Motor vehicles, model year 1989.

Moran, Larry R.

Motor Vehicles, Model Year 1989

SALES of new motor vehicles in the United States decreased 1 1/2 percent to 15.4 million units in model year 1989, following a 1-percent increase in 1988 (table 1).(1) The 1989 decrease was more than accounted for by sales of imported cars and trucks. Sales of both domestic cars and trucks increased slightly.(2)

Motor vehicle sales have been within a range of 15 million to 16 million units in each year since 1985. Prior to 1985, the highest level of sales was 15.3 million in 1978, and only once were sales more than 14.5 million for 3 consecutive years--1977-79 (chart 2).

The continued high level of sales in the past 2 years reflected strength in many of the general factors usually associated with consumer expenditures for durable goods, as well as small increases in new car prices. For the second consecutive model year, real disposable personal income increased by more than 4 percent, and for the sixth consecutive year, the unemployment rate declined. In 1989, consumer confidence (as measured by the Index of Consumer Sentiment prepared by the University of Michigan's Survey Research Center) registered its largest increase in 5 years. The consumer price index for new cars increased slightly in 1989 after increasing only 2 1/2 percent in 1988. One result of the strength in consumer income was a 6 1/2-percent increase in the average expenditure per new car to $15,189 in 1989 after a 6-percent increase in 1988.(3) The increases in average expenditures, which were well above the increases in the consumer price index for new cars, indicated that consumers shifted purchases to bigger cars or to cars with more optional equipment.

Other factors specific to the motor vehicle market have constrained the growth in unit sales in recent years. The stock of consumer-owned vehicles reached a record high in 1989, the result of 5 years of strong sales and an increase in the length of time owners are keeping vehicles. The average age of cars on the road (estimated by R. L. Polk and Company) climbed in 1985 to 7.6 years--the highest level since 1950--and has changed little since then. Replacement purchases (purchases to replace older vehicles), which had stimulated unit sales in 1983-86, returned to more "normal" levels in 1987-89. The increase in the number of vehicles per household, which had been steady in 1983--87, slowed sharply in 1988--89.

Two factors related to the financing of new car purchases--longer new car loans and higher interest rates--also constrained unit sales growth. The average length of new car loans made by auto finance companies, which had climbed steadily through most of the 1980's, jumped sharply in 1987 and 1988 to a record 56 months. For two reasons, longer loan periods may impede new car sales when the car that the loan covers is to be used as a trade-in. First, the owner must use at least part of the trade-in value received to pay off the loan rather than as a down-payment on the new car. Second, if the owner waits until the loan has been paid off, the owner would receive less value on the trade-in because the car is older. (The average length of new car loans declined slightly to 55 months in 1989; the decline reflected the effects of sales-incentive programs that encouraged buyers--who otherwise would have paid cash--to finance cars over 24 months. Similar declines in the average length of loans occurred in earlier years when substantial incentive programs were offered.) Interest rates on new car loans were generally higher in 1989 than in 1988 (chart 3). After ranging from 10 to 11 percent in model year 1988, interest rates offered by commercial banks increased from 11 percent in the fourth quarter of 1988 to 12 1/2 percent in the second quarter of 1989, before declining to 12 percent in the third. Interest rates offered by auto finance companies, which were 12 percent for most of model year 1988, were 13 percent in the fourth quarter of 1988 and the first quarter of 1989 and then declined to 12 percent in the second and third quarters.

New Cars

New car sales declined 1 1/2 percent to 10.3 million units in model year 1989; the decline was more than accounted for by import car sales. New car sales had declined 1/2 percent in 1988 and 5 1/2 percent in 1987.

Domestic and import car sales

Domestic car sales increased 1/2 percent to 7.4 million in model year 1989 after declining for 3 consecutive years. Increases in luxury and full-size cars (to 1.7 million) and compact cars (to 2.7 million) more than offset declines in intermediate cars (to 2.0 million) and subcompact cars (to 1.0 million).

