Today's Auto Market, Fact Versus Science Fiction
(Bloomberg Opinion) -- In 1986, Arthur C. Clarke’s “July 20, 2019: Life in the 21st Century” was published. Now, exactly half a century since man first landed on the moon, Clarke’s book has turned out to be fairly prescient. For the moon landing’s 50th anniversary, Rebecca Jones of Car and Driver magazine published a thoughtful examination of Clarke’s many transport-related predictions, one of which was far off the mark.
“For 2019’s low, low prices of $70,000, with easy credit terms, a new car will offer a lot,” Clarke predicted. Today, according to Edmunds, the average transaction price for a new car in the U.S. is actually about half what Clarke expected: $37,342.
So how did Clarke, a noted futurist and scientific visionary, manage to be so wrong? There are two ways, via inflation figures, to look at Clarke’s assumed “low, low price of $70,000” for a new car in 2019.
The first is to use the actual inflation rate when Clarke was writing(2), apply it to every year since, and see what a new car would cost in 2019 by that calculation. According to the Houston Chronicle, the average new car cost $11,838 in 1985. Applying 1985’s actual inflation rate of 3.8% per year until 2019 gives a car cost of $42,071, 14% above 2019’s actual cost of $37,028.
The second is to determine what inflation rate would be necessary to turn the $11,838 cost of a car in 1985 dollars into a $70,000 car in 2019 dollars. That inflation rate is 5.9% per year — higher than the actual rate in 1985.
That 1985 rate of 5.9% is high by today’s standards, but it probably was not outside expectations in the early 1980s. Annual inflation peaked at 13.3% in 1979, and even as that rate plunged to 3.9% by 1984, we can forgive an author — even of science fiction — for thinking that serious inflation might return.
In 1986, the trailing 10-year average inflation rate was 6.4%; the trailing five-year inflation rate was 3.3%. The inflation rate needed to arrive at an average price of $70,000 in 2019 was less than what the country had experienced, on average, in the 10 years prior to Clarke’s writing.
It’s not just that inflation faded significantly as Clarke was writing. Cars themselves became a different element of the U.S. consumption basket. The U.S. Bureau of Labor Statistics has helpfully created an entire consumer price index for new cars. Compare it to the overall urban consumers’ CPI, and we see something significant. For decades, cars were above the CPI trend line relative to its 1982-1984 baseline; since 1987, cars have been below the general trend line and have hardly moved at all since the mid-1990s.
At the same time that cars have decoupled from the rest of the urban consumer price index, their quality has also improved significantly. It’s something I wrote about last year, in comparing two small coupes with dedicated fan bases, one from the early 1980s and one from today. Today’s car is more powerful, faster, more comfortable, has a better entertainment system and is much safer — for relatively less money — than it was in Clarke’s time.
Clarke makes one final supposition about a 2019 car: that it’ll be purchased “with easy credit terms.” On that, he was not wrong. U.S. Federal Reserve data on new car loans show that rates peaked at more than 17% in 1982. Rates are currently 5.35%, after bottoming out in November 2015 at 4%.
As Liz McCormick wrote this week in Bloomberg Businessweek, a decade of low interest rates is changing everything.
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(1) I’m assuming that his book, published in mid-1986, was being written a year earlier in 1985.
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Nathaniel Bullard is a BloombergNEF energy analyst, covering technology and business model innovation and system-wide resource transitions.
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