The Dow Jones Industrial Average (^DJI -0.65%) is continuing its down streak this week, trading 0.68% lower in early afternoon trading, despite positive signs in new-home sales, job creation, and the automotive industry. New-home sales jumped by 25.4% in October compared to a 6.6% monthly drop in September -- showing that homebuyers are coming back into the market after the summer swoon. Automatic Data Processing also reported a 215,000 gain in the number of private-sector jobs in November, which was well ahead of expectations of 178,000. October's reading of 134,000 was also revised 50,000 higher, to 184,000.
In addition to those positive developments, the automotive industry posted a strong November, with industry sales up 9%, and has been a staple of consumer spending this year. Let's take a deeper look at one of America's most important industries.
SAAR
November posted a nice surge in vehicle sales that recorded a Seasonally Adjusted Annual Rate, or SAAR, of vehicle sales at 16.4 million -- the highest recorded in nearly seven years.
Graph by author. Information from Automotive News DataCenter
November's 16.4 million rate last month is up significantly from last year's 15.3 million mark, and much higher than analysts' 15.8 million estimate. It was the automotive industry's best November since 2003, and only 84,000 units shy of its best November ever.
A consistently increasing SAAR indicates strong demand for new vehicles and, coupled with other factors that I'll discuss later, shows the automotive industry remains healthy.
Average transaction prices
As the automotive industry SAAR continues to rise, two key factors to watch to better understand consumer demand are average transaction prices and incentives. Over the last few years, we've watched average transaction prices steadily climb higher as more consumers need to replace older vehicles. That, in combination with automotive giants like Ford (F -3.01%) and General Motors (GM -0.91%) slashing massive amounts of production capacity and supply, has led to record high transaction prices -- until November.
Table by author. Information from TrueCar.com
November was the first month since December 2010 that average transaction prices declined in year-over-year comparisons, down $198, to $30,634. This will be a key factor to watch going into 2014 to see if this is a one-time wonder, or the beginning of a new trend. I personally believe it to be the former, as the automotive industry is very seasonal, and incentives, or discounts, rose during the holiday season.
"Relatively higher levels of discounting are being used to clear out 2013 model year vehicles," said Jesse Toprak, senior analyst for TrueCar.com, in a press release. "We expect transaction prices to continue to stay in record territory in the short term, as long as the fundamentals in the economy stay positive."
Scrap rates
As you already know from reading this, automotive SAAR is on the rise, and average transaction prices are steady, near record highs. This equals better revenues and better profits for the automotive manufacturers and their investors if these conditions continue... but will they? I believe so.
Recently, the average age of vehicles increased slightly to 11.4 years; and until it begins to decline from massive purchases of newer vehicles, it means that pent-up demand still exists. Further, people often forget to take it a step further, and take vehicle scrap rates into consideration. Vehicles don't miraculously last forever; eventually their usefulness declines to the point they are completely scrapped.
Research by Itay Michaeli, Director of Autos & Auto Parts at Citi Investment Research & Analysis, concluded that vehicle scrap rates rise dramatically at 13 years of age. That means that the average car is less than two years away from being scrapped at a much higher rate, thus providing fresh demand for new and used vehicles soon. As that begins to take place as soon as 2015, in combination with easily available credit and affordability, it should provide the automotive industry with plenty of demand for auto manufacturers and their investors to profit from.
