The U.S. auto industry may soon hit some speed bumps.
While auto sales are forecast to reach 16.3 million units this year, financiers should pay attention to fundamental changes looming on the two-year horizon, according to an AlixPartners LLP global automotive outlook called “Caution: Blind Curves Ahead.”
As the Fed unwinds its quantitative easing efforts expected in the next year, the liquidity bubble will begin to deflate as the industry faces a long-anticipated rise in consumer interest rates.
“For lenders and captive finance companies, the situation is probably even more dire because of the industry’s sensitivity to interest rates and, in particular, sensitivity to residuals,” said Mark Wakefield, managing director at AlixPartners and head of the firm’s automotive practice in the Americas.
The AlixPartners study looked at the current state of the nation’s household and disposable income. Typically, those two lines track together, Wakefield told Auto Finance News. But during the internet bubble and the housing bubble, the wealth line moved off the income line for a time. Now, it’s gone up yet again during the liquidity, or quantitative easing, bubble.
In theory, total wealth should track total disposable income. “Once interest rates do start rising, if it’s in a managed way, starting at the end of 2015 and then inching up over a two-year period, they’ll go up three percentage points, and with that, you’ll be getting the full brunt of the impact in the in the auto sales market,” Wakefield said.
A 3% spike in interest rates translates to $2,500 less purchasing power for car buyers, according to the report.
But if interest rates rise seven points over that same period ― a far smaller spike than what was seen in the recession of the early 1980s ― that would mean $5,250 less purchasing power.
Not only that, Alix compounds the deflating QE bubble news with a revealing car buyer trend. Vehicle renewal rates in the United States have been on the skids since 1976. Today, they’re approaching replacement levels. Meanwhile, vehicle-usage rates are also declining. Both those shifts are due, on one hand, to aging Baby Boomers, and on the other, to younger Americans pegged as Generation N, a group of car buyers that are neutral about driving.
And that’s despite an increasingly improved economy.
Wakefield said lenders can enjoy the current positive car sales news for the short term. But they should watch out for when rates increase not just on their business, but also when volumes decline.
