Howes: Slipping auto sales ain’t what they used to be

Howes: Slipping auto sales ain’t what they used to be
Daniel Howes, The Detroit News Published 10:48 p.m. ET Jan. 4, 2018

The virtuous circle of low interest rates, an aging U.S. vehicle fleet pushing something like 11 years and swelling used-car inventories is threatening to shift into reverse, ending the longest auto sales expansion this town has seen in 50 years.(Photo: Stan Honda / AFP/Getty Images, file)
The kids are barely back from Christmas break, and already we’re being warned that the auto industry’s great post-recession run has come to an end.
Sales for the coming year are likely to dip below 17 million cars and trucks in 2018 after two years above the magic threshold. The virtuous circle of low interest rates, an aging U.S. vehicle fleet pushing something like 11 years and swelling used-car inventories is threatening to shift into reverse, ending the longest auto sales expansion this town has seen in 50 years.
Except that means a lot less than it used to for Detroit’s automakers. Their North American break-even points are lower than any time in memory. And as much as the lineups of players like General Motors Co., Ford Motor Co. and Fiat Chrysler Automobiles NV increasingly skew to profit-rich trucks and SUVs, they’re also betting big on zero-emissions electric vehicles and self-driving technology.
As industry problems go, that’s not a bad one to have. Yeah, yeah, I know: What if oil spikes to $100 a barrel and pushes gas back to $4 a gallon after North Korea goes nuclear? What if Iran’s mullahs fall and the turmoil threatens the Straits of Hormuz?
Yeah, won’t that stick dealers with a whole lot of trucks and SUVs customers won’t want, swelling costly inventories and draining bottom lines? It could, but we’ll have a lot bigger problems than slowing vehicle sales, that’s what.
Instead of conjuring worst-case scenarios designed to expose (yet again) the alleged stupidity of Detroit’s auto brass, consider how differently things look on the slight downside of the industry’s record-setting sales peak. Namely:
As much as Detroit and, frankly, many of its foreign rivals are placing near-term bets on trucks and SUVs — because that’s where the rich U.S. market is — they’re also placing enormous bets on an Auto 2.0 future that presumes to cut Middle East oil completely out of the automotive equation.
The truth is that the industry’s dual-track strategy, pursued in some way by every global automaker, theoretically shields it more from the market vagaries that historically have thrown the business into periodic tailspins. And the globalization of product development, even manufacturing, makes it easier for them to respond to sharp swings in consumer preference.
A perfect defense? No. But it’s a heckuva lot better, and more flexible, than the old days — something critics mired in an industry that ceased to exist a decade or so ago would be wise to keep in mind … along with a bright macro-economic outlook.
“In 2018, we expect continued moderation in incentive spending patterns, rising interest rates (albeit off historically low levels) and forecasted growth in off-lease volumes to continue to pressure the rate of U.S. light vehicle sales,” J.P. Morgan said in a note Thursday.
“However, we do not see an accelerating decline in auto sales materializing in the near term given the health of the underlying economy (including consumer confidence), the relative age of the car parc, and still reasonable prices at the pump (though rising gas prices are worth monitoring).”

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Translation: There’s a whole lot more to be positive about than negative. The health of the auto industry — and the fortunes of Detroit — long have been directly correlated to the national economy. Now is no different.
Tax reform, expected to begin showing up in pay-stub withholdings as early as next month, could offset slight rises in interest rates. Unemployment rates remain low, the stock market is soaring, job creation is churning ahead and wages are expected to rise more than they have in recent years.
PNC Bank predicts the current U.S. economic expansion, now entering its ninth year, could be on pace to be the longest ever. Says senior economic adviser Stuart Hoffman, in a statement: “It may be old in years, but it’s young at heart with a lot of life left. The economy has legs.”
His six reasons: stable oil prices; low inflation expectations for at least the next couple of years; gradual interest rate increases by the Federal Reserve, which PNC pegs at three separate quarter-point moves this year; strong global growth; relative financial strength of consumers; and the beneficial effects of tax reform.
The question isn’t whether the auto industry that still drives a big chunk of Michigan will prosper in the near-term. It’s whether the automakers are managing their core businesses efficiently enough when times are good — and the future of mobility and autonomy remain uncertain. It’s a delicate balance, and whoever does it best will be a winner.
Daniel.Howes@detroitnews.com

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