Have We Reached Peak Auto?

What the future holds for the venerable industry.

U.S.vehicle sales totaled 17.55 million in 2016, beating the previous record of 17.47 million set just the year before. That’s according to data from Autodata Corp. It represents the seventh consecutive year of year-over-year sales growth.

Enjoy it while it lasts.

The National Auto Dealers Association expects U.S. sales to drop to 17.1 million in 2017. Why? Because interest rates and vehicle prices are both on the rise.

According to market researcher Edmunds, the average price for a vehicle is up 12.6% since 2011 and is now $34,077. That’s because consumers are increasingly spurning cars for costlier SUVs, crossovers, pickups, and vans. Per Edmunds, of vehicles purchased in 2016, approximately 40% were cars the lowest level since at least 2003.

Of course, there are other factors: more than 3 million autos reached the end of their leases in 2016,a 35% increase from 2015. Because lease terms are traditionally shorter, this could represent a glut of two or three-year-old vehicles on the market, putting a strain on new vehicle sales. As a result, analysts are predicting a more robust certified pre-owned vehicle market. 2016 figures aren’t yet available, but 2015 saw a record 2.55 million certified pre-owned sales.

In addition, the politics of President-elect Donald Trump add uncertainty. He has said he would impose a 35% tariff on vehicles made in Mexico. And though it has stated these comments were not the reason, in January 2017, Ford Motor, the nation’s second-largest automaker, scrapped plans to build an assembly plant in the country. At the same time, Trump’s promises to improve infrastructure could prove a boon to the sales of working vehicles such as pickup trucks. Finally, withdrawing from NAFTA could prove disruptive to automakers as well.

It’s also unclear how much if any fuel-economy standards will be relaxed standards automakers argue lead them to try to sell cars consumers don’t want, resulting in lower profits and more spending on research and development.

And according to the Los Angeles Times, dealer incentives are likely to take a hit as well. Dealer incentives hit a record high in2016, according to Kelly Blue Book, for an average of $3,741 per vehicle sold. Compare this with the $3,087 average seen in 2015. Incentives such as cash-back offers, zero down payments, and others are necessary to move built up inventory from full lots.

Going forward, however, auto makers have started reducing production of slower-selling vehicles (see: Ford Mustang),which lowers dealer stock and lessens the need for incentives for consumers.

That’s all in the short-term. Long-term, other concerns persist. According to 2010 U.S. Census data, 13.4 million people worked at least one day at home per week,an increase of 35% from 1997. Additionally, according to January 2016 statistics from GlobalWorkplaceAnalytics.com, 50% of the U.S. workforce holds a job compatiblewith at least partial telework and 80-90% of the U.S. workforce says they would like to telework at least part-time. So, the more the telework, the less need for a car.

And while everyone’s favorite demographic, the millennials, are buying cars after all, self-driving cars are quickly catchingsteam in Washington. Elaine Chao, the president-elect’s nominee for secretary of transportation, has indicated support for further testing and experimentation without much federal intervention,per Wired. Why buy a car when you can just hail a robot? And what disruption might this cause the U.S. trucking industry?

Now, it’s not as if auto loans at credit unions will suddenly fall off a cliff even if there may be a subprime bubble brewing. New and used auto loans at credit unions totaled more than $293 billion at third quarter 2016, according to data from Callahan & Associates. Year-over-year, new and used auto growth hasn’t quite matched recent heights, though they still remain in the double digits: at 16.23% for new autos and 12.76% for used autos. But the auto environment is changing, and quickly.

January 12, 2017

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