Motor vehicles, model year 1986.

Moran, Larry R.

Motor Vehicles, Model Year 1986

SALES of new motor vehicles increased in model year 1986, but at a slower pace than in the preceding 3 years of the economic recovery and expansion. Unit sales of motor vehicles reached a record 16.0 million, up 2 percent from 1985 (chart 2). Sales had increased at much higher rates in 1983-85. All categories of cars and trucks, except imported cars, contributed to the slowdown. The volatile quarterly pattern of sales in 1986 reflected, to a large extent, the terms and timing of sales-incentive programs offered by domestic manufacturers.

Car sales increased in model year 1986 to the highest level since 1973. The 1986 increase was more than accounted for by sales of imports, which increased sharply for the second consecutive year. Sales, as well as production, of domestic cars declined for the first time in 4 years.

Truck sales increased to a record level in model year 1986, reaching a record 30 percent of motor vehicle sales. Sales of light domestic trucks and imported trucks increased moderately, but at slower rates than in the preceding 3 years. Sales of "other" domestic trucks declined for the first time in 3 years.

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 account estimates.

New Cars

Car sales increased 1-1/2 percent to 11.2 million units in model year 1986. Sales of new cars had increased 7 percent in 1985, 17 percent in 1984, and 14-1/2 percent in 1983.

Economic and financial conditions remained generally favorable to new car sales in model year 1986. Real disposable personal income increased moderately--3 percent--for the second consecutive year. Household debt--mainly mortgage and consumer installment loans--continued to increase faster than current-dollar disposable income. The large increases in debt, however, did not dampen consumers' willingness to make major purchases; according to the Index of Consumer Sentiment prepared by the University of Michigan's Survey Research Center, consumer confidence in economic conditions changed little in 1986, remaining at a relatively high level.

Interest rates on new-car loans continued to decline. Rates averaged about 11-3/4 percent for commercial banks in model year 1986, compared with 13-1/4 percent in 1985, and about 9-3/4 percent for finance companies, compared with 13 percent in 1985 (chart 3). The sharper drop in the rates for finance companies reflected the effect of the sales-incentive programs offered by automakers through their financial subsidiaries. The programs, which featured below-market interest rates, contributed to a sizable incrrase in the finance companies' share of car loans. The average maturity of new-car loans was a record high 51 months, little change from 1985; a longer maturity reduces montly loan payments.

New car prices increased moderately in model year 1986. The new auto component of the Consumer Price Index inceased 3-1/2 percent, a little more than its 1985 increase but about the same as the 1986 increase in other consumer prices. The average expenditure per car increased 4-1/2 percent, a little less than in 1985. For domestic cars, the average expenditure increased 5 percent in 1986, following an increase of 4 percent. For imported cars, the increase was only 1-1/2 percent, following an increase of 6-1/2 percent; the slowdown was partly attributable to a shift in the sales mix toward low-priced models.

The sharp deceleration in car sales in 1986 partly reflected an easing of pent-up replacement demand that had boosted sales in the past several years. The stock of late-model cars (cars purchased in the past 3 years) owned by consumers had declined during the 1981-82 recession, as new car sales fell sharply. The subsequent recovery in car sales was strengthened by consumers who had postponed replacing older cars during the recession. By the beginning of model year 1986, the stock of late-model cars owned by consumers had returned to a high level; by the end of the year, the stock was near a record level.

Domestic and import sales

Sales of domestic cars declined 4 percent to 8.1 million in model year 1986; the decline was the first in 4 years (table 1). Sales of domestic full-size and luxury cars declined to 1.8 million from 2.0 million in 1985. The market share (percent of total domestic and import sales) of full-size and luxury cars fell sharply to 16 percent in 1986 (chart 4). Sales of domestic compact and subcompact cars declined to 3.8 million from 3.9 million; their market share declined sharply to 33-1/2 percent, after increasing in 1984 and 1985. Sales of domestic intermediate cars were virtually unchanged at 2.5 million, and their market share remained at 22-1/2 percent.

Sales of imported cars--almost all of which are compact and subcompact cars--jumped 17-1/2 percent in model year 1986 to a record 3.1 million from 2.7 million in 1985. The market share of imported cars increased for the second consecutive year to a record 28 percent from 24 percent in 1985. Sales of Japanese cars, which comprised roughly three-fourths of all imports in 1986, increased moderately. Sales of other imports increased rapidly; the increase partly reflected the introduction of low-priced cars from Yugoslavia and South Korea.

