Forget carmageddon — personal cars aren't going anywhere anytime soon

There's growing concern that the world has hit “peak car” or that a carmageddon is near.

Worriers point to stagnant European and Chinese auto sales and the development of new technologies like autonomous vehicles as proof that the number of people owning cars is set to drop.

But the downward sales trends are the result of short-term economic issues and regulatory changes. And the long-term trends simply don't back up the idea of peak car.

George Pearkes is the Global Macro Strategist for Bespoke Investment Group.

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It'd be easy to look at headlines and assume the end of the global auto industry was nigh, but you'd be wrong to do so.

“Peak car” has been a popular talking point among technologists who point to the rise of ride-hailing companies like Uber or Lyft, the advance of autonomous-vehicle technology, and the assumption that millennials will live in cities and forgo suburbs, as well as cars, indefinitely.

Doomsayers claim that auto sales have peaked forever, and that technological factors as well as a preference for cities mean the auto industry is going to go the way of the dinosaur.

The problem is, the narrative is wrong. In the short term, auto sales have been bouncing — or at least declining much slower — in major regions. Longer term, the peak-car thesis ignores technological, legal, and capacity hurdles to the end of the personal automobile, while households continue to move to very car-centric environments.

Short-term weakness is rolling off

In the past few quarters, temporary factors have depressed global auto sales, but there are signs that the weakness is abating and no reason to believe that baseline demand is going to evaporate anytime soon.

As has been the case with so many narratives related to weak economic growth in recent years, peak-car concerns are being fueled by data from the European Union, and specifically the eurozone. Eurozone auto sales were down 6.2% year over year in June, the ninth year-over-year decline in nonseasonally adjusted sales in the past 10 months.

But looking at the numbers in more detail, eurozone sales are still strong and are accelerating.

The second quarter had the fourth-strongest average sales pace since the mid-2000s, and quarterly sales volumes were up from 10.43 million in the fourth quarter of 2018 and 10.97 million in the first quarter of 2019 to 11.20 million in the second quarter of this year (all at annual rates). In fact, June saw a sales pace equivalent to 11.30 million units per year.

The huge swing upward in auto sales in mid-2018 and then a crash in Q4 was due to new emissions standards introduced by the EU. That forced fire-sale inventory clearing by dealers ahead of the September deadline, especially for diesel cars.

Since, sales have rebounded to about the pace they ran before the regulatory disruption. As a result, year-over-year percent changes in sales aren't a good indication of the health of the European auto market. A more comprehensive look at the data better reflects the idiosyncratic shock and bounce back.

There have been other factors weighing on the global auto market, of course. Chinese auto sales ran at a pace close to 30 million units a year from July 2017 to January 2018, before sliding consistently since. But recent data suggests the Chinese market is bottoming out and a big uptick in sales could be on the way.

China Automotive Information Net data showed sales increased modestly month over month in June, while China's Passenger Car Association reported gaudy over-the-year sales growth that would imply a seasonally adjusted 19.6% MoM increase in sales.

In either case, things are looking less terrible for Chinese auto sellers in recent months. Retail sales data reported spending on autos rose 6.3% MoM after seasonal adjustment in June, and is only 2% below record levels.

Globally, it's pretty clear auto manufacturers hit a rough patch. But the slowing of Chinese declines, rebounding eurozone and other European sales, and sideways movement of US volumes all suggest that rough patch is ending.

Teasing out the difference between idiosyncratic, cyclical, and secular drivers is a huge challenge for any analysis. In the case of autos, there's been too much focus on assumed secular changes and not enough on more near-term headwinds.

While global auto sales have been weak, it's premature to call for peak auto. A series of idiosyncratic factors and extreme weakness in the world's auto-sales growth engine are starting to roll off.

Long-term trends don't support the peak-car idea either

It's highly likely that shifts toward electrical power trains, autonomous features, and lower car ownership rates will reduce the growth of the traditional internal-combustion-engine auto market in the future.

But some of those changes are very slow or look implausible to kick in anytime soon. Key drivers of the peak-car thesis just don't match up with the real world at present, even if they may apply years or decades down the road.

For one thing, millennials love suburbs. Indeed.com chief economist Jed Kolko notes that 25- to 34-year-old populations are growing the fastest, by far, in the lower-density suburbs of large metros.

Autonomous-vehicle development is plugging along, but crashes and general delays have made predictions of self-driving cars becoming available by 2018 or 2020 look silly.

Meanwhile, Uber's IPO basically flopped, and the company has traded below its peak private-market valuation for periods since hitting the New York Stock Exchange. The stock has been gaining lately, but it's been a rocky start to its life as a public company. Rival Lyft hasn't fared much better: It's trading well below its $62 IPO price.

Even if AVs and ride hailing were set to swamp the traditional car, it would take a long time for them to do so. Bureau of Labor Statistics data shows that the average US auto is about 12.5 years old, so barring a massive, unprecedented surge in autonomous-car sales from zero to the tens of millions in a few years, it will take a decade or more to turn over the massive US auto fleet.

Of course, that leaves aside legal uncertainty, other forms of regulation, the need to spin up manufacturing capacity, or the capital intensity of mass autonomous-car manufacturing.

In the meantime, the world population keeps growing, incomes keep rising, and cars can stay on the road for only so long.

Cars are going to be around for a long time, both in the US and the rest of the world economy. Bets on peak auto may look smart right now based on shorter-term factors, but the world isn't capable of moving away from basic four-wheeled, personally owned transportation yet.

George Pearkes is the Global Macro Strategist for Bespoke Investment Group. He covers markets and economies around the world and across assets, relying on economic data and models, policy analysis, and behavioral factors to guide asset allocation, idea generation, and analytical background for individual investors and large institutions.