Download Autofacts Analyst Note- December 2012

Analyst Note
Autofacts
®
December 2012
The Fiscal Cliff & the Auto Industry
Will the threat of another downturn derail progress?
While the US government remains locked in debate regarding the merits of
sequestration, the auto industry continues to outpace the greater economy
in recovery. Even in a worst case scenario, the sector should endure only
minor body damage.
U.S.: Average Household Income for New Vehicle
Purchases
h
2012 (US$ thousands)
$100
Passenger
Car
$80
Light
Truck
CUV
$98
$97
$83
MPV
$60
$67
$
$40
US M
U.S.
Median
di H
Household
h ld IIncome: $50
$50,054
054
$20
$0
Average Buyer's Household Income
Source: Ward’s Automotive Data, 2012 US Census Bureau
Inching closer to the edge
The Fiscal Cliff is a combination of spending cuts
and
d tax iincreases set to take
k effect
ff
on January 1,
2013 unless the U.S. Congress and the Obama
Administration can forge some sort of agreement.
While it remains uncertain if and when a deal will
be reached, the degree to which the automotive
sector will be affected is a primary concern to all
industry participants. An important note to
highlight is that, should the deadline pass without
resolution,
l ti
any subsequent
b
td
deall could
ld
hypothetically be applied retroactively, thus
limiting any lasting economic impact on the
industry if the cliff is indeed breached.
There are several components to consider:
Bush-Era Tax Cuts. Initiated in 2001 and
subsequently revised in 2003 and 2010, a myriad
of tax cuts and credits were enacted that effectively
lowered income tax rates across income brackets in
the U.S. Should the Fiscal Cliff be breached, credits
will
ill expire
i and
d tax rates will
ill iincrease and
d revert to
the Clinton-era rates which, on average, are 3-5%
higher. While both Republicans and Democrats
generally agree that these tax cuts should be
extended for the lower and middle class, the main
sticking point lies with extending the cuts for
individuals making more than $200,000 annually,
and households with more than $250,000 in
combined income
income. Assuming onl
only this group will
ill
be affected, the impact on new vehicle sales will be
minimal, as those within the top brackets would be
expected to have sufficient cushion to absorb
increases in taxes.
Payroll Tax Increase. In order to help stimulate
economic growth, Congress passed two payroll tax
reductions from 2011-2012, lowering the employee
payroll
ll tax ffrom 6.2% to 4.2%. This
hi rate iis set to
return to the 6.2% rate on January 1, 2013 and
there seems to be a mixed range of support to
extend the payroll tax deductions for another year.
Regardless of whether or not the reductions are
extended, the impact on the automotive industry
would be minimal, aside from a potential slight
shift to used vehicles based on reduced available
i
income.
Spending Cuts. Along with the various tax
increases are a litany of spending cuts that are
significant in both proposals. The bulk of these
cuts come from entitlement reform as well as a
reduction in military spending. While a definitive
total balance of military-related spending cuts in
initial drafts from both sides are somewhat vague
and debatable, the bottom-line impact on the auto
industry should be minimal. While select OEMs
(continued on page 2)
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Analyst Note
have ties to militaryy vehicle development,
p
much of
the proposed defense spending cuts stem from
ending the wars in Iraq and Afghanistan. This
withdrawal, and the corresponding decrease in
deficit spending used to finance both wars, has
been previously agreed upon, leaving a net effect
that is substantially less impactful than the
suggested cuts imply.
In terms of influence on the automotive outlook,
Autofacts does not anticipate a significant, or even
U.S.: Estimated Fiscal Cliff Tax Impact
2013
Up to
$20K
U.S.: Tax Rate Changes Effective Jan 1, 2013
2013 over 2012
$1,231
$1,984
$40K to $64K
$64K to
$108K
$3,540
$
,
$108K and up
Income
Tax Increase
(2013 vs 2012)
Tax Change
$412
$20K to
$40K
moderate impact
p
on automotive sales barring
ga
long, drawn-out standoff in negotiations. Even
with fluctuations in consumer confidence
stemming from fiscal cliff uncertainty, pent up
demand for new vehicles and readily available
financing at historic lows should continue to drive
new vehicle sales. Overall, both the automotive
sector and national economy as a whole should be
better off having clarification and resolution to
move forward.
$14,173
Expiration of “Bush Era” tax cuts*
$166 billion
Expiration of payroll tax holiday
$125 billion
Alternative Minimum Tax patch removal
$88 billion
Expiration of business expensing
$48 billion
Expiration of other tax “loop
loop holes”
holes
$40 billion
New Affordable Care Act taxes
$36 billion
Expiration of 2009 stimulus
$11 billion
Total Tax Increases
Average Tax Increase
Source: The Tax Policy Center
* Includes estate tax increases
$514 billion
Source: The Tax Foundation
North America: Assembly Scenario Forecast
2011 – 2015 (millions)
Upside Scenario
20
• Real GDP growth surpasses expectations for the next 12
to 18 months upon news of an amenable fiscal cliff deal.
19
18
• Even if the fiscal cliff is avoided, the upswing to auto will
lik l be
likely
b muted
t d as th
the auto
t iindustry
d t continues
ti
tto outt
perform the economy.
17
16
Downside Scenario
15
• Economic malaise continues due to a fiscal cliff
stalemate, with a possible recession in early 2013 if the
full cuts hit, and limited growth with partial cuts.
14
13
2011
2012
Scenario Range
2013
2014
Baseline
2015
• With inventory levels near or above their preferred
levels, a drop in sales would likely necessitate a larger
d
decrease
iin assembly
bl to k
keep iinventory under
d control.
l
Source: 2012 Q4 Autofacts Data Release
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