Sales of Japanese cars in 1986, as in the past several years, were affected by voluntary limits on shipments to the United States. Effective in April 1981, Japanese manufacturers had agreed to limit shipments to 1.68 million cars per year. When demand for new cars picked up as the economy began to recover in 1983, sales of Japanese cars were constrined by limited supply, and their market share declined sharply. As the limit was raised to 1.85 million cars per year in April 1984 and to 2.3 million in April 1985, the market share of Japanese cars rebounded. The increase in shipments following the April 1985 agreement enabled sales to increase in the second half of model year 1985 and in 1986.

Quarterly patterns

From a high of 12.4 million units (seasonally adjusted annual rate) in the third quarter of 1985, car sales fell sharply in the fourth quarter, increased moderately in the first two quarters of 1986, and then increased sharply in the third quarter (chard 5). The pattern of change in sales--primarily accounted for by domestic cars--largely reflected the impact of the domestic automakers' sales incentive programs.

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 year 1986. The programs, which included both below-market interest rates and rebates, affected the timing of sales of 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 planned to buy late-model used cars to buy new cars instead. Programs offered in the third quarter of 1985 and in the third quarter of 1986 were especially effective; these programs covered most models and offered either interest rates well below those previously offered or sizable rebates.

After boosting domestic sales to 9.4 million and reducing inventories to 1.3 million in the third quarter of 1985, the sales-incentive programs were eliminated at the beginning of model year 1986. Despite the probability that ending the incentive programs would lead to a decline in sales in the fourth quarter, automakers made little change in production because inventory levels were relatively low at the beginning of the quarter. Midway through the quarter, after sales had dropped sharply and inventories swelled, automakers reinstituted incentive programs. Initially, the new programs covered a small selection of cars--mostly compacts--and offered interest rates of just under 9 percent, more than 1 percentage point higher than the rates that had been offered in the third quarter. Sales remained weak; for the quarter, sales were only 7.0 million. Production--at 8.1 million--exceeded sales by a considerable amount, and inventories increased to 1.6 million units by the end of the quarter. The inventory-sales ratio jumped to 2.73, well above the 2.00 ratio generally considered desirable by the industry.

At the end of the fourth quarter, the incentive programs were modified to cover a few more models of cars and some trucks and to offer interest rates just under 8 percent. When sales improved early in the first quarter of 1986, automakers extended the programs, initially planned to end by mid-quarter, to near the end of the quarter. The programs were further modified to cover a much broader selection of cars and trucks and to offer interest rates ranging from 7.5 percent to 10 percent, according to car model and maturity of loan. Car sales increased to 7.8 million, but because production was stepped up to 8.5 million, inventories accumulated further. By quarter's end, inventoris were 1.8 million, and the inventory-sales ratio had changed little at 2.75.

When sales slumped early in the second quarter, incentive programs were reinstituted, with broad model coverage for both cars and trucks and interest rates ranging from 6 percent to 10 percent. Car sales were also boosted by the introduction of new domestic models. For the quarter, sales increased to 8.1 million, and production fell to 7.7 million. By quarter's end, inventories had declined slightly to 1.7 million, and the inventory-sales ratio had dropped to 2.55.

The incentive programs were extended to cover the first half of the third quarter. Sales of domestic cars changed little and inventories--despite cuts in production--still bulged with 1986 models. In mid-quarter, to boost sales and liquidate inventories, automakers made the incentive programs considerably more attractive by broadening coverage to most 1986 models and featuring record-low interest rates of less than 3 percent--more than 7 percentage points below prevailing market rates--or rebates up to $1,500 (rebates received averaged about $750). Sales jumped sharply to unprecedented levels but then fell back near the end of the quarter, partly due to shortages of some models covered by the programs. Sales for the third quarter were a record 9.7 million, up 1.6 million from the second quarter, while production was 7.3 million, down 0.4 million. As a result of record-high sales and curtailed production, inventories were reduced to 1.2 million by quarter's end. The inventory-sales ratio fell to 1.45--the lowest ratio since estimates were begun in 1967.

