Motor vehicles, model year 1987.

Moran, Larry R.

Motor Vehicles, Model Year 1987

SALES of new motor vehicles declined in model year 1987 for the first time since model year 1982.(1) Sales declined 4 percent, to 15.4 million units, in 1987, following increases of 2 1/2 percent in 1986 and 10 percent in 1985 (chart 1). The 1987 decline was accounted for by sales of cars; sales of trucks changed little. As in the 2 preceding years, the volatile quarterly pattern of motor vehicle sales in 1987 reflected, to a large extent, the terms and timing of sales-incentive programs offered by domestic manufacturers.

1. For analysis in this article, a model year begins on October 1 and ends on the following September 30. Thus, model year 1987, which began on October 1, 1986, and ended on September 30, 1987, covered the fourth quarter of 1986 and the first, second, and third quarters of 1987.

Discussions in this article are based on unit sales, inventory, production, and price data. These data underlie BEA's estimates of auto and truck output, which are part of the national income and product accounts estimates.

Following 2 years at high levels, car sales fell 5 1/2 percent in model year 1987. The fall in sales was more than accounted for by domestic cars, which dropped sharply after declining moderately in 1986. Sales of imported cars increased for the fifth consecutive year.

Truck sales in model year 1987 were virtually unchanged from 1986; however, because cars sales declined, trucks accounted for a larger portion of total motor vehicle sales--a record 31 1/2 percent. Sales of all categories of trucks--light domestic, "other" domestic, and imported--changed little.

New Cars

Car sales decreased 5 1/2 percent to 10.6 million units in model year 1987. Car sales had increased 1 1/2 percent in 1986 and 7 percent in 1985. The weakness in 1987 car sales reflected several developments--some economy wide, some specific to the motor vehicle industry.

The economy-wide developments involved changes in consumer income, confidence, and debt. Real disposable personal income increased only 1 1/2 percent in model year 1987, less than one-half of the increases in each of the 2 preceding years. While remaining high, consumer confidence, as measured by the Index of Consumer Sentiment prepared by the University of Michigan's Survey Research Center, declined slightly in model year 1987. Further, survey respondents were more reluctant than a year ago to finance purchases by increasing debt.

Developments specific to the motor industry included higher interest rates offered by automakers' finance companies, a larger increase in new car prices than in 1986, saturation in the car market, and the continued shift by consumers from car to truck purchases.

For the most part, interest rates on new car loans in model year 1987 were higher than in 1986. In 1986 and 1987, domestic automakers--through their financial subsidiaries--offered sales-incentive programs that featured below-market interest rates. As shown in chart 2, interest rates on loans by automakers' finance companies were around 9 1/2 percent throughout most of model year 1986, considerably lower than rates on loans by commercial banks--the other major source of car loans. In 1987, except in the third quarter, interest rates on finance company loans were considerably higher than they had been in 1986 and were also higher than rates on commercial bank loans. Interest rates on commercial bank loans declined in 1987, but were still above 10 percent at the end of the model year.

New car prices increased somewhat more in 1987 than in 1986. The Consumer Price Index for new cars increased 4 1/2 percent in 1987, compared with a 3 1/2-percent increase in 1986; the increases in each year were more than the increase for all consumer prices. In contrast, the average expenditure per new car increased at the same pace--6 1/2 percent--in each model year.2 For domestic cars, the average expenditure increased to $13,074 in 1987; for imported cars, the average expenditure increased to $14,387 (table 1).

2. 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 its 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.

The saturation in the new car market was the result of 4 years of strength in car sales. During the 1981-82 recession when new car sales fell sharply, the stock of late-model cars (new cars purchased in the past 3 years) owned by consumers declined. Early in the current expansion, new car sales increased sharply, as consumers --who had postponed replacing older cars--began making replacement purchases. Cars sales, spurred by domestic automakers' sales-incentive programs, continued strong in model years 1985 and 1986; in 1986, car sales reached 11.2 million. By the end of model year 1986, replacement demand was waning as the stock of late-model cars owned by consumers reached a near-record level. Further in 1987 the average number of cars per household was a near-record 1.33, and the average number of motor vehicles per household was a record 1.83.

As replacement demand subsided, a larger portion of new vehicle purchases were second and third vehicles for families. Because families are less likely to purchase a car as a second or third vehicle than as a first vehicle, car sales continued to weaken relative to truck sales. In 1987, cars were a record low 68 1/2 percent of vehicle purchases, down from 70 percent in 1986, 75 percent in 1983, and 79 1/2 percent in 1981.

Domestic and import sales

Sales of domestic cars dropped 9 percent to 7.3 million in model year 1987, following a 4-percent decline in 1986 (table 1). The 1987 decline was spread across all size classes. The largest decline was in sales of intermediate-sized cars, to 2.1 million from 2.5 million in 1986. Sales of full-size and luxury cars declined to 1.6 million from 1.8 million, and sales of compact and subcompact cars declined to 3.6 million from 3.8 million.

