Edmunds' Unrealistic Forecasts Hurting Auto Industry

| About: Ford Motor (F)

Edmunds.com economists have come out with an evaluation of the Cash for Clunkers programs that states only an additional 125,000 vehicles were sold at a cost of $24,000 per incremental vehicle.

To arrive at this number Edmonds’ economists made forecasts of sales with and without Cash for Clunkers. While the reasons for doing this analysis are unclear (their conclusion hurts the chances of the auto industry getting additional stimulus) it is clear that the forecasts they made are either too high or too low.

In general, most people do a poor job of forecasting sales (95% of new products fail) but it is easy to track obvious bias in forecasts if you have ever had your bonus dependant on their accuracy. As a brand manager, I was carefully beaten about the head and shoulders by management to make sure I knew about forecasting errors and applied this learning to my subordinates when it was my turn. Let’s see how good Edmunds’ economists are at forecasting.

Here’s how they forecast sales would be with and without Cash for Clunkers.

Edmunds Cash for Clunkers ForecastClick to enlarge

Note that they forecast that Cash for Clunkers would permanently depress demand as shown by sales being lower than their “without” forecast in December, 4 months after the program end. This was a promotion, not an advertising campaign so changes to demand would have been restricted to people who were immediately considering buying a vehicle. Any event that is still affecting sales more than 6 or 8 week later is something that changes the basic demand.

The best way to check the accuracy of a promotion forecast is to compare it to unpromoted products whose sales move similarly (and for similar reasons to minimize the chance correlation is unrelated.) In this case, we have retail sales excluding auto from the Census Bureau which tend to go up and down similarly to auto sales, though auto sales are much more depressed. Because the past two years have not been typical, I compared sales versus 2006.

Here's the chart:

Monthly Retail Sales Versus Edmonds ForecastClick to enlarge

Total retail sales excluding autos are about the same level as 2006 but auto sales are running about 25% behind. The month-to-month trend show that auto sales tend to go up and down when other retail sales do. Edmonds forecast without Cash for Clunkers (in red) assumes that auto sales would have suddenly accelerated without Cash for Clunkers.

The trend line for retail sales ex-autos is overlaid on the forecast to show that Edmonds forecasted a significantly faster increase in auto sales than other retailers were experiencing.

(Note: October AUTO, OTHER MOTOR VEHICLES sales based on manufacturer sales reports. Other data from US Census.)

Now it’s pretty easy to show bad performance if you assume it is bad which is what Edmonds has done. Let’s hope that auto industry sales recover and they don’t need any more stimuli as this does not help their case.