How Much Pent-Up Demand For New Cars Is There?

Edward Niedermeyer
by Edward Niedermeyer

Over the weekend Bertel reported on some depressing economic news, noting

Suddenly, automakers aren’t so sure anymore about all that pent-up demand that will bring back U.S. car sales back to their old glory… The big recovery has been postponed for a year or more.

But how much pent-up demand is there, really? According to Edmunds’ analysis of 12 Factors To Watch In The Industry’s Second Half, only about half of the sales lost between 2008 and 2010 were not lost forever to used cars, the inability to get credit and the “new austerity.” As a result, they calculate about 4.3m units of demand is “pent up.” But there’s a question of how accurate that estimate is, and beyond that there’s another question: what happens once the pent-up demand has been blown through?

Lacey Plache, chief economist for explains:

Under normal circumstances, auto sales momentum would be difficult to achieve in the face of a slowdown in hiring and increased uncertainty about economic conditions. However, the supply shortages caused by the Japanese earthquake are far from normal. We estimate deferred demand resulting from these shortages and the associated price increases to total more than2.5 million units at a Seasonally Adjusted Annualized Rate (SAAR) of sales. In May, the SAAR of 11.8 million units fell short of the 2011 forecast of 12.9 million by 1.1 million units. June’s SAAR of 11.4 million units underperformed by 1.5 million. July’s SAAR also will likely increase deferred demand, although by less than May’s and June’s contributions.

Of course, it is possible that automakers will not be able to recover some lost sales if these sales represent lost demand – for example, if consumers decide not to make new auto purchases due to increased concerns about current and future economic conditions. However, the amount of lost demand is likely to be minimal in this case. Typically, lost demand for new cars would occur from buyers defecting to the used car market. In recent months, however, used cars also have been subject to tighter inventories and higher prices resulting from increased demand for Japanese and fuel efficient cars by consumers and dealers.

The key challenge for auto sales momentum will come when deferred demand from the recent shortages is depleted. We expect the lost sales to be largely made up by late fall. At that point, employment and income growth, which drive consumer spending, will be more critical than ever for driving auto sales. Ironically, the expected upcoming rise in auto sales from deferred demand may be the key factor for sparking the jobs growth needed for auto sales momentum to continue.

With estimates ranging from Edmunds’ 12.9m units to about 13.5m units (with many on the low end of that scale), 2011 should be stronger than last year’s 11.6m unit market. But if job creation and housing prices stay weak, and especially if the debt ceiling deadlock affects the US economy through higher lending costs, there’s still a chance that this year will se only modest improvements on 2010’s market. In any case, the economic fundamentals will have to come back in a big way if the auto industry ever wants to return to the “old normal” of 15m+ units per year.

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3 of 45 comments
  • Brewswane Brewswane on Jul 26, 2011

    I drove a 1947 Mercury for 14 years, then a 1966 Chevy pickup for 17 years then a 1939 Ford everyday for 16 years 11 months. Now I split my driving time among a 1931 Ford, a 35 Ford, a 59 Ford and a 60 Ford pickup. I also drive my newest car, a 66 Chrysler, but rarely. There are lots of guys like me. I've never bought a new car and never will.

  • StatisticalDolphin StatisticalDolphin on Jul 26, 2011

    Final demand, pent up or otherwise, is kinda irrelevant when the government is ready, willing and able to funnel tax dollars forcibly extracted from taxpayers into the insatiable maw of GM (don't call it Government Motors) and Chrysler. If you're a taxpayer, you are paying for the capacity to produce new vehicles by these companies regardless of whether you (or anyone else) will enjoy purchasing and owning them.

  • Add Lightness Range Rovers have come a long, long ways from their original concept of a gentleman's Land Cruiser. Pretty useless off road now but the wannabees will love them until the warrantee expires.
  • ToolGuy 'Non-Land Rover' gets 2 bonus points for the correct use of carbon fiber in an automotive application. 🙂
  • ToolGuy "a newly developed vehicle platform it says will double driving range"• Anyone know what this is about?
  • ToolGuy "Toyota recommends that no one ride in the front passenger seat until an inspection or fix can be performed."• This is a good opportunity for the back seat driver in your life. 😉
  • Art Vandelay It will allow Tasos and EBFlex to puff each other’s peters in comfort