US Automotive Sales Boom to End in 2017

Tightening credit, more Millennials likely to shrink purchases.

by on Oct.14, 2015

Automakers have at least one more year of robust auto sales, including the likelihood of a new record, before sales begin to slide, according to IHS.

What happens after next year? “Pull back.”

At least that’s the word from IHS Automotive, which believes that U.S. auto sales will continue to strengthen through 2017 until a convergence of events begins to stifle new car and truck sales.

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“We do see headwinds starting to form,” said Charles Chesbrough, IHS senior economist, during the company’s global outlook.

In fact, some of those headwinds are already blowing, he noted, adding that banks are beginning to see slowdowns in applications for car loans. Those applying for loans are finding banks are being stingier with their money, tightening restrictions on credit standards.

Additionally, buyers can expect at least one rate hike by the Fed and those two factors will combine to cut down how much buyers can borrow for that new ride.

In the interim, U.S. automakers will get the opportunity to build up their rainy-day funds as IHS sees U.S. sales peaking at sales of 18.2 million vehicles in 2017. Sales will slide back down to about 17 million by 2022, Chesbrough said, according to Chesbrough.

IHS isn’t alone in its boom cycle prediction for auto sales. The National Automobile Dealers Association also believes the current trend of strong sales should continue, although its tea leaves suggest the up cycle is shorter with 2016 being a record-setting year and 2017 beginning the slide back to more normal sales levels.

While Chesbrough suggested economic factors like higher interest rates will hasten the decline, NADA Chief Economist Steven Szakaly, points to another contributing factor: used-car prices.

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NADA expects used-car prices to fall by an average of 4.5% per year in 2016 and 2017, making previously owned vehicles a palatable alternative, especially for those who wanted a new vehicle but are finding that the amount they can afford won’t get them as much new car or truck as they had hoped.

For 2016, NADA predicted U.S. sales of about 17.6 million new cars and light trucks – that is, pickups, SUVs, crossovers and minivans, which would surpass the current mark of 17.4 million, set in 2000.

The group is prediction sales of 17.2 million this year. In addition to used cars, NADA believes a new generation of buyers will begin impacting sales in 2017 and beyond. Generation Y – the group born after 1980 – will soon become the majority of consumers, and this could present challenges to the long-term growth in auto retailing.

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“It will take four Millennials to replace the spending power of one Baby Boomer in the automotive-retailing marketplace,” Szakaly explained. “There’s also a wage gap between Baby Boomers and Millennials, and stagnating wages for Millennials, along with increasing vehicle-transaction prices, will pose challenges in the long run.”

The group is also far more likely to keep their cars for a longer period of time compared to previous generations. Not only are they inclined to hang onto them for a longer period, they’re likely to have the ability, as new vehicle quality continues to improve.

Before panic sets in, Chesbrough stopped short of forecasting the kind of steep decline the industry has experienced in the past after boom periods. Automakers worked to bolster their ability to weather sales valleys during the last recession by cutting capacity and improving production flexibility.

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Additionally, the car companies are in a better place in terms of their long-term finances with better labor contracts and lower retiree health care costs than at any point in recent memory.

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