Analysis of New Vehicles Purchases in the U.S.
The largest major product type contributing to the value of goods accounted for in the personal
consumption expenditure as well as the gross domestic product in the United States is classified as
motor vehicles and parts. Motor vehicles and parts are considered durable goods by the Bureau of
Economic Activity, due to the fact that their expected useable life time is over three years. In the past
five years up to 400 billion dollars has been spent annually by households in the United States on these
types of products (B. o. U.S. Department of Commerce, National Income and Product Accounts Table:
Table 2.3.5. Personal Consumption Expenditures by Major Type of Product). The product most
responsible for the significance of this major product type is the purchase of new vehicles. New vehicle
purchases have peaked at 250 billion dollars in previous years (B. o. U.S. Department of Commerce,
National Income and Product Accounts Table: Table 2.4.5. Personal Consumption Expenditures by Type
of Product ). As the numbers will show this industry has become a driving force of the United States
economy over time.
A number of changes have taken place within the automotive industry since its beginnings. For
many years the main hub of automotive industry activity in the United States was centered in Detroit.
The most recent recession has created a number of serious changes to this industry, causing Detroit to
become a center of unemployment rather than economic activity. It is very important to understand
how and why this recession has torn apart the automotive industry in order to move on and create more
sustainable industries in the future.
Vehicle registrations are higher in the United States compared to other countries. In 2006 there
were over 250 million vehicles registered in the United States (U.S. Department of Transportation,
Federal Highway Adminstration, Highway Statistics). In addition the median age of vehicles, survivability
of vehicles, and number of new vehicles sold have all been increasing as well as a reduced rate of
scrappage of vehicles, which can have a number of serious effects on the U.S. economy. All these points
have lead to the current state of the automotive industry and will be discussed in further detail. We
believe it is important to more clearly understand how new car purchases effect the overall economy
and how households have changed their consumption patterns of automobiles in regards to the
significant changes the auto industry has undergone.
As the facts will show new vehicle purchases are a significant proportion of household
consumption in the United States. Consumption is accountable for approximately 66% of the gross
domestic product in the United States, and it seems as if the economic growth of the United States is
purely dependant on this consumption at this time. The goal will be to understand how this
consumption drives the economy using the automotive industry as an example and how recent changes
in economic, environmental, and societal policies have made it more difficult to continue on the same
patterns of consumption and economic growth.
The total number of vehicles registered in the United States has historically increased over time
(U.S. Department of Transportation, Federal Highway Adminstration, Highway Statistics). There are a
number of reasons for this increase, including increased demand for vehicles prompting new vehicle
sales, a higher quality of vehicles offered as well as an increased affordability of vehicles must likely
induced by the competition of foreign vehicles, longer new car warranties, and an increasing standard of
living in the U.S. This fact is shown graphically in figure 1. The increasing trend is proof that the
automotive industry, and specifically the purchasing of new vehicles, has historically been a large area of
consumption in the U.S. The trend of this increase in vehicle registrations in the United States has been
linear with little variations. The number of vehicles registered in the last 50 years has tripled to the
amount of 250,000. The question that needs to be asked in regards to this automotive growth is
whether or not it is sustainable to continue. If the growth is not sustainable significant changes will take
place which will reduce the consumption of vehicles and result in a contracting economy.
Figure 1 - Number of Vehicles Registered in the U.S. 1
Figure 2 displays registered vehicles per capita in the United States. Over the last 50 years this
value has also increased similar to the increased in vehicle registration in the U.S. An increase in this
value is more indicative of an expanding sector of the economy than total vehicle registration. The
increase from year to year shows that there is higher demand for vehicles by households, and each year
this demand has been met, resulting in more cars per person in the United States. The increasing trend
in registered vehicles per capita can be caused by two things: negative growth in population or a faster
growth in vehicle registrations than population. The first of these two possibilities is clearly false as the
1
Source: Department of Transportation, Federal Highway Administration, Highway Statistics
population of the United States has historically increased (see figure 6 for a graphical representation of
U.S. population trends). The second possibility seems much more feasible.
