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This Generation Gap Could Jump Start Detroit...


Economic Trends

THIS GENERATION GAP COULD JUMP-START DETROIT...

By all accounts, there's still no light at the end of the tunnel for the bellwether auto industry. Domestic-make car sales slumped to a 5.7 million-unit annual rate in January, the slowest pace since the last recession. And total car and light-truck sales hit an 11 million-unit rate, compared with 13.9 million in all of last year and an average 15.5 million clip in 1986-88.

The woes besetting the auto sector, which usually turns up well before overall business activity, have raised fears that the carmakers and the economy are in for a long recessionary siege. Industry analysts, who are accustomed to taking the long view, however, are more sanguine. They note that underlying demand fueled by demographic factors and replacement needs are building the foundation for recovery, even as the near-term outlook remains murky.

"Sooner or later, all cars die," says Philip K. Fricke, who covers the auto industry for Prudential-Bache Securities Inc. "Sooner or later, replacement demand for cars should start to drive a potentially strong cyclical rebound as a large portion of the 176 million cars and light trucks on the road are retired."

Though the U. S. car fleet grew steadily younger in the early postwar decades, it has aged sharply in the past dozen years. The average age of U. S. passenger cars was about 7.6 years in 1989, with 36% at least 9 years old (chart) and 19% at least 12 years.

While part of the reason for greater car longevity may be improved durability, it's clear that the high price of new cars and slow growth in consumer incomes has induced a lot of car owners to keep their clunkers running longer. Nonetheless, aging jalopies can be kept in service for only so long, and a growing number of cars are approaching the 12- or 13-year span that some industry observers estimate is the average life of a car.

The huge surge in new car and light-truck sales in the mid-1980s, says Fricke, essentially satisfied the pent-up demand generated during the sharp sales slump at the start of the decade. But his calculations indicate that auto and light-truck sales have now fallen well below the level dictated by normal growth and scrappage and will probably run only 13.2 million this year, even though they could be on the upswing by spring.

Noting that scrappage hit 11.2 million vehicles in 1989, the highest level in history except for 1979, Fricke expects the number of retired vehicles to climb to 14 million units within a few years. Assuming the vehicle population grows at a 1.5% compound annual rate in the 1990s, compared with 2.6% in the 1980s and 3.8% in the 1970s, he figures that replacement demand will push total auto and light-truck sales above a 16 million-unit annual rate by 1993-94.

"We think an auto recovery could come as soon as the second half of this year," says Fricke. "But given the underlying growth in demand generated by replacement needs, the longer a rebound is delayed, the stronger it is likely to be."GENE KORETZ


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