Global Perspectives Report Global Perspectives Report

Has the U.S. Seen Peak Auto Sales?

by Craig Holke, Investment Strategy Analyst

Key takeaways

  • Sales of autos in the U.S. have declined for two years, even with solid economic growth. A growing population is expected to drive sales higher, yet changes in the use of cars may be having wide-reaching effects.
  • Changing technologies, continued urbanization, and continued increase in ride sharing may be redefining historical ownership of autos.

What it may mean for investors

  • The auto industry is a significant portion of the U.S. economy, both in terms of output and employment. A decline in demand for autos may negatively impact consumer spending and economic growth.

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A significant portion of manufacturing globally is involved in the production of automobiles. Slowing auto sales growth has raised concerns that future economic growth may be constrained. As populations grow and emerging markets continue to develop, the sale of autos should keep increasing. However, competing forces to limit the ownership and expansion of automobiles are acting as headwinds, even in the face of continued economic growth.

Auto sales’ influence on economic growth

Auto manufacturing is important for economic output and employment. In the U.S., autos and parts accounted for 2.5% of GDP growth in the fourth quarter of 2018, and about 8% (999,000 jobs as of March 2019) of manufacturing jobs. There are another two million employed by auto and parts dealers. As a single industry, these are significant numbers. The U.S. is also a key exporter of autos. In 2017, the U.S. accounted for 7.5% of the $747 billion export market, only behind Germany (21%) and Japan (14%). Changes affecting the auto industry have the potential to impact U.S. economic growth.

Growing populations, all else equal, should lead to increased auto sales. Chart 1 shows annualized auto sales for both the U.S. and China. In the U.S., sales recovered following the recent recession. However, the trajectory flattened, and auto sales have declined in both 2017 and 2018. Auto sales in China had been increasing at a rapid pace as the economy develops and more people are able to afford cars.

This trend is expected across emerging economies. Yet, growth declined in 2018. This may be temporarily related to slowing growth or changes, both socially and economically, taking place across the globe and may be impacting demand for autos.

Chart 1. Have we reached peak auto sales?

Chart 1. Have we reached peak auto sales?

Sources: WARD’s Automotive Group, China Automotive Information Net, Bloomberg, Wells Fargo Investment Institute, April 18, 2019. Annualized auto sales between 2005 and 2018.

Changes are taking place in auto preferences

Social changes are taking place that likely will limit the rate of growth in auto sales. The continued urbanization of both developed and emerging markets has changed the need for autos. Very large cities have taken action to limit auto usage to cut down on pollution and congestion. Rapid changes in technology are also affecting demand for autos. Electronic vehicle demand is increasing. While lower oil prices has increased demand for trucks and SUVs in the U.S., a return to higher prices at some point in the future may shift demand to smaller, more fuel-efficient vehicles, as in the past. Ride sharing services has the potential to significantly affect demand. The proliferation of available rides reduces the incentive to have one’s own method of transportation.

Investment implications

Auto makers across the globe are facing increased competition and changes in the use of and demand for their products. Technological changes are being made at a rapid pace. This is requiring expensive investments in new technologies such as batteries for electronic vehicles and autonomous capabilities. At the same time, a potentially slower rate of sales growth or even a decline in sales may have rippling effects across the economy. Lower employment in the higher-paying auto industry may have a negative effect on consumer spending, the key driver of economic growth in the U.S. While the final outcome of these changes is unknown at this point, the auto industry is facing higher volatility and greater uncertainty than in the past.