Overall figure 2 shows that the consumption of automobiles in the United States has increased
significantly. The data shows there are 0.8 vehicles for every person in the United States, and 1.2
vehicles for every licensed driver in the United States. The number of vehicles per person in the U.S. has
nearly doubled in 50 years, and in regards to the population of licensed drivers the rate has increased by
a third. When taking into consideration the significant increase in growth this sector of the economy
has undergone it is very apparent that the automotive industry is indeed a driving force of the economy.
Figure 2 - Registered Vehicles Per Capita in the U.S. 2
2
Source:
U.S. Department of Transportation, Federal Highway Administration
U.S. Census Bureau
It is important to note that in the last 20 years the rate of increase in registered vehicles per
capita has begun to slow down, as can be seen in figure 2. Again there could be a number of
explanations for this happening. The most understandable explanation for it could be a change in
consumption patterns by U.S. households in regards to new vehicle purchases due to either a larger
supply of used vehicles or increased life expectancy of new vehicles. Another possible reason for this
slowdown in growth could a reduced demand, but with an expanding population in the United States
and an economy centered on consumption, this explanation is not reasonably adequate.
To further explain how the significant growth of automobile consumption as well as increased
vehicle registration in the United States has occurred we must look into the purchasing of new vehicle
by households. New additions are made to the total number of registered vehicles by new vehicle sales.
In contrast to the addition of vehicles to the system, each year a number of vehicles are also scrapped
and removed from the system. As stated before the purchase of new vehicles accounts for a huge
proportion of personal consumption expenditure. Understanding how the additions and removals of
vehicles from the system have happened is essential to fully understanding the consumption patterns of
automobiles for households in the U.S.
Data over the past 50 years has shown that the number of vehicle sales have followed a cyclical
trend closely related to the economy, while overall increasing over time (Ward’s Automotive Group).
Figure 3 shows this data graphically. The two most significant drops in new vehicle sales have happened
during the early 1980’s and early 1990’s. The common thread between the two time periods is that the
United States was undergoing economic recessions. During most times of economic expansion the
number of new vehicle sales has increased significantly. This fact is clearly shown by the huge jump in
new vehicles sales following the recession in the early 1980’s. Another very important fact to point out
is that the number of purchases of new vehicles has become more constant since 1995, with the
exception of the most recent economic recession. The most likely explanation for the more stagnant
growth in new vehicles purchases can be attributed to a reduced demand resulting for increased vehicle
life or possibly an increase in available used vehicles for purchases.
Figure 3 - Number of New Vehicle Sales in the U.S. 3
Understanding this period of stagnant growth in number of new vehicle purchases is very
important. From 1994 to 1998 the number of new vehicles purchased remained very consistent, varying
by only 177,600. This value is approximately 11.5% of the average number of vehicle purchases from
that time period. After an increase of 9% in 1999, the automotive industry again experienced a period
of consistency in the number of new vehicles purchases. From 2000 to 2007 the number of new
vehicles purchases varied by only 135,200, a value which was even less than the variation seen in the
similar time period taking place in the mid-late 1990’s. This value is less than 8% of the average number
3
Ward’s Automotive Group, U.S. Vehicle Sales:1931-2009
of new vehicles purchased from that time period. For comparison, during the time period from 1981 to
1986 the number of new vehicle purchases varied by 578,500. This value is more than 43% of the
average number of new vehicle purchased during that same time period. Also, from 1987 to 1991 when
the number of new vehicles purchases began to decrease, the variation in number of new vehicle
purchases was 324,200. This value was slightly higher than 22% of the average number of new vehicle
purchases during that same time period.
