Need proof of the wealth effect?
Look at U.S. auto company sales for 1999. They are the best ever--17 million cars and trucks.
That tops the previous all-time high of 16.03 million new vehicles sold in 1986.
Low unemployment, low interest rates, a soaring stock market, virtually no inflation and high consumer confidence in the economy drove buyers to new-vehicle showrooms in record numbers in 1999, according to auto industry analysts and executives.
But the really good news for automakers and their dealers was that a solid 48 percent of those buyers chose light trucks--pickups, vans, minivans and sport-utility vehicles.
Trucks generally bring in more money than cars. For example, look at Ford's third-quarter 1999 performance. According to industry analysts, Ford had an average pretax profit of $953 on each vehicle that it sold in the United States in the third quarter. The automaker broke even on cars, generally losing money on smaller models such as the compact Contour sedan, while making up the losses on sales of large and luxury cars.
But Ford earned an average of $2,540 on every pickup, sport-utility vehicle, van and minivan it delivered to consumers, analysts said.
In all, it was a spectacular performance, one that surprised industry executives and analysts alike.
"At the beginning of the year, if anyone had told me that we'd be looking at this kind of number, I would not have believed them," said Jim O'Connor, president of the Ford Division of Ford Motor Co. "I don't think many people would've believed them."
It was the "wealth effect," a general feeling of prosperity that spurs spending, that changed the outlook, said James Holden, president of DaimlerChrysler AG's North American operations.
"People had jobs and income," Holden said. "The stock market was up. People felt good about things."
Holden predicted that many of those conditions will remain in place in 2000. Analysts at the McLean-based National Automobile Dealers Association (NADA) appear to back him up on that, though with a bit less enthusiasm.
NADA chief economist Paul Taylor, in his organization's sales forecast for 2000, predicted that a slowdown in hiring and probable higher interest rates will shrink to the number of new-vehicle sales 15.5 million. He said, however, that 15.5 million "is nothing to scoff at."
Holden and O'Connor are a tad more optimistic. Both executives believe their industry could register 16 million car and truck sales in 2000, thus matching the performance results of 1986.
Still, no one is betting on another 17 million sales year any time soon.
"Seventeen million. That's going to be tough to beat," Holden said.
The prospect of declining sales, however, does not mean declining profits. The reason, according to auto executives and analysts, is trucks.
Ford, DaimlerChrysler and General Motors Corp. all are betting that truck sales will top 50 percent of new-vehicle sales in 2000. Even German sports car specialists, such as BMW AG and Porsche, are lining up to cash in on the expected truck bonanza.
BMW, for example, has introduced its X5 "sport activity vehicle," a crossover vehicle that combines the attributes of a station wagon and sport-utility vehicle. Porsche, meanwhile, has been working on a similar model. Ford is turning its classic pickup truck, the F-150, into a four-door, five-seat pickup/sport-utility vehicle called the F-150 Crew Cab. And GM is outfitting its rugged Chevrolet Tahoe to behave more like a family sedan.
There is worry in some parts of the auto industry that all of this truck stuff might be too much for consumers to accept.
For example, sales of large and luxury sport-utility models, such as the Lincoln Navigator and Chevrolet Suburban, were down 1 percent in November, compared with an overall 7 percent rise in all U.S. auto sales for that month, said David Bradley, an analyst for J.P. Morgan Securities Inc.
December sales of big sport-utility vehicles were soft as well, leading to some speculation within and outside of the industry that consumers might be turning away from the giant trucks.
"A prolonged slowdown in this segment would raise profitability concerns for the Big Three automakers," Bradley wrote in his Dec. 8 survey of the U.S. auto market. He said that part of the November-to-December slowdown in big sport-utility vehicle sales could be attributed to supply problems, mostly caused by plant shutdowns as automakers tool up for the introduction of new models.
Bradley said he expects sales of big sport-utility vehicles "to rebound in the first quarter [of 2000], when large/luxury SUV production lines are again running at full speed."
But, oh, what a sales party it has been, especially for auto dealers who now are rolling in the black.
According to the NADA's January 2000 Trend Line industry forecasts, auto dealers across the nation have been making money during the current sales campaigns.
Dealers in the south Atlantic region, which includes the District, Maryland and Virginia, had net return on sales of 2.4 percent through the first eight months of the year, which amounts to a 15 percent gain in dollar profits when compared with the same period in 1998, the NADA report said.
Dealers in the mid-Atlantic region, which includes New Jersey, New York and Pennsylvania, fared even better. Dealers there had an annual increase of 38 percent in dollar profits, the NADA report said.
"It's been a good year," DaimlerChrysler's Holden said.
Ford's O'Connor agreed, though his company's share of the U.S. market fell to 23.9 percent during the first 11 months of this year, from 25 percent for the same period a year earlier.
O'Connor, speaking with reporters during a national teleconference, attributed the decline to Ford's "conscious decision" in 1999 "to put [profit] margins before share."
"I'm not sure that market share means what it meant before," he said. "If we sell a Ford Focus [economy car] and Ford Explorer [sport-utility vehicle], they both count for the same thing in terms of market share. But the Explorer makes more money."
Ford does not want its market share to continue to decline, O'Connor said, adding that the company's market share is likely to increase in 2000 when all of its latest models are in place. Besides, he said, the company and the industry have reason to be optimistic.
"All the fundamentals that drove this year's record sales are still with us," O'Connor said. "There are low interest rates, high employment, strong consumer confidence and no inflation."
CAPTION: DRIVING UP SALES (This chart was not available)
CAPTION: Ford is turning its classic pickup, the F-150, above, into a pickup/sport-utility vehicle called F-150 Crew Cab.
CAPTION: General Motors's Yukon XL sport-utility vehicle for 2000 has four doors and will feel more like a family sedan than a heavy truck.