Caution Signs Aplenty as U.S. Market Heads for Continued Growth in 2015

SAN FRANCISCO – The U.S. automotive market will remain strong in 2015, but keep a close eye on those warning signs, an analyst for J.D. Power says.

New-vehicle retail sales should grow 5.3% to 14.0 million units this year, and consumer spending in the sector should hit a second straight record at $420 billion, Thomas King, vice president-Power Information Network U.S. OEM Operations, says at the 2015 J.D. Power Automotive Summit here.

But he points to several emerging trends in vehicle inventories, loan duration and average transaction prices that could threaten market growth and industry profitability in 2016 and beyond.

Among concerns are lengthening new-vehicle financing terms that are stretching the vehicle-replacement cycle for consumers, with 32% of loans now at 72 months or more, up from 26% in 2011. Loans of 84 months or beyond remain relatively rare, King says, but at 3% of volume they are triple 2009 levels.

Still, the average loan length of 66 months is up only three months from five years ago, so “right now the balance is appropriate,” King says. “But we see the trend, (and) if we start to see 84 months become dominant, then the average will rise dramatically and potentially be very disruptive to the industry.”

Also on King’s watch list are ATPs, which have been increasing consistently since the 2009 recession but are seeing slower growth.

Last year ATPs, after factoring in incentives, reached $30,000, up $700 per unit from 2013. But King projects only a $300 increase this year, “Are we at the point where we start to plateau?” he says. “We think there’s still some upside (but) it is slowing.”

Competition is to blame in part for the brakes being applied to both ATPs and volume growth. Last year saw 136 new or refreshed models debut in the U.S., and this year J.D. Power expects another 142.

“So it will be harder (to gain volume) with carryover product,” King notes.

Inventories, escalating slightly to 62 days’ supply, a steady expected rise in interest rates through the end of 2016 and climbing incentives ($3,005 per unit last year), aren’t setting off alarm bells just yet but are worth keeping a wary eye on, King says.

Falling gas prices that have shifted the car-truck mix to just 42% cars from 51% in 2012 is making it hard for sales and production planners. “It increases potential for folks to make mistakes, inventories to rise and incentives to build,” King tells attendees of the conference, held a day ahead of the 2015 NADA Conference & Exposition opening.

Also causing concern are those considered risky buyers, a subset of purchasers who are subprime borrowers, contract loans for 72 months or more and borrow 110% of the vehicle’s value. They accounted for 653,000 vehicle sales in 2014, up fourfold from 162,000 in 2009.

King also is warily eyeing the rising number of off-lease vehicles due in 2016, expected to hit 3.1 million units.

With the slowdown in retail sales growth, an additional 400,000 units are expected this year compared with the 700,000 gained in 2014, there will be “fewer winners” in 2015, the executive notes.

J.D. Power forecasts global sales this year at 109.5 million units, up 3% from 2014. North America will grow by an identical margin to 22.3 million, while South America gains 1% to 6.1 million vehicles. Asia sales will rise 4% to 40.1 million, while Europe declines 2% to 17.8 million on an expected 33% dive by the Russian market.

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