Figure 4 – Percent Change from Preceding Period in Real Personal Consumption Expenditure of Motor Vehicles and Parts 4
4
Source: U.S. Department of Commerce, Bureau of Economic Activity, National Income and Product Accounts
Table: Table 2.3.1. Percent Change from Preceding Period in Real Personal Consumption Expenditure by Major Type
of Product
To further evaluate the reduced volatility in vehicle sales in the past two decades figure 5 shows
the percent change from the preceding period in real personal consumption expenditure on motor
vehicles and parts (B. o. U.S. Department of Commerce, National Income and Product Accounts Table:
Table 2.3.1. Percent Change From Preceding Period in Real Personal Consumption Expenditures by
Major Type of Product ). This chart can give a more accurate view on how large the changes in motor
vehicle and parts expenditures were from year to year. It is clear that from the 1950’s through to the
mid to late 1980’s the volatility of household expenditure on automotive products was very high. The
most radical change experienced was between 1955 and 1956 were expenditure on motor vehicles and
parts dropped by from 36.9% to -14.9%. The data also does show correlation to cyclical behavior related
to major economic rescissions. Prime examples of this are displayed from the recession that took place
in 1974, 1980, and 1991. During all these time periods the percent change from the preceding period of
personal consumption expenditure was at least -10%.
Since 1991 the percent changes have been less radical and show a more consistent trend in
growth rates. With the exception of the most recent recession taking place from 2008 through 2009,
since 1991 the lowest percent change has been -3.2% in 2006 and the highest has been 10.5% in 1998.
Percent changes in 2008 and 2009 were -13.6% and -8.7%, respectively. The severity of this past
recession should be taken into account when analyzing these two years, as the trend of decreased
volatility should continue once the economy begins to rebound based on data regarding to the current
conditions of vehicles which will be explained in further detail in the analysis of vehicle survivability and
median car age.
The change in volatility of expenditures on motor vehicles can be caused by changes to the
quantity of new vehicle purchases as shown in figure 3, as well as changes in prices of new motor
vehicles. The price index of new motor vehicles is shown in figure 5 (B. o. U.S. Department of
Commerce, National Income and Product Accounts Table: Table 2.4.4. Price Indexes for Personal
Consumption Expenditures by Type of Product ). As the data shows the price of new motor vehicles
remained rather consistant from the 1950’s until 1970. After 1970 the price began to rise through all of
the 1970’s, 1980’s, and early 1990’s before leveling off in 1994. During this time the price index
increased from 38.4 to 95.9. From 1995 to 2008 the price index became much less volatite, varying by
only 7.76. This period of time is also the same period of time where the growth of number of new
vehicle purchases began to slow down.
Figure 5 – Price Index for Personal Consumption Expenditure of New Motor Vehicles 5
The rapid increase in price index during the time period between 1970 and the early 1990’s may
have been caused by the effect of baby boomer generation. The U.S. Census Bureau recognizes the year
5
Source: U.S. Department of Commerce, Bureau of Economic Activity, National Income and Product Accounts
Table: Table 2.4.4. Price Indexes for Personal Consumption Expenditures by Type of Product
between 1946 and 1964 as a demographic baby boom were the population increased significantly. By
the early 1970’s the first of the baby boomers would become of age to been making purchases such as
new motor vehicles. This sudden increase in demand could very easily cause increased prices. By
contrasting with figure 3 displaying new vehicle purchases, it is clear that around this time period when
baby boomers would be able to purchases new motor vehicles that the number of vehicles also began to
grow rapidly, as is apparent by the radical increases experienced during the 1970’s and 1980’s compared
to much a much lower number of vehicle purchases in the 1960’s.
Figure 6 – Number of Licensed Drivers and Resident Population in the U.S. 6
By comparing the change in growth rates from the 1980’s to the growth rates in the 1990’s and
2000’s it is clear that the automotive industry has experienced a significant decrease in growth. A
6
Source:
U.S. Department of Transportation, Federal Highway Administration
U.S. Census Bureau
number of possible explanations and reasons exist. One possible reason for the reduced growth of the
automotive sector could be that the large increases in the number of new vehicles purchased during the
1980’s created a larger supply of used vehicles available to the public during the 1990’s and early 2000’s.
This possibility may not be adequate to explain the reduced growth though, because the population of
the United States as well as the number of licensed drivers has increased at the same relative rate
during the latter half of the century as displayed in figure 6. In addition to this, figure 2 showing the
number of vehicle registered per capita has also still increased and not decreased, meaning that there is
still a demand for more vehicles in the U.S. A larger supply of used vehicles would not imply this
behavior, as there are still a number of vehicle being scrapped at the end of their useable lifetime every
year.
