CAR SALES STUCK IN SLOW LANE / THE WALL STREET JOURNAL ( RECOMMENDED READING )

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JUNE 28, 2010, 12:57 P.M. ET.

Car Sales Stuck in Slow Lane .

By LIAM DENNING

If America's economic recovery is gathering strength, someone forgot to tell the nation's drivers.

Light-vehicle-sales figures for June will be announced Thursday. JD Power & Associates expects these to translate to a seasonally adjusted annual rate (SAAR) of 10.9 million units. That would be 13% up on last June, but still a dismal figure for a supposed year of recovery.

A weak June would be even worse than JD Power's headline estimate suggests. Of that 10.9 million figure, 21.1% is expected to consist of lower-value fleet sales to rental companies, above the long-term average of 17.7%. This would mean another month where annualized retail sales came in below nine million units. In comparison, retail SAAR for June 2007 was 12.9 million.

The question is whether the U.S. consumer will switch into higher gear in the second half of the year.

Cars are big-ticket purchases that correlate relatively closely with employment and house prices, says Chris Ceraso of Credit Suisse. Since the start of 1980, monthly vehicle sales have generally been lower when the unemployment rate is high, with an inverse correlation of 56%. Meanwhile, since 1991, the year-on-year change in the Federal Housing Finance Agency's house-price index has had a positive correlation of 60% with vehicle sales.

Correlation doesn't necessarily imply causation. But intuitively, drivers surely factor their income and wealth into making a decision to buy a new car. After all, a basic Ford Fusion costs about $20,000 new, equivalent to 40% of median household annual income in 2008.

Neither the labor nor the housing markets look ready to support vehicle sales over the next six months. May's payrolls report was surprisingly weak. In addition, the unemployment rate among 16- to 24-year-olds, from which many newly licensed drivers emerge, is 18.1%, about double the overall rate. Meanwhile, house prices, new- and existing-home sales, and new construction remain sluggish.

Against this the Thomson Reuters/University of Michigan consumer-sentiment index is at its highest level since January 2008. Unfortunately, while vehicle sales display significant correlation with this—42% since January 1989—this is lower than for employment or house-price data.

Eventually, vehicle sales will rise. Mr. Ceraso's analysis suggests the U.S. vehicle fleet turns over roughly every 13 years and that scrappage explains about 75% of demand for new vehicles. On that basis, the surge in vehicle registrations from 1998 to 2000, climbing from 15.6 million to more than 18 million, bodes well for next year and thereafter.

On the other hand, the late 1990s represented an unsustainable boom, similar to the one that ended in 2008. This time, with savings rates rising to help repair household balance sheets, drivers might choose to keep driving their old jalopies for a bit longer.

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