Import car sales fell 7 percent to 2.9 million--the lowest level since 1985--after declining 2 percent in 1988. The declines reflected, in part, increases in sales of foreign models manufactured in the United States, which are counted as sales of domestic cars; previously these models had been imported. In addition, the shift in consumer purchases to larger cars may have dampened sales of imported cars, which are mostly compacts and sub-compacts. A number of foreign manufacturers have responded to the shift by introducing full-size and luxury models. Sales of imported cars from most countries declined in 1989: Sales of cars imported from Japan--which account for roughly two-thirds of all import car sales--declined 4 1/2 percent, and sales of cars from South Korea and West Germany declined 13 1/2 percent and 11 1/2 percent, respectively.

The shift in consumer purchases to larger cars has been in progress for several years and can be seen in changes in size-class market shares (percent of total domestic and import car sales) in the past 2 years (chart 4). Domestic compact cars gained market share at the expense of domestic subcompact cars; the market share of domestic compact cars increased to 26 1/2 percent in 1989 from 22 1/2 percent in 1987, and the market share of domestic subcompact cars declined to 9 percent from 11 1/2 percent. Further, domestic full-size and luxury cars gained market share at the expense of domestic intermediate cars; the market share of domestic full-size and luxury cars increased to 16 1/2 percent from 15 1/2 percent in 1987, and the market share of domestic intermediate cars declined to 19 percent from 20 percent. The market share of imported cars declined to 28 1/2 percent from 30 1/2 percent in 1987; the decline was partly due to lower sales of imported subcompact cars.

Quarterly patterns

New car sales changed little at 10.5 million (seasonally adjusted annual rate) in the fourth quarter of 1988, fell sharply in the first quarter of 1989, and then increased in both the second and the third quarters (chart 5). The pickup in the second half of the model year primarily reflected enhanced sales-incentive programs--featuring rebates or below-market financing--offered by manufacturers.

Domestic cars.--In the fourth quarter of 1988, domestic car sales increased slightly to 7.5 million from 7.4 million in the third. Production increased to 7.6 million from 7.3 million. Inventories increased slightly to 1.62 million units from 1.57 million. The inventory-sales ratio edged up to 2.60 from 2.53, remaining above the 2.40 ratio traditionally targeted by the industry.(4)

Sales fell to 7.0 million in the first quarter. In an attempt to reduce swelling inventories, manufacturers cut production to 7.1 million. Still, by quarter's end, inventories had risen to 1.69 million, and the inventory-sales ratio was 2.90.

As an additional measure to reduce inventories, manufacturers introduced incentive programs late in the first quarter. Early in the second quarter, these programs were enhanced. Sales picked up initially but fell off late in the quarter; for the quarter, sales increased to 7.3 million. Production changed little at 7.1 million. Inventories edged up to 1.73 million, and the inventory-sales ratio, reflecting the increase in sales, edged down to 2.84.

With inventories still high, domestic manufacturers again enhanced their incentive programs early in the third quarter. The new incentives covered nearly all 1989 models and, in September, many 1990 models. Many of these programs were the most attractive ever offered by manufacturers. Interestingly, about four-fifths of new car buyers chose cash rebates rather than below-market financing, even though the latter generally provided a larger financial benefit. Buyers used the cash to pay off existing loans on trade-in cars or as a downpayment. Sales jumped to 7.9 million for the quarter, the highest level since the third quarter of 1987. This jump, along with a cut in production to 6.8 million, led to a decline in inventories to 1.58 million and in the inventory-sales ratio to 2.41.

Although the inventory-sales ratio has been at or above 2.40 in all but two quarters since the fourth quarter of 1986, recent developments suggest that a higher ratio has not become acceptable to the industry. Even with the inventory-sales ratio at the end of the third quarter of 1989 at the lowest level in six quarters, retail dealers have resisted pressures from manufacturers to increase inventories of 1990 models. Consequently, manufacturers have cut production plans for the fourth quarter.

Imported cars.--Sales of imported cars, which had declined in each quarter of model year 1988, declined further to 3.0 million in the fourth quarter of 1988 and to 2.8 million in the first quarter of 1989. Only a few foreign manufacturers offered incentive programs through the first quarter, and those programs were, for the most part, modest. Most foreign manufacturers, with import sales at a 4-year low and inventories at record levels, joined domestic manufacturers in offering new or enhanced incentives in the second quarter; import car sales increased to 3.0 million in the second quarter. However, even with enhanced incentives in the third quarter, sales declined to 2.9 million.

