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What's Good For Scrap Heaps Is Good For Detroit


Economic Trends

WHAT'S GOOD FOR SCRAP HEAPS IS GOOD FOR DETROIT

While auto industry executives expect sales to rise 6.5% this year, to around 14.8 million units, there's growing optimism in some quarters that the pace could accelerate far more sharply (page 92). One development raising hopes is a big rise in the number of cars and light trucks being scrapped.

In the past decade, America's fleet of cars and light trucks has grown older and older--a trend attributed to slow income growth, improved vehicle durability, and rising car prices. Since most cars sold in any year replace older vehicles, the lengthening of car lives inevitably reduced scrappage and undercut sales. At some point, however, it no longer makes economic sense to

keep old clunkers running, and pent-up replacement demand takes off.

That's apparently what's started to happen in recent years. As the percentage of vehicles on the road that are at least six years old has continued to climb from 53% in 1989 to 58% last year, the number of vehicles being junked has jumped to record levels (chart). Economist William Wilson of Detroit's Comerica Bank notes that more than 77 million vehicles were sold from 1984 through 1988. Since 73% of all vehicles are junked by their 10th year, he predicts that scrappage will rise steadily, topping 14.7 million vehicles by 1998.

The icing on the cake is that scrappage provides only a rock-bottom floor for sales, which always outpace replacement demand by a healthy margin in cyclical upswings. (On average, sales ran 38% ahead of scrappage during the 1980s expansion). Thus, barring a recession, says Wilson, vehicle demand over the next few years is primed to eclipse its record pace of the mid-1980s, when annual sales reached as high as 16.3 million. In fact, auto analyst Philip Fricke of Prudential Securities Inc. thinks there's a fair chance that scrappage will rise more than anticipated.

"Today's cars and trucks, with air bags, multivalve engines, and antilock brakes, are far different from the vehicles sold as recently as 1988," he says. "A growing perception of technological obsolescence may just provide the market with a positive surprise."GENE KORETZ


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