Figure 7 – Retail New Passenger Car Sales for Domestic and Imported in the U.S. 7
Another possible reason for the reductions in growth of the number of new vehicles purchased
is the introduction of competitive imports from abroad. Figure 7 shows the number of retail new
passenger car purchases for both domestic and imported passenger cars in the U.S. Although imported
vehicles have become a significant proportion of new vehicle purchases, they have remained a fairly
consistent proportion of the total number of new passenger vehicles purchased, averaging at
approximately 21% of the total market for new passenger car purchases from 1970 till 2004 (U.S.
Department of Transportation, Research and Innovative Technology Association, Bureau of
Transportation Statistics). Significant increases in the proportion of new passenger vehicle purchases
that were imported did occur from 2002 till 2004, where imported passenger vehicles accounted for
7
Source: U.S Department of Transportation, Research and Innovative Technology Association, Bureau of
Transportation Statistics, National Transportation Statistics 2010
27% of total new passenger vehicles purchased. In addition to the increase in imported new vehicle
sales in the past decade, domestic new vehicle sales have declined.
Although the number of cars may not seem relatively consistent, the effect of the imported cars
is what would be able to cause a significant change to the automotive industry. The quality of many
Japanese imports is very high, including the quality of imported vehicles like the brand Toyota. This
higher quality from the imports is responsible for creating the competition that resulted in the need for
a higher quality of vehicles being produced domestically to compete with imports. The effect of this
higher quality will later be explained through vehicle median age and survivability of vehicles.
As stated before the opposing factor to new vehicle sales is the scrapping of vehicles at the end
of their useable life. The change in registration from year to year is equal to the difference between the
number of new vehicle purchases and number of scrapped vehicles. The scrappage rate of all registered
automobiles in the U.S. has decreased over the past 40 (R. L. Polk & Co. Reports Vehicle Age in U.S. on
the Rise). Figure 8 shows this fact graphically. From 1970 to 2005 the scrappage rate of vehicles in the
U.S. has decreased by approximately 50%. Overall households are holding on to their vehicles longer
before discarding them. This point again sheds light on the effect that the increase in vehicle life has
caused many changes within the automotive industry.
The overall increasing trend in new vehicle purchases coupled with the fact of reduced
scrappage rates of vehicles in the U.S. has created a larger supply of vehicles available to the public.
These two trends, as observed in figure 3 and 8, have produced the higher number of vehicle
registrations as well as increased vehicle registration per capita. Specifically, the lower scrappage rate of
vehicles gives headway to the fact that the vehicles are lasting longer due to technological advances in
past years. Since the automotive industry plays such a significant role in the United States’ economy,
changes like these can have serious effects.
Figure 8 – Vehicle Scrappage Rates in the U.S. 8
Figure 9 shows the median age of passenger vehicles and light trucks in the U.S. since 1970. It is
very clear that the average lifetime of vehicles is increasing from this figure. The median age of
passenger vehicles has almost doubled in this time period, and currently is at an all time high of 9.4
years (Department of Energy, Oak Ridge National Laboratory). The median age of light trucks has also
increased, but has seen a somewhat cyclical trend since the 1980’s after a significant increase. This
cyclical trend may be attributed to the fact that many businesses will use light trucks, such as
contractors, small vendors, etc. The troughs of the light truck median age cycle are seen during
economic expansions. During these times of economic expansion many small businesses will be more
willing to make the investment in a new automobile than during economic recessions, resulting in a
large number of brand new trucks on the road. Overall the increase in new trucks would push the
8
Source: R.L. Polk & Co.
median age down until small businesses were less willing to buy a new vehicle. A similar trend can be
seen with passenger vehicles, although its effect is not nearly as significant as it is with light trucks.
