SOURCE: Scotiabank


March 10, 2016 08:00 ET

Driving the U.S. Auto Cycle Higher for Longer: Scotiabank

Industry Fundamentals Continue to Strengthen

TORONTO, ON --(Marketwired - March 10, 2016) - Global car sales started the year with solid gains, providing a much more upbeat assessment of global economic conditions than the uncertainty that gripped financial markets through mid-February.

More recent February data for North America point to a further acceleration. Volumes in Canada jumped to a new peak for February, while U.S. purchases climbed to a sixteen-year high. Sales in Canada totalled an annualized 1.99 million units last month, up from 1.97 million in January and a full-year total of 1.90 million in 2015. Light trucks, especially CUVs, led the way in both countries with solid double-digit gains. These vehicles now garner nearly 70% of the Canadian market, up from less than 50% as recently as 2009.

Auto industry earnings and margins are currently at record highs in North America, in contrast to the previous decade when zero percent financing led to slumping industry profitability. Data from auto manufacturers with the largest market share in the United States indicate that pre-tax earnings jumped to US$3,500 per vehicle last year, 70% above the average of the previous five years.

The Wall Street consensus believes that the U.S. auto cycle is peaking, after car and light truck sales climbed to a record high in 2015.

"We do not subscribe to this view. We believe that the U.S. industry is in the midst of an extended upcycle, with gains fueled by a strong labour market, rising replacement demand, healthy household balance sheets, as well as favourable demographics," said Carlos Gomes, Senior Economist and Auto Industry Specialist at Scotiabank.

Improved affordability makes it easier for Americans to continue to replace their aging vehicles and will buoy volumes further. Replacement demand accounts for 80% of overall U.S. sales and will continue to drive sales higher. The average age of the U.S. fleet stands at a record 11.5 years, and we estimate that more than 40% of the U.S fleet is currently at least 12 years old, with many to be replaced in coming years. While some households will opt to exchange their aging cars and trucks for a pre-owned model, most will travel to new vehicle dealerships for their new automobile. 

Other highlights from the report include:

  • Asia led the increase in global sales in January. Volumes advanced 7% year-over-year, driven by the fourth consecutive double-digit advance in China.
  • Western Europe was the second-best performing market in January, with volumes increasing at a double-digit pace in six countries - one-third of all countries in the region.
  • The U.S. labour market continues to gain momentum, advancing by nearly 2% year-over-year - the fastest pace in fifteen years. Income growth is accelerating at a time when low interest rates have reduced interest costs on household mortgage and consumer debt to one of the lowest levels on record. The sharp slump in oil prices since mid-2014 has also lowered energy costs significantly, enhancing the purchasing power of American households.

Read the full Scotiabank Global Auto Report online at:,,3112,00.html.

Scotiabank provides clients with in-depth research into the factors shaping the outlook for Canada and the global economy, including macroeconomic developments, currency and capital market trends, commodity and industry performance, as well as monetary, fiscal and public policy issues.

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