 percent in 1988. The market share of imported cars declined to 28 percent--the lowest level since 1986--from 28-1/2 percent. The recent declines in import sales partly reflected increases in transplant sales.

Quarterly patterns

Sales of new cars, from a level of 10.7 million units (seasonally adjusted annual rate) in the third quarter of 1989, fell sharply in the fourth quarter and rebounded somewhat in the first quarter of 1990. Sales then declined in the second quarter and increased to 9.7 million in the third (chart 7). The increases in the first and third quarters primarily reflected sales-incentive programs--featuring rebated or below-market financing--that were among the most attractive ever offered by manufacturers.

Domestic cars.--From 7.8 million units in the third quarter of 1989, domestic car sales plummeted to 6.2 million in the fourth quarter; third-quarter sales had been boosted by very attractive sales-incentive programs, and the fourth-quarter drop in sales reflected the expiration of these programs and the imposition of substantial price increases on 1990 model cars. Plagued by high inventories and weak sales, manufacturers cut production from 6.7 million--already the lowest level in six quarters--in the third quarter to 6.3 million in the fourth. However, inventories still increased slightly to 1.7 million units in the fourth quarter from 1.6 million in the third. The inventory-sales retio soared from 2.4 to 3.2--the highest level in nearly 3 years and well above the 2.4 ratio traditionally targeted by the industry.

Sales jumped to 7.0 million in the first quarter of 1990 in response to enhanced incentive programs that were, in many cases, the most attractive ever offered; these programs covered popular models (such as minivans) that had never been covered before, and some programs guaranteed that buyers would receive additional benefits if more attractive programs were introduced later in the model year. Continuing the effort to reduce inventories, manufacturers slashed production further to 5.6 million--the lowest level since the fourth quarter of 1982. By quarter's end, inventories had dropped to 1.3 million, and the inventory-sales ratio was down to 2.3.

Sales declined to 6.8 million in the second quarter, partly reflecting a scaling back of incentive programs. The early introduction of some 1991 models, which were among the best sellers in the quarter, may have slowed the second-quarter decline in sales. Production increased but remained low at 6.3 million. Inventories were unchanged at 1.3 million, and the inventory-sales ratio remained at 2.3.

Sales increased to 7.2 million for the third quarter, as manufacturers again enhanced incentive programs to stimulate sales. The new incentives were as attractive as the first-quarter programs, and, in addition to covering nearly all 1990 models, they covered many 1991 models. Aggressive fleet marketing programs by manufacturers also contributed to the increase in sales. Production jumped to 6.9 million. Inventories edged up to 1.4 million, and the inventory-sales ratio again held constant at 2.3.

With the scaling back of incentive programs at the conclusion of the third quarter, manufacturers plan to cut production in the fourth quarter in an attempt to keep inventories learn.

Imported cars.--Sales of imported cars declined in three of the four quarters of model year 1990. From 2.9 million in the third quarter of 1989, sales of imports dropped to 2.6 million in the fourth quarter, increased to 2.8 million in the first quarter of 1990, and declined to 2.7 million in the second quarter and to 2.5 million--the lowest level in 6 years--in the third. Import car inventories jumped sharply in the fourth quarter of 1989, changed little in the first quarter of 1990, and then declined in the second and third quarters.

New Trucks

Sales of new trucks declined 6-1/2 percent to 4.7 million units in model year 1990 after declining 1 percent in 1989. Sales of all categories of trucks declined in 1990. Even though the 1990 decline was the largest since the recession year of 1981, truck sales' share of total vehicle sales increased--to 33-1/2 percent--for the ninth consecutive year.

Sales of light trucks (up to 140,000 pounds gross vehicle weight), which accounted for 93-1/2 percent of total truck sales in 1990, declined for the second year after seven consecutive increases. These trucks, about two-thirds of which are purchased for personal use, include light conventional pickups, compact pickups, sport utility vehicles, and passenger vans. Many of the same developments that affected car sales, including changes in sales-incentive programs, also affected light truck sales.

Light domestic truck sales dropped 5 percent to 4.0 million in 1990 after increasing 2 percent in 1989. Even so, domestic trucks' share of all light truck sales increased to 90 percent in 1990, the highest level since 1978. Light imported truck sales tumbled 16-1/2 percent to 0.4 million in 1990 after plummeting 19-1/2 percent in 1989 and 28 percent in 1988. The declines in imported truck sales, like those of imported car sales, partly reflected an increase in transplant sales.

Sales of "other" trucks (over 10,000 pounds gross vehicle weight) fell 10-1/2 percent to 0.3 million. These trucks, nearly all of which are purchased by business, range from medium-duty general delivery trucks to heavy-duty diesel tractor-trailers. The domestic models' share of all "other" truck sales has declined in recent years to roughly 90 percent in 1990.

The quarterly pattern of truck sales in model year 1990 roughly mirrored that of cars. From 5.3 million in the third quarter of 1989, truck sales fell to 4.7 million in the fourth; sales of both light domestic trucks and "other" trucks declined, and sales of light imported trucks increased (chart 8). In the first quarter of 1990, truck sales increased to 4.9 million. Sales of light domestic trucks increased, reflecting the enhanced incentive programs; sales of light imported trucks declined, and "other" trucks were unchanged. Truck sales declined to 4.7 million in the second quarter; sales of both light domestic trucks and "other" trucks declined, and sales of light imported trucks changed little. Truck sales edged up to 4.8 million in the third quarter; light domestic truck sales--stimulated by the enhanced incentive programs--and "other" truck sales increased, and light imported trucks sales fell sharply.

(1) For this article, the model year is defined as beginning October 1 and ending on the following September 30. Thus, model year 1990 convers the fourth calendar quarter of 1989 and the first, second, and third calendar quarters of 1990.

This article focuses on data for unit sales, inventories, and production drawn mainly from Word's Automative Reports and the Motor Vehicle Manufacturers Association and on data for prices drawn mainly from the Automobile Invoice Service and the Bureau of Labor Statistics, U.S. Department of Labor. These data underlie BEA's estimates of auto and truck output in the national income and product accounts.

(2) Sales of domestic cars and trucks consist of vehicles manufactured in North America and sold in the United States. Sales of imported cars and trucks consist of vehicles manufactured outside North America and sold in the United States.

(3) BEA derives the average expenditure per car by using the suggested retail price for each model (adjusted for options, discounts or premiums, and sales taxes) weighted by each model's share of sales. Movements in the BEA measure differ from movements in the new-cars component of the Consumer Price Index (CPI) primarily because the CPI, unlike the BEA measure, is adjusted to remove the influence of quality change on prices and because the BEA measure, unlike the CPI, reflects changes in the sales mix and includes cars sold to business.
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Author:Moran, Larry R.
Publication:Survey of Current Business
Date:Nov 1, 1990
Previous Article:National income and product accounts.
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