Ruben Rajan, bought his first used car a year before recession and before he enrolled in a private college. Fast-forward to six years later and Rajan graduated with over $80,000 dollars in student debt — and a degree that didn’t even fetch him a well paying job to cover the cost of fuel.
At 30, Rajan now works in the supply chain industry and has finally brought his student loan down to $5,000. But like millions of other workers across the country who graduated post recession, Rajan’s consumption power remains low.
“What I earn ranges anywhere from 50-70k per year,” Rajan said. “At this point, I need to save money for other things in my normal life like rent and car insurance.” He views his buying condition for cars or homes as ‘out of grasp.’
Millennials have been a slow force in the new car market due to lingering effects of recession that have impacted their income and employment patterns. Consumers under the age of 35 have viewed buying conditions for homes, cars and other large household items far less favorably than other age groups over the past decade, according to a survey of consumers by the University of Michigan.
After the recession, auto sales climbed up in a march towards recovery, but have flat-lined since 2015. Low rates of car buying among millennials are one reason for the stagnation in overall car sales, according to experts.
“Driving has been made less attractive and useful to students than it used be,”said Robert Brusca, chief economist at Fact and Opinion Economics. He added, “Tariffs have gone a lot more expensive.”
Light weight vehicle sales, for example, edged up by just 0.3% in 2018 as compared to the previous year, selling only 50,000 more units. Sales of both brands of Ford Motor Company – Ford and Lincoln – decreased in the last month of 2018 as compared to December 2017.
But, as the job market strengthens with unemployment at record low levels of 3.8% and wage growth reaching 3.4% this February – strongest number in a decade – millennials are expected to slowly add to the new car economy.
“Millennials are not buying cars at the same rate as other gen x or baby boomers were in their peak earning years,” said Matt DeLorenzo, senior managing editor of Kelley Blue Book, an automotive research company. “But, as they grow older they will become a major force in the new car market. They are not a major force now due to high price of new vehicles and because many of them have high levels of student loan debt.”
A global consulting firm called Korn Ferry showed that 2018 graduates will earn up to $50,390 a year on average – a 2.8% rise compared to the 2017 average. Even though that’s a fairly small increase considering the current almost 2% inflation rate, the increase can help in auto loan payouts. The cost of a Toyota Prius, a fuel-efficient family-friendly car, ranges anywhere from $24,395 to $31,485.
“The main factor affecting the consumption opportunities of recent college graduates is the strength of the economy,” said Sandy Baum, a nonresident fellow at the Urban Institute, a think tank in Washington D.C. “Better employment opportunities and higher wages make it easier for young people to settle into careers, buy houses, start families—and pay off their student loans.”
Lisa Kahn, a University of Rochester economist in her widely cited analysis said that the effects of graduating in a worse economy can persist for decades. Lost job opportunities, the time taken by the economy to heal, rise of wages to the pre-recession level are all factors that have held back millennials from buying at a rate comparable to Gen-X or Baby boomers.
However, it’s the long term trend that matters. The buying capacity changes as more and more millennials pay off their loans and get better jobs with higher salaries.
“Unemployment and underemployment during and just after the Great Recession has meant they have lagged economically more than any other demographic,” said Michelle Krebs, a executive analyst for Autotrader. “It is changing but they remain a bit behind.”
So, for Rajan and most other millennials, the key factor to watch out for is how long it takes for the U.S. economy to recover ‘completely.’
Video: Auto Sales Crisis, Explained (1 min)
