Take our quiz & meet the car you’ll love.

Why 2012 Could Be the Year of the U.S. Auto Industry

Many signals globally suggest instability. Traditional growth economies — the oft-cited BRICs, or Brazil, Russia, India and China — are slowing their once-seismic growth; Europe’s sovereign debt crisis is anything but resolved and the yen’s strength is putting a squeeze on profits for automakers in Japan. Yet the U.S. seems to be trundling along.

The Fed announced last week it will keep interest rates low until late 2014 — a sign the economy isn’t growing as quickly as expected — but unemployment has dropped for four straight months. New-home sales are up, and annual auto sales have improved 23% since recession-wracked 2009.

Could the U.S. be poised for a great turnaround on the back of the auto industry? GM’s Mustafa Mohatarem thinks so.

“The most surprising thing to many is that the U.S. could be in a leading position” among global players, Mohatarem says. The chief economist at GM, he spoke at the Society of Automotive Analysts’ Automotive Outlook Conference earlier this month. Mohatarem calls the U.S. his source of “greatest optimism” among major global economies, but that comes with a caveat. The auto industry is more volatile than the overall economy, he says, and economic indexes like unemployment still have a long road to recovery.

But auto sales should improve. Most analysts predict shoppers will buy 13.5 million to 14 million new cars for 2012, up from 2011’s 12.8 million.

Pent-up Demand vs. Credit
Colin Langan, a U.S. auto analyst at UBS, sees a few reasons for the improvement. The U.S. is adding roughly 2.3 million new drivers per year, he says, and cars per capita have stabilized. Roughly 77 cars exist in the U.S. for every 100 people, according to R.L. Polk & Co., automotive industry analysts, and U.S. Census data. That’s just off 2007’s 80 cars per 100 people, but up from the low 70s in the early part of the decade.

What’s more, scrappage rates — the number of cars totaled or otherwise sent to junkyards — have outpaced new-car sales for three years; cars on U.S. roads have reached an all-time-high median age of 10.8 years. That makes for pent-up consumer demand, especially as used-car values remain “at near-record highs,” Langan said. “People are getting good values for their trade-ins.”

Will they be able to finance their purchases? The answer seems to be a qualified yes if you’re a qualified buyer. New-car loans, which dried up at the height of the recession, have become readily available: “We have a very good credit environment,” Langan says.

Paul Taylor, chief economist at the National Auto Dealers Association, agrees. Prime borrowers should find easy credit, but subprime car shoppers won’t. The latter group, which he estimates made up more than 2 million auto sales in the mid-2000s’ boom years, built up an unsustainable lending model, and “we’re actually better off long-term” because it’s over, Taylor says. Indeed, 57% of auto loans in mid-2008 went to people with prime (680 and above) credit scores, Experian reports. By the third quarter of 2011, that figure had climbed to 78% even as the average credit of new-car shoppers had dipped slightly.

U.S. vs. the World
China, Europe and the U.S. account for about two-thirds of global auto sales. Flagging consumer confidence in the debt-ridden eurozone will slow auto sales in the region — R.L. Polk projects European sales to be flat or slightly down — but analysts expect the eurozone to eventually stabilize. After meteoric sales gains in 2009 and 2010, light-vehicle sales in China grew just 5.2% in 2011, the China Association of Automobile Manufacturers reports.

That leaves the U.S., a region on which auto analysts pin cautious hope for 2012. Though it fell short of economists’ expectations, U.S. GDP grew 2.8% in the fourth quarter of 2011, the best quarter since mid-2010.

“It’s a better market,” NADA’s Taylor said. “Cars are on the move, and we’re guardedly optimistic.”

GM’s Mohatarem agrees: “The economy consistently gets hit with external shocks, [but] somehow we muddle through them.”