Figure 9 – Median age of Cars and Trucks9
The increase in median vehicle age as well as reduced scrappage rate of vehicles over the last 30
years may have been in part caused by a lower utilization of vehicles due to higher gasoline prices, such
as the price shocks caused by the oil embargo from OPEC in 1973. An event such as this with creating a
significant effect on the utilization of vehicles would lead to an increased survivability of vehicles used
during that time period due to the decreased utilization of the vehicles (K. Conrad). When taking this
implication into consideration with figure 9, a possible reduction in utilization of vehicles during the oil
price shock of 1973 can be responsible for the increased vehicle median age in the following years since
those vehicles used in the early 1970’s underwent less utilization.
9
Source: Department of Energy, Oak Ridge National Laboratory, Transportation Energy Data Book: Edition 28
The increase in median vehicle age is also backed by an increased survivability rate of vehicles
as shown in figure 10 (Department of Energy, Oak Ridge National Laboratory). The survivability rate
represents the probability that a vehicle made in a given year will still be in service in a future year. As
figure 8 shows progressing from the 1970 model year vehicle onward to the 1990 model year vehicle
results in a higher probability of the vehicle still being in service after each year of service. A 1970
model year vehicle will still be in service after 20 years only 3.62% of the time, while a 1990 model year
vehicle will still be in service after 20 years 13.5% of the time. Within this 20 year period the vehicle
survivability rate has almost quadrupled. This change in survivability rate of automobiles shows clearly
that the new vehicles on the road are much capable of being utilized for longer periods of time.
Figure 10 – Survivability Rate of Vehicles10
10
Source: Department of Energy, Oak Ridge National Laboratory, Transportation Energy Data Book: Edition 28
From the previous material presented it is now clear that there have been a number of changes
within the automobile industry that have created a new environment for the purchasing of new
vehicles. The most important change has been that through technological advancement as well as
through a competitive nature of the industry between providers, vehicles are being produced at a higher
quality and lasting longer than previous models. The median age of cars on the road today is 94% higher
than what it was in 1970, and vehicles from 1990 are 3.75 times more likely to be on the road after 20
years than their 1970 counterparts. This number has most likely increased even further due to the
increased productivity the United States experienced in the 1990’s. Increasing median car age and
survivability is also backed by the reduced scrapping rate of vehicles over the last 40 years.
At this point in time it is clear that the most recent economic recession is not fully responsible
for the immense hardship being experienced by the automotive industry, but the current conditions
under which it has been exposed to caused by increased lifetimes of vehicles has set the stage for lower
growth of sales. Figure 3 displaying new vehicle purchases in the U.S. over time can clearly reiterate this
fact. The previous system of automobile production was apparently not sustainable enough. Once
automobile producers were forced to compete with a higher quality of vehicles, they unknowingly
decreased future demands for vehicles due to extending the lifetimes of the new vehicles being
produced. Extended lifetimes of vehicles resulted in reduced scrappage rates of vehicles and stabilized
the sales of new vehicles. If the extreme case were considered where the lifetime of a vehicle was
infinite and never left the system, new vehicle sales would only occur with increased population. The
effect, although far lesser, is similar in the current conditions of the automobile industry. The
automotive industry was unable to sustain the growth it was experiencing once lifetimes of vehicles
were increased causing reduced consumption of new vehicles by households in the United States.
The reduced consumption of new vehicles is an environmentally friendly effect of the increased
lifetime of vehicles and should be taken into account. Reduced production of vehicles results in less
pollution and fewer waste products. Also, the reduced scrap rates of vehicles will cause reductions in
the total amount of solid waste produced yearly from unusable vehicles. It should be taken into account
that there is a hidden cost involved in owning a vehicle. This hidden cost is representative of the
damage done to the environment from producing a vehicle as well as consuming a vehicle. An increased
lifetime of vehicles being produced reduces this cost, and makes the nominal price of the vehicle that
the consumers pay a more accurate representation of the actual cost of the vehicle. This thinking can
be applied to the automotive industry as a whole as well. Although new vehicle purchases total to be a
huge proportion of personal consumptions expenditure, the detrimental effects of vehicle production
on the economy was not included. If the effects were included new vehicle purchases would amount to
less and account for a smaller proportion of gross domestic product.
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