Record or not in 2016, auto sales growth seen drawing to end

Nissan vehicles are loaded onto car carriers for dealer delivery at the Port of Los Angeles in Los Angeles on June 28, 2013. : Bloomberg photo by Tim Rue.

While it’s still too close to call whether 2016 delivered another annual record for U.S. auto sales, it’s clear the era of rapid growth is over.

The industry is entering 2017 with analysts projecting the first significant decline in eight years — a drop of 200,000 vehicles, about the equivalent of one factory’s production — to 17.3 million cars and light trucks. While top-earning consumers will continue to snap up luxury vehicles loaded with high-tech features, analysts say higher expenses are working against less well-heeled buyers.

“Car sales have experienced an unprecedented run that just couldn’t last forever,” said Michelle Krebs, senior analyst with Cox Automotive. “Rising gas prices, rising interest rates — that just puts pressure on household budgets.”

There’s one wild card for the U.S. auto industry as the year begins: the arrival of Donald Trump as U.S. president on Jan. 20. During the campaign Trump discussed policies that have potential to help auto sales — tax cuts, for example — or hurt them, such as adding tariffs on imported vehicles.

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When automakers release results Wednesday, analysts on average project that December sales will come in at a seasonally adjusted annualized rate of 17.6 million cars and light trucks, up from last December’s 17.5 million rate and probably good enough to just squeak past 2015’s full-year total, which also was 17.5 million.

One challenge is that there was one fewer selling day this December compared with the year-earlier month. Another is that December can vex automotive advertisers, caught between November’s Black Friday sales pushes and the clutter of holiday-season ads for other consumer goods.

“December is kind of a tricky month,” particularly from Dec. 10 to 26, said Cynthia Brown, Toyota’s national advertising manager for dealerships. This observation led to the heavy use of Toyota’s “Right Light” spot, in which a soldier sees a welcome home greeting outside her airplane window, written with strings of holiday lights. The feel-good ad contains only a subtle reminder of December’s “Toyotathon” sales event.

Other automakers didn’t hold back. Cable channels were jammed with leasing deals, no-interest offers and other aggressive come-ons. General Motors Co., the largest U.S. automaker, may gain 4.4 percent, based on the average analyst estimate. Fiat Chrysler, which discontinued its compact and midsize sedans, is projected to drop 14 percent, while Ford, Toyota, Honda and Nissan are all seen slipping less than 3 percent.

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Either way 2016 turns out, what a run it’s been: Since the depths of the recession, light-vehicle sales in the world’s most lucrative market have grown faster than a million units a year on average, delivering an unprecedented streak of annual gains.

Most automakers will reveal their 2017 forecasts next month around the North American International Auto Show in Detroit. The average estimate in a Bloomberg survey of analysts has risen to 17.3 million cars and light trucks from a 17.2 million average in November.

One reason for the boost is Brian Johnson of Barclays, among the more bearish analysts this year, who raised his outlook for the industry in an extensive Dec. 16 report about the effects of the Trump administration. Where he once predicted an “eroding plateau,” he’s now calling for, well, just a plain old plateau.

“In 2017, tax cuts, new fiscal stimulus, as well as improved ‘animal spirits,’ could strengthen consumer spending and effectively extend the auto cycle,” Johnson wrote. U.S. consumer confidence, which recovered from the lowest levels on record to above average during Barack Obama’s presidency, has continued to climb since Trump’s election and in December reached the highest since 2001.

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Longer term, Johnson cautions that rising interest rates, weakening residual values, ongoing shifts away from personal vehicle ownership and potential tightening in availability of financing will keep sales from soaring to 18 million.

Johnson also sees some risk in automakers’ willingness to spend a bit more freely on incentives. Discounts have risen almost 14 percent this year through November to $3,303 on average, according to Autodata Corp. — but average transaction prices have also risen, allowing automakers to remain extremely profitable. If many automakers project another 17.5 million year, they may plan their production around that level and then further increase incentives if needed to soak up the supply, he said.

For investors, the hope is that with today’s more-flexible labor contracts, automakers are better positioned to avoid the bad habits of past downturns, such as building vehicles no one wants to buy and then selling them at a loss.

“In past years you had a legacy cost associated with the Detroit Three in terms of excess capacity and excess labor that is no longer part of the system,” said Joe Langley, an analyst with IHS Markit. “So there’s no need to take some of these measures that we’ve done in the past of artificially over-producing vehicles and overly incentivizing them.”

While tax cuts and a promised surge in infrastructure spending might spur demand, IHS Markit cautions that the complexity of legislation needed to enact these efforts — as well as the time to implement them — mean that many benefits won’t be felt quickly.

“For example, an infrastructure bill, if passed in the first half of next year, will not impact the economy until 2018, because it takes several months of planning before a project can get under way,” said Patrick Newport, the firm’s U.S. economist. “Similarly, corporate tax reform will take several months to work its way through Congress.”