Why Car Sales Are No Sign of Recovery

Cars sales may best represent the recovery of the consumer economy. People who can spend $20,000, $30,000 or even $40,000 must have confidence in their prospects. Otherwise, why take on such a large burden that for many people is second only to the cost of their homes? But car sales may be a poor proxy for two reasons. The first is that the average American car has been on the road for more than 10 years. The other is that manufacturers are nearly giving away some models.

Cars sold in American have higher quality and dependability than ever before, at least based on information from JD Power, the gold standard of auto research. Manufacturers have undermined their old replacement cycles. Vehicles once were less durable and often were traded in after two or three years. Those cars, then sold used, still had a relatively short life span. The average amount of time a car spent in use, on average, was only eight years in 1995. Now that figure is 10.8 years.

A car cannot run well forever, and many analysts believe that once a vehicle is a decade old and has over 100,000 miles of use, that wear starts to become expensive. At some point, it is cheaper to buy a vehicle with a warranty and an odometer on zero than to make hundreds or thousands of dollars in repairs. This is particularly so given the aggressive sales tactics used by many manufacturers. Many cars sold recently are probably part of a new replacement cycle.

Several car companies currently offer zero-percent financing for as many as 72 months on new vehicles. General Motors (NYSE: GM) offers zero-percent financing for 60 months on new Cadillac CTS sedans. The model has been fairly popular, which begs the question why Cadillac has to offer the incentive at all.

Car sales may be strong and could remain so for the balance of the year. But the trend offers little offset most other economic indicators, such as overall consumer confidence, retail sales and employment.

Douglas A. McIntyre