One for the Record Books

canstockphoto3240708It is hard to avoid gaping at the performance of the auto industry in 2016. “Wow” just doesn’t seem to do justice to the record sales year.

The 17.6 million new cars sold last year did not just top the 2015 total. Yes, analysts had projected another record year in 2016, but predictions are just that.

Should incentives temper the joy of 2016 sales? Perhaps. JPMorgan Chase & Co. today released a research report on car sales, and here’s what the bank said about incentives:

Despite the large headline number, we note that incentives once again spiked, increasing +23% y/y to a new record high ($3,766 per vehicle), indicating an aggressive pricing environment. After a strong run-up in average transaction prices (ATPs, which are net of incentives), TrueCar estimates that December saw the second straight month of year-on-year ATP declines.

According to JPM, each of the Detroit Three increased incentive spend last month compared to December 2015 — GM +15% YOY (-3% MOM), Ford +33% YOY (-2% MOM), and Fiat Chrysler +27% YOY (+5% MOM). JPM cites a preliminary TrueCar report that says incentive spend as a percentage of ATPs in December 2016 reached the second highest level of at least the past seven years at 11.0%, second only to November 2015’s restated 11.3% level. This represents an increase of ~200bp vs. last year’s 9.0%, and TrueCar also estimated ATPs declined -1.1% YOY in December to $33,340 per vehicle.

OK, so maybe the auto market isn’t as healthy has the 17.6 million number implies. Indeed, it is hard to believe that the sales cycle has not peaked. There was a sense that 2015 was perhaps the best of times, but certainly 2016 must qualify for that. Which means 2017 should fall short of 2016 totals. Here’s how JPM assesses the situation:

We expect volatility in monthly sales and increased promotional activity to continue in the near term, and believe that YOY sales growth will be difficult to achieve in 2017. However, we note that a flattish to modestly lower sales number, all else equal, would not be a bad outcome for automotive credit, relatively tight levels aside.

That’s the essence of it. For the auto sector, the year 2017 seems to be heading toward a modulation, in sales and in credit quality. And with the Consumer Financial Protection Bureau presumably headed for battle with the White House, an easing of compliance burdens might mitigate that modulation somewhat. That’s not a bad prognosis for the year, when you come down to it.

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