By Nancy Dunham

Looking ahead this year, many broad economic factors will affect both new- and used-car sales. Economists seem pretty sure the worst is over, but differ about when the economy will really begin to expand (some say not until 2012). Here’s the auto retail outlook so far:

USED-CAR SUPPLY REMAINS LOW
The trend started in 2008 when dramatically lower new-car sales brought fewer used vehicles to the marketplace. Combine that with 2009’s trends, which brought fewer trade-ins, off-lease vehicles, and rental car fleets, and the result is about 8 million fewer used cars on the market in the past two years. A 15 percent projected increase in 2010 new-car sales would put an additional 1.1 million used cars and trucks on the market. Used-car prices will still stay relatively high for several years, though, NADA chief economist Paul Taylor predicts, until the supply returns to average.

NEW-CAR SALES WILL IMPROVE
The short supply of used vehicles narrows the spread between new- and used-car prices. That means that new-car sales will constitute a greater share of the sales mix than in previous years. Before 2008, used cars were profitable on a net basis in every year since 1980. In 2008 dealerships saw, on average, a net loss of $5.00 per used vehicle retailed as gasoline prices first surged to $4.11 per gallon nationally and then fell to less than $2.00 per gallon later that year.

BANKS AND CREDIT UNIONS
They have loosened their constraints on some areas of consumer credit, which in turn has made new- and used-vehicle sales more accessible. But don’t watch for the subprime market to ease dramatically in the near future, says Taylor. Although GMAC’s loosening of some requirements—specifically, lending to customers with scores as low as 620 (and occasionally lower)—has allowed 30 to 35 percent more buyers to qualify for a vehicle, subprime credit is still a stumbling block. Subprime options will likely return once unemployment rates dip, he says. At press time, unemployment was 10 percent, according to the U.S. Bureau of Labor Statistics. Don’t look for immediate changes to the system, though. When employment starts to grow, banks and credit unions with less real estate loan exposure will increase lending for new cars to good credit risks.

THE SUCCESS OF ‘CASH FOR CLUNKERS’
The program translated into 625,000 cars sold and about $18.2 billion worth of retail sales, says Taylor. Those car sales not only stimulated the economy—with money paid in taxes, advertising, and dealership salaries—but brought financial relief to some consumers who might in turn now buy cars. Many used car buyers become new car buyers in this program.

AN UPTICK IN LUXURY PURCHASES
Although the recession caused many consumers to cut back, luxury purchases, such as big-screen TVs, are beginning to rebound, Taylor says. Reports from the Commerce Department show retail spending was up 5.4 percent in December 2009 from December 2008. It’s not a stretch to figure that this will soon translate into car sales. While those who lived through the Great Depression pinched pennies well after economic stability had returned, there’s no indication the same will be true of this recession, which compares to the 1980-82 recession in severity.

NEW-HOME SALES AND BUILDING
These are still off, says the Commerce Department. Sales of new single-family homes declined 11.3 percent in November, to a seasonally adjusted annual rate of 355,000 units.  Looser credit restrictions may ease that decline. When they do, watch for truck sales to begin to rise as building resumes.


Nancy Dunham is a contributing writer.

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