Different Economists, Different Auto-Sales Outlooks

TRAVERSE CITY, MI – Sean McAlinden and Steven Szakaly are fellow economists who once worked together at the Center for Automotive Research.

But they offer markedly different views of the auto industry’s health in coming years.

McAlinden, CAR’s vice president-strategic studies and chief economist, paints a gloomy picture of falling sales and automakers scrambling to prop them up.

Szakaly, chief economist for the National Automobile Dealers Assn., is more upbeat. He anticipates issues here and there but sees healthy auto sales ahead, in part because of young Millennials increasing their earning power and becoming serious car buyers.

“I’m worried about a downturn in the next few years,” McAlinden says at the CAR Management Briefing Seminars here. “Think about getting ready for that. This market is subject to deep cycles. Seven years of growth in auto sales is coming to an end.”

He predicts the industry in 2017 will see a significant drop in sales and revenues and a 5% decline in vehicle prices.

Describing it as “scary,” McAlinden says 29% of prime borrowers have auto loans that extend to 72 months. Protracted payback terms ultimately can put consumers in negative-equity situations, with their auto-loan balance greater than the vehicle’s value. That’s an impediment to a car sale based on a trade-in.

“Even scarier” is that vehicle lease rates are at an all-time high of 31%, McAlinden says, raising the possibility of residual losses and glutted markets when waves of cars come off lease.

“These are worrying signs that things have slowed down. (Automakers) are resorting to gimmicks to try to keep sales up,” he says.

Szakaly is less anxious.

“We’ve had six years of growth. It’s a fantastic time for the auto industry,” he says.

He doesn’t share McAlinden’s fears about the possibility of runaway leasing. Auto dealers tend to like leasing because it brings consumers back into the market – and often specifically to their dealerships – in pre-ordained cycles.

Szakaly thinks the industry even can accommodate an increase of 1.2 million to 1.4 million leased vehicles, which would bring the overall mix to 40%. “It’s a demand you can meet.”

The average new-car buyer earns about $80,000 and is 52 years old, he says. “These are the ones that are purchasing cars, although we do see Millennials coming in,” Szakaly says. “But it will take some time for them to reach an income level to instigate car buying.”

The average income of Millennial car buyers is $49,900 a year, he says. “A $400- to $500-a-month car payment is a stretch for someone making $50,000 a year. It’s also hard to get that person approved for a car loan.”

Szakaly says it will take five to seven years before Millennials have an impact on auto sales.

Another chief economist on the panel who disagrees with McAlinden is G. Mustafa Mohatarem of General Motors.

“I don’t share Sean’s pessimism,” he says, citing positive economic indicators of population growth, high employment, consistently low interest rates and an economy that is growing, although modestly.

“The long-term demand for vehicles remains very promising,” Mohatarem says.

Various industry forecasters see light-vehicle sales of about 17.6 to 17.7 million this year.

Likewise, the WardsAuto Forecast predicts 17.6 million light-vehicle sales in the U.S. this year.

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