At the trough of every cycle there is the inevitable debate of whether there will be a “return-to-normal” or whether “this-time-is-different”. Today, aspects of both arguments have been captured by the ubiquitous use of the term “new normal.”
Most forecasts are now projecting that the underlying rate of demand for new vehicles has shifted down from what it was between 1999 and 2006. Some have described their outlook as a “new normal”. I agree with the projection, but disagree with the description. It’s only new, if you ignore the trends of the past 40 years.
Consider, for example, the ratio of new vehicle sales to the number of
The government does not update household projections as frequently as the population numbers, but a total household count of 123 million is a reasonable assumption for 2015. Then, it is simply a case of picking an assumed sales-per-household ratio to get the underlying rate of demand. Assuming a return to the 13% ratio would seem widely optimistic, and would give vehicle sales of 16 million. If the ratio moves to 12% (its current track), that would imply underlying demand is 14.8 million new vehicles.
To be sure, these numbers should be refined by accounting for the size and age structure of the households, their income, their current stock of vehicles, the number of active drivers, average miles of travel, etcetera. Additionally, a permanent reduction in the level of fleet sales should be factored in.
To provide a fuller look at the underlying rate of demand for new vehicles, I’ll review its two components (growth of vehicles in operation and scrappage) in future postings. For now, let’s just recognize that what a lot folks are calling a “new normal” is really a continuation of long-established patterns and trends.