In order to rebuild inventories from low levels at the beginning of the 1987 model year, domestic automakers have scheduled an increase in production to 8.3 million in the fourth quarter of 1986. Fourth-quarter sales will be influenced by the aftereffect of the 1986 sales-incentive programs and the Tax Reform Act of 1986. It is likely that sales will be reduced because some consumers may have shifted purchases to the third quarter to take advantage of the programs, most of which ended early in the fourth quarter. The Tax Reform Act of 1986 may boost sales somewhat in the fourth quarter, as consumers time purchases to use the sales tax deduction on itemized Federal income tax returns before it is eliminated on January 1, 1987. While the tax act may have some positive impact on fourth-quarter sales, it may have a negative impact thereafter due to the loss of the deductions for sales taxes and for interest paid on new car loans, which will be phased out over the next 4 years.

Imports. --Sales of imported cars increased in the fourth quarter of 1985 to 3.2 million from 3.0 million in the third. The increase partly reflected the greater availability of Japanese cars due to the increase in the voluntary limit on shipments to the United States in the second quarter. Import sales fell to 2.8 million in the first quarter of 1986, increased to 3.1 million in the second, and, despite the domestic incentive programs, increased to a record 3.5 million in the third. The increases in import sales in the second and third quarters may have partly reflected decisions by Japanese manufacturers and the U.S. dealers selling Japanese cars to hold down price increases by absorbing some of the cost of devaluation of the dollar against the yen. In addition, some dealers, to reduce inventories that were at a 4-year high at the end of the second quarter, offered sales-incentive programs in the third quarter; some foreign manufacturers, to maintain their market share, gave dealers cash discounts to help support these programs.

New Trucks

Truck sales increased for the fifth consecutive year to a record 4.8 million units in model year 1986 from 4.6 million units in 1985. The 4-1/2-percent increase was much smaller than increases in the preceding 3 years--17 percent in 1985, 35 percent in 1984, and 19-1/2 percent in 1983.

Sales of light domestic trucks (up to 10,000 pounds gross vehicle weight) totaled 3.7 million--nearly one of every four vehicles sold--in 1986, up from 3.5 million in 1985 and from 3.1 million in 1984. Many of the same factors that affected car sales also affected truck sales. About three-fifths of light truck purchases are for personal use, and much of the market strength of light trucks may reflect their role as low-priced alternatives to cars. Further, light trucks--light conventional pickups, compact pickups, sport utility vehicles, and passenger vans including mini-vans--have features, such as increased passenger- or load-carrying capacity, not available in cars. Families that own more than one vehicle often purchase a truck for these features; a study by the University of Michigan's Survey Research Center showed that, in 1985, trucks accounted for only 11 percent of the first vehicles owned by a family, but accounted for 40 percent of additional vehicles.

Sales of imported trucks increassed to 0.79 million in 1986 from 0.74 million in 1985 and from 0.56 million in 1984. Most imported trucks are small pickups from Japan. Because these trucks have not been subject to voluntary agreement to limit shipments, sales were able to keep pace with demand as market conditions improved in 1983-85.

Sales of "other" domestic trucks (over 10,000 pounds gross vehicle weight) declined slightly to 0.28 million in 1986 from 0.30 million in 1985. Sales of "other" trucks had increased strongly in 1984 and 1985. These trucks, nearly all of which are purchased by business, range from medium-duty general delivery trucks to heavy-duty diesel tractor-trailers.

The quarterly pattern of truck sales generally reflected sales of light domestic trucks, which were affected by the incentive programs. Truck sales declined slightly to 4.86 million (seasonally adjusted annual rate) in the fourth quarter of 1985 (chart 6). The decline was accounted for by light domestic trucks, which had been covered by the incentive programs in the third quarter but were not, for the most part, covered by the fourth-quarter programs. Sales of "other" domestic trucks increased strongly, and imported truck sales were virtually unchanged. In the first quarter of 1986, truck sales declined further to 4.28 million, primarily due to a decline in light domestic trucks, although sales of "other" domestic trucks also declined sharply; imported truck sales increased slightly. In the second quarter, truck sales, again mirroring the movement of light domestic trucks, increased to 4.77 million. "Other" domestic trucks and imported trucks both increased slightly. In the third quarter, truck sales increased to a record 5.38 million. The increase was more than accounted for by light domestic trucks, which were, for the most part, covered by the extensive incentive programs initiated in mid-quarter. Sales of "other" domestic trucks decreased slightly, and imported truck sales dropped sharply.