Automobile Dealers

Consumers delayed major purchases for years—now pent-up demand is driving a lot of potential for automobiles and related industries.

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American consumers put the brakes on major purchases through 2008 and 2009, and car sales—for both new and used vehicles—suffered significantly. Now, more than a year after government incentives (remember Cash for Clunkers?)  got consumers back onto the auto sales floor, the industry is recovering—and could face a big boost due to a simple fact: people are sick of driving their beaters.

"Thorugh the downturn, we saw severe declines as consumers were just putting off large purchase decisions as they hunkered down to weather the storm," says Will Boland, a senior analyst at research firm Sageworks. "Even though 2010 wasn't a great year economically, but there was large pent-up demand in the auto market due to consumers riding out their old vehicles." How big's the demand? Boland himself is starting a business helping drivers sell their used cars.

The data is clear: In March, sales were expected to rise 12 percent over last year, and Sageworks estimates a more than 18 percent increase in sales by private dealers. Analysts seem to agree that between 13 and 13.5 million new cars will be sold in the United States this year. 
Data from 2010 and early 2011 indicate a combination of pent-up demand for cars by consumers who had been delaying large purchase decisions is paired a slight increase in consumer confidence, which is tied to a softening in unemployment numbers. That makes the auto industry a key economic indicator—particularly because such a large number of tangential industries is growing in conjunction with auto sales numbers. The net profit margin for motor vehicle parts manufacturing was nearly 5 percent in 2010; machine shops, more than 7 percent.

It's unclear yet how significantly production slowdowns in Japan, as the country recovers from an earthquake and nuclear reactor crisis, will affect U.S. stock or purchasing. The key factor to watch on whether this trend will continue past 2011, analysts say: gas prices. If oil hits $125 a barrel, all bets may be off for the industry's impressive new sales figures—unless consumers turn to more efficient and smaller vehicles. "It's not something dealers are excited about, but it does create some opportunity for another segment: fuel-efficient cars," Boland says.

Christine Lagorio is a writer, editor, and reporter whose work has appeared in The New York Times, The Washington Post, The San Francisco Chronicle, The Village Voice, and The Believer, among other publications. She is executive editor of Inc.com. @Lagorio