Car Sales Still Have Room To Grow

Features Dow Jones Newswires

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Sales of cars and light trucks in the U.S. are likely to have hit a record in 2015, and economic signs point to 2016 being the domestic auto industry's healthiest in decades, thanks to an improving labor market and low interest rates greasing demand.

Cheap gasoline is also spurring sales of more profitable trucks and sport-utility vehicles, while the average cost of a vehicle sold is rising enough to offset rising sales incentives.

December auto sales are to be reported Tuesday, and Wardsauto.com is forecasting a tally of 17.5 million for 2015, 6.2% higher than last year and slightly higher than the prior 17.3 million record set in 2000.

The strong fundamentals buffer concern about what the Federal Reserve might do to interest rates in coming months. Lending terms remain favorable, prompting AutoNation Inc. Chief Executive Mike Jackson to say "the auto industry does not need a free lunch on interest rates."

Still, a significant rate increase would have tough consequences for industry profits, said Mark Wakefield, head of the automotive practice at consultants AlixPartners LLP. He estimates if new-car loan rates eventually increase to 4% from 3%, consumers would spend roughly $1,000 less at the dealership.

For now, consumers hit the showroom acting as if they just got a raise, Mr. Wakefield said. He said low gasoline prices are putting enough money in car buyers' pockets that they are beginning to alter spending decisions on bigger-ticket items.

"We're kind of at the stage where people are believing" cheap gasoline is here to stay, Mr. Wakefield said.

That is more good news for auto-industry employment and the mood in dealerships. North American light-vehicle production and capacity utilization have touched records, while the value of U.S. dealerships appears to have fully recovered from the dark days of 2009 when auto sales fell to about 10 million.

Despite the positive signs, there are some risk factors for the industry. Prices of used cars -- whose retail sales are roughly double those of new cars -- have remained firm over the past four years because of short supply, Mr. Wakefield said. But their supply is expected to increase in the near term as vehicles sold in recent years are returned to the dealer as trade-ins or off-lease vehicles. That will likely lead to a drop in used-car prices, which in turn could cannibalize some new-car sales.

"People do need to consider the softening of used-car values as a factor that may dampen new-car sales in 2016 from what they otherwise might have been," said Tom Kontos, chief economist for used-car auction service Adesa.

Mr. Kontos said a more significant influence on future new-car sales might be the fact that consumers' trade-in vehicles are worth less. That decline might make them reconsider buying a new car if they can't swing as much equity into the deal. Average terms of new-vehicle loans also are climbing, which could also result in consumers finding themselves with less equity or even underwater on their loans. "There's definitely a threat if you will to new-car sales from used-car values going down," he said.

U.S. demand is only part of the story. While European volumes are solidly increasing, margins remain thin or nonexistent because of a continuing price war. Large emerging markets such as Russia and Brazil collapsed in recent years, and show little sign of a near-term recovery.

The car markets in China and India are expected to continue expanding, but offer a dose of uncertainty. Demand in China showed signs of flagging earlier in 2015 before volume jumped again in November. In any event, the era of double-digit annual sales growth isn't expected to last.

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