New-Car Sales Are Likely to Flatten Next Year

The shiny wheels that helped keep the U.S. economy rolling for the last five years may finally be slowing.

Rapidly rising new-vehicle sales provided much of the shove that got the economy moving again in 2009.

And those sales stayed strong in August, increasing 6 percent from a year ago while probably headed for 4.5 percent overall growth this year.

But over the next several years, growth will probably linger between flat and 2 percent annually, keeping sales in the 16 million to 17 million range.

While national sales at that level would be a high plateau, some industry observers worry that automakers may slide back into overproduction as they struggle to keep quarterly earnings up.

“I think 2014 will be the beginning of a plateau,” said Alec Gutierrez, senior market analyst for Kelley Blue Book. “We see sales growth remaining flat for the next three to five years.”

Moreover, the new-vehicle market seems to have shifted from primarily “need” buyers looking to replace old cars to more volatile “want” buyers.

“When most of your buyers don’t need a new car, you’ve got to sell the sizzle,” said Jesse Toprak, chief analyst at Cars.com. “You may have to work to get them into the showroom.”

None of the analysts anticipates a decrease in sales. Most, in fact, believe the business will remain robust.

But there are worrisome signs. Incentives are up 5 to 10 percent over last year, Toprak said, with some segments relying more heavily on spiffs than others.

Honda, for example, spent an average of $2,013 in incentives per Accord sold in August, three times what it did a year ago, according to The Associated Press.

Also, manufacturers have returned to occasional interest-free, 72-month financing to spur sales — a measure that virtually guarantees buyers won’t have any equity in their vehicles for years.

“I think we’re in a great spot right now and have a lot going for us,” said Ray Huffines, CEO of Plano, Texas-based Huffines Auto Group, which includes Hyundai, Chevrolet, Subaru, Chrysler, Jeep, Dodge and Ram franchises. “But 72-month financing just takes people out of the market too long.”

Meanwhile, used-car values have slipped for the last three months, while the average price that consumers pay for new vehicles remains high — $32,495 in August, according to Kelley Blue Book.

The result is a growing gap that some buyers try to close with longer-term loans, some running seven years or more.

“I do worry about the increasing lengths of loans — including some six- and eight-year leases,” said Toprak of Cars.com. “It just takes too long to get those buyers back into the market.”

LONG-TERM LOANS

The average new-car loan is now 66 months, and nearly a third of the loans are for 72 months or more, up from 18 percent in 2008, according to data from LMC Automotive.

Consumers still want and need new cars, said Chaz Gilmore, managing partner of Ford and Lincoln dealerships.

“But they want them at the best price they can find,” he said.

Gilmore figures the rising incentives are temporary, the result of high inventories. Dealers still have 2014 models on their lots and are getting shipments of 2015 vehicles.

“There is so much competition in the marketplace, and inventory levels are so high, that some manufacturers see an opportunity to gain share,” he said.

Inventories could be subjected to more pressure.

Automakers tend to look at steady — sometimes dazzling — growth and set their production for “500,000 more (vehicles) than they had planned,” said John Eagle, owner of the Dallas-based John Eagle Group, which includes Acura, Honda, Mazda and Toyota stores, as well as several luxury brands.

“They are in the business to sell cars,” Eagle said. “But at some point, that will catch up with you. Bad habits are made in good times.”

While he still sees strength in the new-vehicle market, he watches the increasing incentives and deals with some concern.

“The only way to get quarterly results is to move more iron,” he said. “Is it as bad as it once was? I can’t say that. But it could get that way.”

This article appeared in print in the September 15th, 2014 edition of Hamodia.