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The indicator car makers should be ecstatic about

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Category: Business
Published on Thursday, 16 February 2012 Written by Super User

By Doron Levin, contributor

new_car_lot FORTUNE -- Memory is tricky. A new car recalled from youth always seems cheaper and more affordable than the new, higher-priced models of today. Until, that is, you take into account that we weren't earning much in those days anyway.

In terms of the average American's wage today, a new car has rarely been more affordable and is getting even more so, according to a long-compiled index by Comerica Inc. (CMA), the Dallas-based banking company. In the fourth quarter of 2011, it took 23.1 weeks of median family income to buy the average new car. That figure is the smallest it has been since the third quarter of 2009. Even in the late 1990s, when the economy was cranking, American families had to spend between 29 and 30 weeks of their income to purchase the average new car.

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New cars, in other words, are within reach and that's a positive sign for auto makers and the broader U.S. economy. Unlike simpler statistics -- average new car cost or the unemployment rate -- Comerica's figure accommodates changes in consumer confidence and tastes. Less dimensional statistics cannot, for example, take into account the strategic emphasis car companies have placed on smaller, more fuel efficient vehicles. To wit, the increasing affordability of cars reflects the convergence of a few trends: rising median family incomes; a growing preference of cars over more costly pickups and sport-utility vehicles; and improving household credit conditions. (The absolute peak of affordability was mid-2009, when it reached 22 weeks, coincident to the bankruptcies of General Motors (GM) and Chrysler.)

Recent stronger job creation in the U.S. and falling personal debt mean "that households are increasingly willing to take on a reasonable amount of debt by purchasing an attractively-priced automobile," says Robert Dye, Comerica senior vice president and chief economist. But many are opting for less expensive cars; in the fourth quarter of 2011 the average price of a car purchased was more than $1,000 less than the quarter before. "Favorable affordability and improved job growth mean more upside potential for auto sales in early 2012," he adds.

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The average age of a car on the road today is about 11 years old, which means that many drivers have been delaying purchases as long as possible, creating pent-up demand. U.S. vehicle sales in January rose 11.4% over the same month a year earlier, setting the market on an early course for a third straight year of gains following the 2009 collapse. The National Automobile Dealers Association has forecast sales of nearly 14 million this year, up about a million over last year. Edmunds.com, a car-buying web site, expects sales to tally 13.6 million.

Comerica says the average price of a new vehicle today is about $25,000. And while the bank declined to disclose the median family income component of the index, by implication it must be in the neighborhood of $56,200 annually. One of the biggest differences in the car market today compared to a decade ago is the proportion of cars sold to trucks, vans and SUVs. The proportion of cars has risen to more than 50%, as consumers seek fuel efficiency. During the 1990s, relatively cheap gas prices and the popularity of large sport-utility vehicles and pickups for personal transportation meant that less than half the market was represented by conventional passenger cars.

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Following massive restructuring, U.S. auto companies have learned how to earn bigger profits by selling fewer cars – and smaller and more fuel-efficient vehicles -- than four years ago. This virtuous circle of affordability and profitability could continue for some time as long as job growth and income growth continue.Automakers may be looking at a very good year indeed.

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