Economists Say Auto Sales Growth Has Hit Plateau

The U.S. automotive market has peaked, with looming issues of populist protectionism and vehicle oversupply possibly further hurting the long-term economic picture, two leading automotive economists said.

Nariman Behravesh, chief economist of data giant IHS Markit, said worries about President Donald Trump’s combative campaign rhetoric have eased somewhat, given that he has actually surrounded himself with trade globalists.

“It’s a lot of bluster, but he’s a businessman. Things are settling down,” Behravesh said at the NADA/J.D. Power Automotive Forum, held prior to the opening of the New York International Auto Show.

As for the larger economic picture, Behravesh predicted strong continued job growth and consumer spending leading to GDP growth of 2.3 percent in 2017, and 2.8 percent in 2018.

“Ignore the [weak] March number. It’s nothing to get worked up about,” Behravesh said. He predicted a continued decline in the U.S. unemployment rate, to about 4 percent.

Of course – Behravesh cautioned – “All this (improvement) depends on no trade war, no mass deportations, no major policy mistakes.”

How much this economic growth will help the automotive market is uncertain. Auto sales last year hit 17.5 million total vehicles sold, for a seventh straight year of growth, but both Behravesh and J.D. Power forecaster Thomas King feel the market has peaked.

Sure, first quarter’s auto sales figure of 3.1 million retail sales was the best since 2004, but there are some underlying weaknesses that are worrisome, King said.

“A lot of behaviors are driving short-term performance but with long-term risks,” King said, referencing soaring vehicle inventories as well as heightened incentives needed to move the sheet metal to an artificially high level.

Inventories are already 500,000 units higher, at 4.1 million vehicles on dealer lots, than they were in 2015. That’s a $15 billion swing in sheet metal sitting on the ground, which hurts automaker balance sheets.

On the plus side, if you are a consumer in the market for a new car, that gives you much more purchasing power. Incentives are currently at $3,900 per unit, “higher than in deepest darkest days of recession,” King said.

However, not enough consumers are in that position to sustain that growth, as they are already set with what’s in their garage. And many consumers’ credit scores or bank balances are still weak; for consumers to afford the monthly payments, more than one-third of auto loans are 72-month terms or longer, King said. That’s a precarious time frame that often puts consumers owing more than the car is worth.

And because new-vehicle transaction prices continue to rise due to their increased content levels, many people are instead opting to buy one of the flood of low-mileage used vehicles coming off lease. That drains new car sales, putting further pressure on manufacturers – who despise the idea of dialing back production. Instead, they kick the can down the road, and worry about a possible collapse in vehicle values later.

“Every day that we see [new-car] incentives at their current levels, we see greater chances that the vehicles will not be worth what we say they’re going to be worth,” King said.

 

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