/ 18 October 2010

Readers are ready to spend on cars

In a recent Smart Money poll, 69% of readers said they were ready to take the plunge and buy a new car, while 28% of readers are not ready to start spending quite yet. Virtually no readers were planning on spending on clothes or electronic equipment.

This trend confirms what the economic figures are showing us and also gives substance to the theory that car sales are a good lead economic indicator for economic recovery.

Rationally it would make sense for people to test the waters at the beginning stages of a recovery by starting with the small stuff, like clothes and electronic equipment, but we find quite the opposite. Generally car sales are the first thing to pick up in a recovery while the retail sector lags for a long time afterwards. That is why you will find retail stores still closing down well into a recovery.

The reason is that car sales are the first thing people cut back on in a recession. At the first hint of uncertainty people will hold on to their cars for longer and make do, the same with company cars and even car rental agencies.

As a result, car sales are the first to take the plunge when the economy slows down and dealerships are the first to feel the pain. Those people, who for example were planning on upgrading their car in 2008, have already postponed that decision for two years.

Now that interest rates have fallen significantly and they are feeling more confident that further job cuts are not on the cards, they are confident to take on the financial commitment of a new car.

Retailers face completely the opposite. They continue to thrive well into a recession as people cut back first on big-ticket items. Many inexperienced retailers make the mistake of thinking that the recession has passed them by. However, as an analyst at KPMG once said, you have only hit the real bottom of a recession when retailers start bleeding.

So while people will make the car purchase they have postponed for a while, that doesn’t mean they are ready to spend on other items. It would also appear that those consumers who were not planning on buying a car still have no intention of spending quite yet.

Economists don’t always get it right but when it comes to lead economic indicators our survey proves they are spot on.

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