New Trucks

New truck sales declined slightly to 5.07 million units in model year 1989 from a record high in 1988. The decline--the first since the recession year of 1981--was more than accounted for by sales of imported trucks. Sales of domestic trucks increased.

Light truck sales (up to 10,000 pounds gross vehicle weight), which accounted for 90 percent of total unit truck sales in 1989, declined for the first time in 8 years. These trucks include light conventional pickups, compact pickups, sport utility vehicles, and passenger vans. About two-thirds of light truck purchases are for personal used, and, thus, many of the same developments that affected car sales affected light truck sales. Light trucks were included in most of the manufacturer's sales-incentive programs in the second and third quarters.

Throughout much of 1980's, the strength in light truck sales reflected a substitution of truck purchases for car purchases, particularly by families purchasing second or third vehicles. Light trucks offer recreational and utility features, such as increased passenger and load-carrying capacity; families purchasing a second or third vehicle often purchase a truck for these features. In addition, prices were lower for many light truck models than for most car models. However, the substitution of truck purchases for car purchases slowed significantly in 1989. Trucks accounted for 33 percent of motor vehicle sales in 1989, only slightly more than in 1988.

Light domestic truck sales increased 2 percent to 4.21 million in 1989 after 12-percent increase in 1988. Import truck sales, mostly small pickups, dropped 19 1/2 percent to 0.52 million in 1989 after plummeting 26 1/2 percent in 1988. The declines in import truck sales, as with import car sales, partly reflected an increase in foreign truck models manufactured in the United States; these models, which previously had been imported, are counted as domestic trucks.

Sales of "other" domestic trucks (over 10,000 pounds gross vehicle weight) changed little at 0.34 million. These trucks, nearly all purchased by business, range from medium-duty general delivery trucks to heavy-duty diesel tractor-trailers.

The quarterly pattern of truck sales in model year 1989 mirrored that of cars. Truck sales declined to 5.09 million in the fourth quarter of 1988 from 5.19 million in the third; sales of both domestic light trucks and imported trucks declined, and sales of "other" domestic trucks increased (chart 6). In the first quarter of 1989, truck sales declined to 4.88 million; sales of all types of trucks contributed to the decline. Truck sales increased to 4.96 million in the second quarter; sales of both domestic light trucks and imported trucks increased, partly reflecting new incentive programs, and sales of "other" domestic trucks declined. Truck sales jumped to 5.41 million in the third quarter, the highest level in 3 years; a large increase in light domestic truck sales, reflecting enhanced incentive programs, more than accounted for the jump. Sales of both imported trucks and "other" domestic trucks declined slightly. [Chart 2 to 6 Omitted] [Tabular Data Omitted]

(1)For this article, the model year is defined as beginning October 1 and ending on the following September 30. Thus, model year 1989 covers the fourth (calendar) quarter of 1988 and the first, and third quarters of 1989.

This article focuses on data for unit sales, inventories, and production drawn mainly from Ward's Automotive Reports and the Motor Vehicle Manufacturers Association and 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, which are part of the national income and product accounts estimates. (2)Sales of domestic cars and trucks consist of sales of vehicles manufactured in North America and sold in the United States. Sales of imported cars and trucks consist of sales of vehicles manufactured outside North America and sold in the United States. (3)BEA derives the average expenditure per car by using the average retail price of each model (adjusted for options, discounts or premiums, and sales taxes) weighted by the market share of sales taxes) weighted by the market 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. (4)Inventory developments may be tracked using data on inventory-sales ratios or, as is frequently done by the industry, day's supply (the number of days that would be required to liquidate inventories at the current rate of sales). (Movements in these series are very similar; the differences reflect the fact that inventory-sales ratios are derived from seasonally adjusted data and that days' supply estimates are derived from unadjusted data.) The industry targets about 60 days' supply, which translates into an inventory-sales ratio of about 2.40.