Details may have shifted a bit, but for the most part, the conditions that led to record sales and massive automotive profits in 2015 remain in place, raising the possibility of back-to-back record breaking sales years.
Entering 2015, the big growth drivers in autos were low interest rates, slowly increasing employment and wages, and relatively low gasoline prices. This year, wages and employment continue their slow growth, interest rates are marginally higher and expected to grow a bit more, and a global oil glut is generating gas pump prices not seen since the worst of the Great Recession in 2009.
Steven Szakaly, chief economist of the National Automobile Dealers Association (NADA), says the upshot is that declining gasoline prices should give buyers the disposable cash to afford higher payments as interest rates rise.
“New light-vehicle sales will rise to 17.71 million units in 2016, a 2.3% increase from our forecast of 17.3 million sales in 2015,” Szakaly says. “This would mark the seventh straight year of increasing U.S. new-vehicle sales.”
Research company IHS Automotive predicts as many as 18 million annual new car sales by 2016 or 2017. Alex Gutierrez, senior analyst for Kelley Blue Book, says sales should hit 18 million this year before falling slightly in 2017. All of those predictions call for low single-digit sales increases this year, a slowdown from the double-digit growth years following the recession.
Cheap gasoline should make heavier, less fuel-efficient vehicles more popular, so automakers are focusing a lot of their attention this year on trucks, crossovers, and sport utility vehicles – relatively expensive products with fat profit margins. In the opening weeks of 2016, both Ford and General Motors issued financial guidance calling for big profits for the new year.
Despite that optimism, there are potential barriers to further growth. NADA’s Szakaly predicts that wage growth will slow this year, gaining only 2%. So while consumer costs may be down slightly because of low gasoline prices, take-home pay won’t provide a similar bump. In addition, interest rates could grow 0.5% to 0.75% during the year. Those increases would still be below wage growth, but any increase in projected monthly car payments could scare away some buyers.
Szakaly says companies will likely make up the interest rate differences with higher incentive spending on cash-back deals or promotional interest rates.
“We expect rising incentives and for automakers to use their increased manufacturing capacity to chase market share and volume in 2016,” he says. “In the long run, new-vehicle sales cannot be sustained above 17 million units because of rising interest rates, increasing regulatory compliance costs, and wage and income pressure. While we expect 2016 to be an excellent sales year, we forecast new-vehicle sales falling to 17.2 million units in 2017.”
