The US auto industry has recorded excellent sales last year. A report from Business Insider informs us that the total volume of auto units sold by manufacturers across the country was 17.5 million in 2015, with most units passenger vehicles and trucks. The upward trend continues in 2016. The month-to-month surge of inflation-adjusted manufacturing output was 0.49% in January, more than that of last year’s July.
But how long will the uptick continue? To answer that, we need to understand the factors that accounted for the increase. These factors include:
Cheap Gasoline Price
It was January 2015 when John W. Schoen of CNBC predicted car sale volumes will go up because of falling gasoline prices. The biggest beneficiary of cheap gasoline was pickup and light truck segment because large vehicles are less fuel-efficient compared with passenger vehicles.
The hybrid car segment remained unaffected despite the dropping price of gasoline. The sale of plug-in hybrid cars saw an increase in the final quarter of 2015. That was chiefly because many buyers wanted to avail the tax credit of up to $3,400.
Low Interest Rate
The auto interest rate has been low all through 2015. The interest rate hovered between zero and 3.00% with manufacturer incentives added. But unlike gasoline, which seems to be in a free fall, auto interest rate may increase this year because the Federal Reserve increased the benchmark interest rate last December for the short term.
Experts believe that if there’s an increase of just 1.00%, a borrower would have to pay an additional $16 for an auto loan of $25,000. As auto manufacturers are worried, some lenders (credit unions) clarified that increasing the rate is not in their best interest. The rate may still increase, reducing the volume of auto sale.
The reduction may be minimal though, because most vehicles on the road are 11 years or older and their owners understand the need to replace them. Hence, people will continue to buy vehicles, but less expensive ones. Automakers can offset the impact of low interest rate by manufacturing inexpensive cars.
Signs that indicate an impending recovery from economic downturn include a high employment rate. The US job market was badly hit during the recession. The aftershock was painful too. Millions were laid off from their jobs.
The latest data, however, indicate employment rate is increasing. See below:
Figure 1 doesn’t paint a picture that is too optimistic, but it does show that the number of jobs has increased a lot in 2015 from 2009. More than 11 million jobs have been created in the middle and the employment rate is highest in 2015.
Employment is essentially linked to buying capacity. A surge in employment rate causes an increase in the buying capacity. As people were employed in 2015, more cars were sold. A forecast by Statista shows the US employment rate will not decline anytime soon. The unemployment rate, currently clocking at 4.8% will steep further below in 2017 and 2018.
If the employment data remain impressive, auto manufacturers will continue to see the upward trend. An increase in the interest rate may create a measured impact, but nothing beyond that.
The US dollar stands quite strong in 2016. If the dollar remains strong, the auto sale might get a hit. The upside of a strong dollar is manufacturers can import important auto parts at a relatively low cost. On the flip side however, the price of the cars will be too high for overseas consumers from countries with weak currency. The automobile market, therefore, will depend on domestic buyers.
However, this argument may be countered with claims that the US automobile market has never been dependent on international consumers, per se. Besides, in countries with weak currencies and emerging markets, people tend to buy small cars, whereas in the US, the latest craze is to buy crossover cars like CUVs and SUVs. Hence, the dollar being strong may not impact auto sales.
The low unemployment rate along with the low interest rate and declining gasoline price are indicators of the continuing growth of the auto industry. The challenges are vehicles being sold through leases and ending up in the used car market after the expiry of the leases. Used car markets are (in)famous for low price. As the selling prices dip, the auto industry suffers.
There’s another challenge; consumers have lately been using on-demand transportation services like Uber, Via, Sidecar, etc. Such services are making it unnecessary for them to buy a car. Many young people, especially millennials, are struggling with student debt. The idea of auto insurance doesn’t appeal to them. They don’t want to buy a car, and are content with the on-demand taxi services.
The discussion above shows that the bullish trend will continue in the auto industry, despite few predicaments. The US economy is recovering, and the growth of the auto industry resonates with it.
Tina Roth is a blogger at Pro Finance Blog, a leading online resource providing high-quality “useful” content on personal finance, money management, debt solutions and many more where her aim is to help people you attain financial security through following the right advice. Apart from Pro finance blog, she also is the co-author at Finance Guest post – a community for personal finance bloggers.
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