What is the “New Normal?”

by Peter Sorgenfrei

A question we get frequently when discussing the future of the auto industry in the U.S. is: “Will this economic downturn have the same impact on the American psyche as the Great Depression?  Will the buying habits of the American automotive consumer fundamentally change?”  Our answer; yes and no.

First off, our current economic situation is nowhere near as severe as the massive market adjustment during the early part of last century.  While the double-digit unemployment rate, high rate of foreclosures and daily doom reports from the talking heads are not exactly great news, we are not experiencing sacrifice and shortages seen in the U.S. beginning with Black Tuesday in 1929.  While our relatives rationed gasoline and saved rubber bands our biggest shortage these days are a dearth of Eggos and canned pumpkin pie filling.  Hardly a comparison.

The American consumer, all things considered, is still consuming. He/she still eats out, still shops, still drives to work and takes the kids to soccer practice. The change that has happened in the last 18 months is how consumers talk about their financial lives. They worry more, they might cut back here and there, but net/net they are still consumers.

Car buying behavior has definitely changed – fewer new cars are sold today compared to last year and the types of vehicles purchased  is changing.  The volume story is one of consumers realizing that purchasing a new vehicle every three-five years isn’t a requirement so they are keeping their vehicles longer.  Most industry “experts” believe that the the sales volume will return, albeit to a “new normal” of 11 – 12 million vehicles per year.  The real question is what will the showroom floor look like?  Will the American consumer start buying only what they need rather than what they want?  Will the streets of NYC begin to mirror those of Paris? Probably not.

Our take is that yes, the garages of America will be populated with relatively smaller, more fuel efficient vehicles in the future but it isn’t because this economic hiccup fundamentally changed our values.  It is more a combination of less conspicuous consumption combined with manufacturers offering more efficient products mandated by law, not consumer desire.

Fundamentally, a 5-passenger hatchback cannot meet the needs of a family of 7.   There will still be a need for minivans, crossovers and yes, even SUVs that seat 7+ passengers.  The difference is they will be purchased by people who need them to schlepp the kids, carry the cargo or tow their boats.  The rest of us may downsize to more fuel-efficient Crossovers and sedans but the “new normal” will still feature the American consumer driving more car than they really need.

Advertisements
Tagged , , , , ,

4 thoughts on “What is the “New Normal?”

  1. Dan says:

    Great write-up Peter. I agree, this economic hiccup (so eloquently stated) will not hugely affect the fundamental American love of large. Do you think, though, that conspicuous consumption will be still be an issue after we’re out of the recession?

  2. sorgenfrei says:

    Dan – thanks. I guess that depends on the definition of conspicuous. We believe consumers will (maybe after a short period to nurse the headache) return to spending and quite carelessly at that. It is such an ingrained part of the American consumer fabric that it is unlikely the current economic challenges will cure it.

  3. robert ampthor says:

    Peter, I agree with all your points. However curious as to your thoughts on if the fundamental financial philosophy of a household or America will change. An example would be the US swinging from a negative savings rate to one of about 4.4% as people are currently more conservative in their spending. Have they changed how they view saving and spending?

  4. sorgenfrei says:

    Bob,
    There has been a fluctuation in the savings rate, and while it may stay positive in the ‘new’ normal, it is still significantly less than most industrialized nations, and we expect it to remain so. We do not believe there is a fundamental change in savings behavior which will affect overall consumerism.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: