Low Interest Rates Best Hope for U.S. Sales Expansion
There’s growing concern increasing incentive levels will get the auto industry back in hot water. But without them, there’s little hope of matching the volume benchmarks of the last decade.
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It depends. The opportunity for the light-vehicle market to perform above 16.5 million-unit trend line in the current business cycle is very limited if we just look at economic fundamentals. Looking back to 1975, we can see how light-vehicle sales have performed against the estimated trend each year.
From 1975 to 2000, every year light-vehicle sales were at or above the estimated trend line combined gross domestic product and employment growth was in excess of 5.2% – a big number compared with 2014’s 3.8%.
During the post-9/11 period there were some exceptions to this fundamental relationship. During 2001-2005, when the prime rate averaged about 5% and the housing boom was under way, sales performed above trend even with GDP and employment growth registering a paltry 2.7%. (Note: Sales declined each year from 2001-2003, although were above trend).
The bottom line: Manufacturers will need incentives to keep the market growing. Even with the optimistic estimate of 4.5% combined GDP and employment growth for 2015, it appears as if a 3.25% prime rate is the best hope for continued market expansion. Otherwise, the peak is at hand.
Suppliers interested in quantifying their 2015 opportunities would be advised to keep one eye on the prime rate and the other on actual sales performance versus the 2006 benchmark.
Warren P. Browne is president of WP Browne Consulting and has extensive experience in the global automobile industry. During the past 20 years, he has held senior executive positions at General Motors, including in Brazil, Poland and Russia. He currently serves as an adjunct professor of economics at Lawrence Technological University.
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