US auto sales on pace for slowest year since 2015
Interest rates and consumer preferences are affecting US sales
INSIGHT ARTICLE |
After several years of robust domestic auto sales, the National Automobile Dealers Association forecasts 16.8 million deliveries in 2019, down from about 17.3 million in 2018.
U.S. automakers face significant headwinds, with proposed tariffs on autos and parts based on section 232 of the Commerce Department’s national security report, coupled with significant uncertainty regarding trade negotiations with China and concern over the United States–Mexico–Canada Agreement with tariffs still in place on aluminum and steel. Along with the prospect of higher customs bills and higher interest rates leading to price increases for consumers coming later this year, U.S. auto sales will continue to be under pressure.
In addition, data from the first two months of the year show a 16.7 million seasonal auto sales rate, falling below 17 million for the first time since 2015. This rate is creating concerns that new car demand may have peaked and may be moving into a decline (see Figure 1).
Delinquencies and higher interest rates
Nearing the end of the current business cycle in which approximately 22 percent of all auto lending was made to subprime and deep subprime lenders, there are signs of lending getting tighter. In its latest quarterly report on U.S. household debt, the Federal Reserve Bank of New York found that a record 7 million Americans are 90 days or more behind on their auto loan payments, representing approximately 4.5 percent of such loans (see Figure 2).
In its 2018 fourth-quarter report, the credit reporting agency Experian notes that auto loans and leases more than 60 days past due rose year over year to 0.78 percent of all loans, up from 0.76 percent. The average monthly payment rose by $30 year over year to $545, a record high, and the average interest rate on auto loans for new cars rose above 6 percent for the first time in 10 years.
Compared to the average in the fourth quarter of 2017, interest rates were up more than 1 percent last quarter. For used vehicles, interest rates averaged 9.59 percent, a jump of 0.75 percent year over year.
Higher monthly payments and higher interest rates, which have previously been driven by the continued consumer shift from sedans to light pickup trucks and sport utility vehicles, are soon going to be affected by price increases as well, putting further pressure on the consumer and, ultimately, vehicle sales.
In addition, according to analysts at ALG, rising interest rates will likely shave vehicle sales by 300,000 units this year. While that represents only about 1.7 percent of 2019 deliveries, it will contribute to the pressures facing U.S. automakers as consumers feel the impact of interest rates on payments which are at or near all-time highs.
The changing consumer
There appears to be some relevant, long-term socioeconomic shifts underway that will likely affect car use and sales going forward. As student loan debt rises along with the cost of urban housing, the amount that consumers are able to allocate for car payments will diminish. In addition, technology has made it possible to travel by car without owning one, with car-sharing services such as Zipcar and car2go, or ride-hailing platforms such as Lyft and Uber, leading the charge.
The year-over-year changes in real GDP and auto sales have tracked historically (see Figure 3), but we have recently seen evidence of sales growth flattening, which supports the theory that compelling alternatives are becoming preferable to owning a car.
Rough road ahead
We expect North American vehicle sales to enter an eroding plateau in 2019 as continued trade tensions with China, proposed tariffs on autos and parts, and higher interest rates create less favorable credit conditions and higher vehicle pricing affects consumer demand—and, for some, the ability to keep up with payments.
Companies reliant on the automotive industry should consider the potential impact on their business from a decline in auto sales. These companies should develop plans for appropriate actions that might include lowering inventory levels, managing A/R aging, slowing raw material commitments and evaluating customers in other end markets.
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