Sales of imported cars, almost all of which are compact and subcompact cars, increased 2 1/2 percent in model year 1987 to a record 3.2 million. The 1987 increase was more than accounted for by sales of South Korean cars, which were up nearly threefold to 0.3 million; 1987 was the first full model year in which South Korean cars were available in the United States. Sales of Japanese cars, which accounted for roughly two-thirds of all imports in 1987, declined to 2.2 million from 2.4 million in 1986. The decline in Japanese car sales--the first substantial decline since 1982--reflected a sharp increase in their prices, largely due to the depreciation of the dollar against the yen. Sales of other imported cars changed little in 1987.

For the third consecutive year, domestic intermediate-sized cars and domestic full-sized and luxury cars lost market share (percent of total domestic and import sales) to domestic compact and subcompact cars and to imported cars, which are primarily compacts and subcompacts. The market share of domestic intermediate-sized cars fell to 20 percent in 1987 from 22 percent in 1986 (chart 3). The market share of domestic full-sized and luxury cars decreased slightly to 15 1/2 percent from 16 percent and that of domestic compact and subcompact cars--despite the decline in sales--increased slightly to 34 percent from 33 1/2 percent. The market share of imported cars jumped to a record 30 1/2 percent from 28 percent.

Quarterly patterns

From a record high of 12.9 million units (seasonally adjusted annual rate) in the third quarter of 1986, car sales fell sharply in the fourth quarter and in the first quarter of 1987; they increased slightly in the second quarter and jumped sharply in the third (chart 4). The sales pattern--primarily accounted for by domestic cars--largely mirrored the impact of the domestic automakers' sales-incentive programs.

Domestic cars.--Domestic automakers offered various sales-incentive programs, designed to promote sales and reduce inventories, throughout much of model year 1985 and nearly all of model years 1986 and 1987. The programs, which offered below-market interest rates or rebates, affected the timing of sales by encouraging consumers to purchase cars or trucks earlier than they had planned or to delay purchases in anticipation of future incentives. Also, the programs may have encouraged some consumers who had planned to buy late-model used cars to buy new cars instead. However, programs offered in the first three quarters of each model year were generally limited in coverage and only mildly attractive. Consequently, their effect on sales and inventories was moderate. Programs offered in the third quarters of 1985, 1986, and 1987 (the last quarter of each model year) were especially attractive; these programs covered most models and offered either interest rates well below those previously offered or sizable rebates. As a result, these programs sharply boosted sales and helped cut inventories.

Sales of domestic cars fell to 7.8 million in the fourth quarter of 1986 from 9.5 million in the third. The decline reflected the ending of the attractive incentive programs offered in the third quarter. Late in the fourth quarter, in an attempt to promote sales, automakers initiated new programs. These programs, for the most part, did not offer as attractive incentives or cover nearly the number of models as did the third-quarter programs. Sales, however, rebounded late in the fourth quarter as consumers responded to the programs and to prospective changes in the Federal tax law. (Effective January 1, 1987, the Tax Reform Act of 1986 eliminated the deduction for State sales taxes and began phasing out the deduction for interest payments on consumer loans.) Domestic car production increased to 7.9 million units in the fourth quarter from 7.4 million in the third. Domestic car inventories, mostly held by dealers, increased slightly to 1.46 million units in the fourth quarter from 1.33 million in the third. Largely reflecting the sharp dropoff in sales, the inventory-sales ratio rose to 2.24 in the fourth quarter from 1.68 in the third. (A ratio of around 2.00 is generally regarded as desirable by the industry.)

Dampened by the changes in Federal tax laws and by the absence of extensive incentive programs, sales of domestic cars fell to 6.7 million in the first quarter of 1987, the lowest level in 4 years. The fall in sales also may have reflected decisions by some consumers to postpone purchases in anticipation that automakers would offer more attractive incentive programs later in the model year. Despite declining sales, domestic automakers maintained production at 7.9 million in the first quarter. Thus, inventories increased sharply to 1.80 million, and the inventory-sales ratio jumped to 3.21, the highest level since the fourth quarter of 1981.

Although sales increased slightly to 7.0 million in the second quarter, they remained considerably below levels in most of 1984-86. Again, some consumers may have postponed purchases in anticipation of new incentive programs at the end of the model year: A survey commissioned by a domestic automaker found that nearly one-half of potential car buyers expected more attractive incentive programs to be offered in the third quarter. To reduce high inventories, automakers cut production to 7.1 million by temporarily closing plants and by converting plants for new models early and for extended periods of time. Domestic car inventories remained at 1.80 million, and the inventory-sales ratio declined only slightly to 3.07.

