Academic journal article Chicago Fed Letter

Auto Sales Outlook: Slower Traffic Ahead

Academic journal article Chicago Fed Letter

Auto Sales Outlook: Slower Traffic Ahead

Article excerpt

It is said that a forecaster is only as good as their last forecast. If that is true, the participants in last year's consensus outlook were very, very good. For example, light vehicle sales in the first third of 2000 were running at a white-hot 18.1 million units. Yet the group forecast that light vehicle sales would moderate significantly from these levels and average a record-setting 17.3 million units, just 0.1 million units more than the actual sales. This accuracy also occurred for a large number of other key statistics. Real gross domestic product (GDP) was forecast to increase by 4.7% in 2000, just below the actual 5.0% growth rate. The unemployment rate was anticipated to average 4.0% for the year, precisely what the rate was for last year. Finally, the Consumer Price Index was expected to increase from 2.2% in 1999 to 3.0% during 2000, which was just below the 3.4% rate for the index that had been affected by energy costs.

As 2000 came to a close, the vehicle industry struggled with excess inventories as sales slowed more rapidly than production. This led the industry to pursue a very aggressive production reduction program in early 2001. At the same time the industry continued to offer large financial incentives oft their products to support the vehicle market. The combination of production cuts and good selling rate brought inventories down to more desirable levels by the end of April. It was in this environment, on May 31 and June 1, 2001, that the Federal Reserve Bank of Chicago held its eighth annual Auto Outlook Symposium. This Chicago Fed Letter summarizes the consensus outlook from the symposium as well as the presentations from industry insiders.

Consensus outlook for the U. S. economy

The U. S. economy had a very strong first half in 2000 with growth in the first and second quarters at 4.8% and 5.6%, respectively. However the air was let out of the economic balloon in the second half of the year as growth slowed to 2.2% and 1.0% in the third and fourth quarters, respectively. Sluggish economic growth continued into the first quarter of 2001, with growth of only 1.3%. The symposium participants expect the over-- all economy, as reflected by real GDP, to grow by 2.0% for 2001 and then rise to 3.2% next year (see figure 1). The unemployment rate is anticipated to rise to 4.6% in 2001, then remain at this rate next year. The consensus forecast for light vehicles sales for this year, 16.3 million units, is nearly a million units less than last year's record-setting sales pace, although it would still qualify as the third strongest sales year. Sales have averaged 17.0 million units (seasonally adjusted annual rate) for the first four months of the year, implying the group was expecting sales to slow to an average of 16.0 million units for the remaining two-thirds of the year. Vehicle sales are expected to rise somewhat, to 16.4 million units in 2002, which would make the years 1999-2002 the four strongest vehicle sales years in history.

The participants expect inflation to moderate to 3.1 % this year and then drop to 2.5% in 2002.

Hybrid electric vehicles

Five speakers on Thursday afternoon discussed the technology and demand outlook for hybrid electric vehicles (HEVs). These vehicles are the front runner of available technologies to improve the fuel economy of the nation's automobiles. They run with two powertrains: One is the usual internal combustion engine, and the other is a battery that draws power from the otherwise lost energy of the brakes. There is a potential fuel efficiency gain of around 20%, depending on the vehicle and driving conditions. Two cars are currently on the market on a limited basis, the Honda Insight and the Toyota Prius. Those manufacturers report a huge pent-up demand for the vehicles.

The first speaker was the vice president in charge of HEV technology al a Big Three automaker. While the speaker felt that the market for these technologies exists, the current cost structure makes the vehicles more ex. …

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