FCA Automotive Reid Bigland, who heads up the Ram brand for FCA Automotive, introduces the 2019 Ram Heavy Duty lineup at the North American International Auto Show.
The release of much of the official U.S. economic data for the month of December has been delayed due to the government shutdown, but we have more than enough evidence to indicate that December was a pretty good month overall for the motor vehicle industry. Preliminary reports show that for the third straight month, the seasonally adjusted, annualized rate for U.S. light vehicle sales in December was greater than 17.5 million units.
The stronger-than-expected performance in the fourth quarter pushed the annual sales total for 2018 very close to, and maybe just a bit over, the total from 2017. This means that total vehicles sales (domestic plus imports) have exceeded 17 million units for four straight years. When the final data is released, I expect overall light vehicle sales for 2018 will be near 17.3 million units, which is just a shade better than the total from 2017.
A year ago, I forecast that the motor vehicle industry would experience a moderate decline in sales in 2018 following the decrease in activity in 2017. Many analysts, including myself, believe that 2016 represented the cyclical peak in the motor vehicles data. As the chart indicates, there was an 8 percent drop in motor vehicle assemblies in 2017. My analysis of historical cyclical patterns combined with the prevailing trend of rising interest rates during the past couple of years led me to conclude that another moderate decline would follow in 2018.
But instead, the trend in the data for most of last year held steady and then it started to show some strength in the fourth quarter. The numbers are still below the levels from the "peak auto" year of 2016, but there should be no doubt in anybody's mind that 2018 was a strong year for the American auto industry.
In 2019, demand for light vehicles will continue to be supported by at least one more year of accelerating wage growth and rising employment levels. In addition to larger paychecks, tax returns are expected to hit an all-time high this spring. These trends will keep consumer confidence high, so as long as there are no dramatic changes to the macroeconomic fundamentals, households will continue to spend money freely. I expect that gasoline prices will also remain low by historical standards, and this, too, will be a supportive factor.
Nevertheless, there are some headwinds in store this year for the auto industry. These include rising prices for commodities such as steel and aluminum; incrementally higher interest rates combined with tighter financing standards; a strong volume of late-model, used cars hitting the market; and finally, the onset of some consumer fatigue.
The combination of all these factors will result in an overall moderate decline in activity levels for the auto industry. My forecast for total motor vehicle assemblies in 2019 is 10.8 million units, which is 4 percent less than the total from 2018. My forecast for annual light vehicle sales in 2019 is 16.6 million units, which also represents a 4 percent decrease from last year. The projected declines notwithstanding, these annual totals still represent robust levels when compared with historical averages.
There are two longer-term trends within the industry that will continue to affect the data in 2019 and beyond. The first is the increased divergence in market demand for light trucks—the category that includes pickups, SUVs and minivans—compared with demand for passenger cars. The mostly flat trend in gasoline prices in recent years combined with incremental gains in fuel efficiency have pushed demand for SUVs even higher, while demand for cars has actually diminished.
Passenger car sales dropped to just 30 percent of total new vehicle sales, which is an all-time low. Sales of these vehicles last year were just above the levels last seen in the Great Recession. Meanwhile, truck and SUV sales were at all-time highs in 2018. Therefore, it should surprise nobody that GM and Ford announced that they are discontinuing some of their well-known passenger car models. The market dominance of light trucks will persist for the foreseeable future, but the divergence between trucks and cars in the coming years is not expected to get much wider.
The second trend is one that will rapidly increase in prominence in the coming years, and that is the trend toward more electric vehicles and hybrids. Pure electric vehicles accounted for less than 1 percent of total vehicle sales in 2018. But Tesla is finally getting the production of their Model 3 ramped up, and most of the other major manufacturers—especially Toyota—are also bringing more models to market. Sales of pure electric vehicles will approach 10 percent of all sales within a decade. The market's accelerating acceptance of fuel cells and batteries appears to be imminent.
At the present time, hybrids look like they offer the best options for the North American market. I expect strong growth rates for many hybrid models in the near-term, especially hybrid pickups and SUVs.