Sales of domestic cars jumped to 8.0 million in the third quarter, reflecting the introduction of more attractive sales-incentive programs. Sales, however, were well below the third-quarter 1986 rate. The lower rate of sales in the third quarter of 1987 reflected the year-long weakness in new domestic car sales discussed above and the fact that the incentive programs were less attractive than those offered a year earlier. Third-quarter 1987 programs were similar to programs offered in the third quarter of 1986, but the 1987 programs were a less dramatic improvement over the limited programs offered in preceding quarters. Further, because the difference between interest rates offered under the programs and rates available from other sources of finance were smaller in 1987, the incentives amounted to a smaller portion of the cost of buying a new car (price and finance costs) than in the preceding year. In 1987, the third-quarter incentive programs amounted to 5 percent of the cost of buying a new car, compared with 3 percent for first- and second-quarter programs. In 1986, the third-quarter programs amounted to 6 percent of the cost of buying a new car, compared with 2 percent for first- and second-quarter programs. Domestic automakers also cut production-- to 6.3 million--in order to reduce inventories. Domestic car inventories fell sharply to 1.36 million, and the inventory-sales ratio fell to 2.06.

Imported cars.--Sales of imported cars were 3.5 million in the fourth quarter of 1986, the same as in the third quarter. For the most part, foreign automakers had not offered incentive programs in the third quarter of 1986; thus, sales of imported cars were not shifted from the fourth quarter to the third. Further, the provisions of the Tax Reform Act of 1986 that made it advantageous to purchase cars before January 1, 1987, helped support the level of sales of imported cars in the fourth quarter. In the first quarter of 1987, sales of imports fell to 2.8 million, the lowest level in nearly 2 years. After increasing to 3.0 million in the second quarter, sales of imports jumped to a record 3.6 million in the third. The third-quarter increase reflected, in part, incentive programs offered by foreign automakers in an attempt to compete with the domestic incentive programs.

New Trucks

Truck sales, at a record 4.9 million units in model year 1987, were little changed from last year. Truck sales had increased 4 percent in 1986 and 14 1/2 percent in 1985.

Sales of light trucks (up to 10,000 pounds gross vehicle weight) were unchanged from last year at 4.57 million. These trucks include light conventional pickups, compact pickups, sport utility vehicles, and passenger vans. About three-fifths of light trucks purchases are for personal use, and, consequently, many of the same developments that affected car sales also affected light truck sales. However, light truck sales were relatively stronger than car sales again in 1987. The share of motor vehicles purchases accounted for by light trucks reached a record 29 1/2 percent in 1987, up from 28 1/2 percent in 1986, 23 1/2 percent in 1983, and 18 1/2 percent in 1981. The relative strength of light truck sales in 1987 reflected, in part, the fact that a larger portion of vehicle purchases were second and third vehicles for families. Light trucks offer recreational and utility features, such as increased passenger- or load-carrying capacity, not available in cars; families purchasing a second or third vehicle often purchase a truck for these features. A survey by the University of Michigan's Survey Research Center showed that in 1986 trucks accounted for only 1 in 10 of first vehicles owned by a family, but accounted for 4 in 10 of additional vehicles. Further, in many instances, light trucks are priced lower than comparably equipped cars.

Sales of light domestic trucks changed little at 3.69 million in 1987. Sales of imported trucks, mostly small pickups from Japan, were unchanged at 0.88 million; however, sales of imported trucks edged up to a record 19 percent of total light truck sales in 1987.

Sales of "other" domestic trucks (over 10,000 pounds gross vehicle weight) were unchanged at 0.29 million in 1987. 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 1987 generally reflected sales of light domestic trucks, which were affected by the terms and timing of the sales-incentive programs. Truck sales fell to 4.72 million in the fourth quarter of 1986 from 5.60 million in the third (chart 5). The fall was more than accounted for by sales of light domestic trucks, which had been boosted by attractive sales-incentive programs in the third quarter; sales of both "other" domestic and imported trucks increased. In the first quarter of 1987, truck sales declined further to 4.42 million. The decline was accounted for by imports; sales of both light domestic and "other" domestic trucks changed little. In the second quarter, truck sales jumped to 5.00 million; sales of all truck categories increased. In the third quarter, sales of trucks increased to 5.29 million. The increase was more than accounted for by light domestic trucks, which were, for the most part, covered by the extensive incentive programs; sales of "other" domestic trucks changed little, and sales of imported trucks declined slightly.

Table: CHART 1 New Motor Vehicle Sales by Model Year

Table: CHART 2 Interest Rates on New Auto Installment Loans

Table: 1.--Selected Motor Vehicle Indicators

Table: CHART 3 Market Share of New Car Sales by Model Year

Table: CHART 4 Retail Sales of New Cars

Table: CHART 5 Retail Sales of New Trucks