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The "New Normal"

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By JustMee01
July 10, 2009

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That's a new favorite phrase of so many people. Now that the world is ending as we know it, "what's the new normal?" Poking around the Internet and doing some background reading about stocks the other night, I came across a link in seekingalpha to an economic blog. The topic was auto sales, and the point boiled down to: it's as bad right now as it's ever been in the era of easily comparable seasonally averaged annualized rate data.

They also noted the June sales bump that could be a bottom. There was one graph that did prove interesting, though. It was the monthly SAAR data for the entire span of 1967 to present.

The first thing that jumps out at you is a set of increasing local minima of between 9 and 12 million vehicles per year that seems to represent the floor of the auto market (9M in 1975, 10M in 1982, 12M in 1991). These minima mostly correspond to the end of recessions, the exception being the double dip of the early ‘80s that for the auto industry behaved as a single long recession. The "bottom" of that support range (9M) is basically where we are right now. They finish the little piece by noting that this is the worst sales rate since 1967, especially given that there are twice as many drivers now as there were then. That's a lot of potential pent up demand, they conclude...

But how will that pent-up demand unwind? We get a lot of bombastic bombardment-populist and political- about our unhealthy tendency toward over-consumption in this country. Much of it is defensible. We are ridiculously overleveraged, our savings rates are minuscule and we do as a group have a healthy appetite for the latest or greatest gadget. But, our current sales rate is identical to 1967, and the SAAR heading into the recession honestly didn't look like it was close to twice that rate either (see the graph). So, the question it prompted to me is: are we really "over-consuming" automobiles in the US? I don't know how many countless times I've heard that we'll never see 16M units again. Every disembodied head on TV is shouting it. I've even seen people say that 12M is unattainable for the relatively near future.

That got me to wondering where recent per capita SAAR figures fit in a historical context. It's not hard to calculate. So, I did. I downloaded the SAAR data from the Bureau of Economic Activity, and pulled out the census data from 1960 to 2000. To smooth the graph a little, I fit the census to an exponential (surprisingly good fit), and got a reasonable estimate of the population for each of the years from 1967 to the present. Then I just normalized the monthly SAAR data to the estimated population figure for that year. Even though I had a feeling that our "consumption" was not out of hand, I was a little surprised by how low it was, and what the numbers imply (IMO of course.)

1. The per capita adjusted SAAR is surprisingly constant IMO over nearly half a century, running cyclically in a channel between 0.05 and 0.065 new cars sold per person per year. It really hasn't risen above 0.065 for any prolonged period in any of the decades.

2. The graph also shows pretty strong support for the market at 0.05 per person per annum. The only extended period below that rate was 1981 to 1984.

3. Over the last 20 years, the per capita SAAR has been pretty average, and since Y2K, SAAR on a per capita basis has actually been falling to what has historically been a pretty weak rate of 0.05 per person per annum. Frankly, this 0.05 level looks like the bottom of the auto market over the last half-century (that 1981-1984 period is the only exception). That "weak" 0.05 rate seen at the tail end of 2007 corresponds to a current SAAR of 15M units . So, 16M on a per capita basis is actually far from a lofty figure; it's quite close to the bottom support of the population-normalized market (a "current" SAAR of 16M corresponds to a per capita rate of 0.053).

4. Finally, look at the tail of the graph. The recession blew a hole in the market and sent it into a tailspin, as we all know well. But that tailspin is historically unparalleled. It's 40% below the bottom of the market channel, and 25% lower than the lowest rate (1981-1984) seen in half of a century .

So, what the hell is this guy's point, you might ask? I asked that myself, LOL.

I think that these sales rates are unsustainable for any considerable length of time. Cars get in accidents. They die on the road, or they get too expensive to maintain. And you absolutely, positively must have one in this country. You're unemployable in 99.9% of the nation without that transportation. I also think that the notion that we are over-consuming automobiles and that we'll never see 16M units again, is complete and total horsepucky. There's a lot of worry that the demand destruction is permanent, because we were assumed to be running so high. But, that's just not true when you adjust for population changes. That sales rate is actually the historical norm . Either we, our fathers and their fathers were all hell-bent over-consumers, or there's something wrong with the notion that we've been buying too many automobiles over the past few "free-and-easy" years. I also think that pent-up demand must be running at historical highs, and that the survivors (Ford is one IMO, of course) will eventually end up with increased market share of a pretty robust market.

Sorry for the length and all, but I thought I'd share the massaged numbers because it kind of surprised me that the per capita sales rates were so flat, and that our current trough is so ridiculously deep even when you consider an entire half-century of data.

Peter