U.S. Markets closed

‘Peak Driving’ Is Looking Like a Myth

Rick Newman
Senior Columnist
The Exchange

You may have heard that Americans’ love affair with the automobile is dead.

Long live the automobile.

Auto executives have been worried lately, and not just because their rear view mirrors are filled with debris. Americans are driving fewer miles, for one thing. The number of households with no car at all hit record levels recently. Perhaps most ominously, “millennnials” aged between 16 and 34 — and the future car buyers of America — don’t seem to hear the call of the road the way prior generations did. “The driving boom is over,” a recent report by the U.S. Public Interest Research Group somberly declared.

Those trends have led to the idea of “peak driving:” a long-term inflection point at which driving begins to decline for good and cars become less culturally significant, the way company towns, three martini business lunches and the nuclear family have faded. The only problem with that theory is that automakers have been enjoying a surge in sales and profitability as the industry recovers from its worst downturn in decades. Peak driving may turn out to be little more than a statistical blip.

2013 Honda CRV (photo: AP Photo/Mark Bramley)

See photos of vehicles discussed in this article.

Auto sales for the first half of 2013 came in at an annualized rate of nearly 16 million vehicles, far above most analysts’ projections. That’s an 8% increase over sales through the same period in 2012 and the strongest pace since 2007. It’s especially notable that sales were strong amid this year’s tax hikes and federal spending cuts, which indicates consumers are shrugging off fiscal austerity measures many economists consider destructive.

[Related: Why More Families Are Shunning Cars]

Sales of pickup trucks such as the Ram, Ford F-150 and Chevrolet Silverado led the surge in June, as housing picked up and more contractors swung into action. “That’s a bright spot because sales to small businesses are a harbinger of a greater economic recovery,” says Jesse Toprak of the car-research site TrueCar.com. “Businesses make better financial decisions than consumers. They do more due diligence.” Pickups also have huge profit margins, which is why they're so important to the Detroit automakers.

Sales rose in nearly every segment, however, with vehicles such as Subaru’s new XV Crosstrek crossover, the Mazda 6 sedan and the Ford Focus compact turning in strong numbers. If auto sales continue at this pace for the rest of 2013, it will mark a surprisingly robust recovery for the industry, given that unemployment is still high and the economy is growing at less than 2% so far this year.

The Potemkin market

Sales still aren’t back to the peak levels of 2005, when automakers sold more than 17 million vehicles. But that was something of a Potemkin market with deep distortions. With far too much capacity, General Motors (GM), Ford (F) and Chrysler were building more cars than demand warranted, and selling them with extravagant discounts, often at a loss. The three automakers bled billions. Many purchases, meanwhile, were financed by home-equity loans linked to the housing bubble, which turned out to be funny money.

“That was the era of spent-up demand,” says Anthony Pratt, vice president of forecasting at market-research firm R. L. Polk. “The domestic automakers were resorting to price wars. A lot of people shouldn’t have purchased cars.”

Compared to that go-go era, the auto industry has clearly downshifted. Yet GM, Ford and Chrysler are all profitable today, even with lower sales numbers. Buyers are in better shape, too, since banks are vetting them more carefully. And the quality of cars continues to improve, which means buyers are committing to products they’ll likely end up happy with.

It’s true that cars seem to be falling out of favor with certain groups of Americans. But there could be other explanations for that besides the peak driving idea. Driving miles may be down simply because fewer people have jobs and more have moved closer to cities in the aftermath of the housing bust. The total amount of miles driven declined at least twice before, during recessions in the 1970s and early 1980s. It could be that drivers are just taking longer to get back to cruising speed this time, which would be in line with the nature (and severity) of the latest recession.

Millennials do say they’re less interested in driving, but young people have never bought many new cars, anyhow. Polk’s data show that buyers between the ages of 18 and 34 accounted for 14.6% of all new car purchases in 2008. Today that has fallen to 11.4%. That’s a significant but unsurprising drop, since young workers have been hurt the most by the weak recovery and grueling job market. Once they get on their feet and start to build families, they may suddenly become more interested in sedans, wagons and even minivans. It’s also possible more young people are driving their parents’ cars, especially if they’ve moved into Mom and Dad’s basement to save money.

Other trends suggest the auto recovery is sustainable and might get better still. The average vehicle these days is 11.4 years old, according to Polk, up from 9.8 years old in 2003. That’s partly because cars are more reliable, but it also reveals considerable pent-up demand, with many owners likely to buy a new ride in coming years. Even if that 11-year-old car still runs like a dream, it doesn’t have the modern safety equipment or slick electronics found on new cars today; these are very effective at drawing people into showrooms.

Low interest rates have helped fuel sales, but rates on auto loans are driven less by Federal Reserve policy than mortgage rates are. So they ought to stay low for longer. And even if rates go up, automakers with “captive” in-house finance companies might still find it better to offer low-rate or even zero-rate loans than to offer rebates or cash incentives.

One final factor undergirding a long and lasting auto recovery is a more pragmatic consumer. Car buyers are spending more on their purchases, with the average cost of a new vehicle hitting $31,000, according to TrueCar. But they’re spreading out loans over seven years on average, which keeps monthly payments down, and keeping their cars until well after the payments end. So they're making more-careful purchases knowing they may hold onto their next car longer than the last one. Instead of a fiery romance, Americans' love affair with the automobile may have evolved into a tested and committed relationship.

Rick Newman’s latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.