Fed's rate hike plans dim auto sales hopes

As automakers seal their fir s t annual U.S. sales decline since 2009, expectations for more inter- est-rate hikes are bolster-

ing the nearly unanimous view that car demand will shrink again in 2018. Few analysts anticipate

sales this year will reach 17 million vehicles, which was just achieved for a third straight year and only the fifth time in history. The Federal Reserve forecasts three rate hikes this year, crimping the free-flowing credit that’s helped fuel a record streak of demand growth that’s come to an end.

“Consumers could face slightly higher costs for all

their borrowing: credit-card balances, student loans,

financing a house or a car,” said Charlie Chesbrough, senior economist at Cox Automotive, which owns websites including Kelley Blue Book and Autotrader. “At the same time, higher rates drive up the cost to provide low-rate financing, which eats into profit mar- gins and hurts the carmakers as well.”

The central bank, which hiked rates three times in 2017, raises interest rates to keep the economy from overheating and leading to high inflation. For consumers, those protective

measures make it more expensive to take on new car loans or leases.

“The monthly payment matters,” said Jonathan

Smoke, Cox’s chief econ- omist. “When rates rise, many consumers do not have an option to pay more. We believe higher rates have already led the automotive market to see some shift” toward used-vehi-

cle purchases instead of new ones. The final tally for 2017 deliveries will industry reported today when auto- be

makers announce Decem- ber results. Analysts proj- ect that all major carmak

ers will report declines compared with the blowout final month of 2016, which benefited from an

extra selling day. sales Industrywide, probably ran December at about annualized a rate, 17.7 analysts million estimated in a Bloomberg News survey. That would be down from the nearly 18.2 mil- lion pace logged the previous December but still among the top months of the year. market With a record-high and low unem- stock ployment, the Federal

Open Market Committee is expected to stay the course and keep raising rates slowly as the chair-

manship passes to Jay Powell from Janet Yellen this year. Aquarter-point increase in interest rates typically adds $8 to $20 to the monthly payment on a new vehicle, according to Ivan Drury, senior analyst with car-shopping website Edmunds. Throw a handful of those at a consumer this year and the higher payments could lead shop- pers to give up options like heated seats and satellite radio, or move down in vehicle size, pinching automaker profits. considerably Still, interest lower rates are than in 2000 and 2001, the only other period that annual U.S. sales topped 17 million, Drury said. At that time, typical auto loan rates were in the range of 6 or 7 percent, compared with about 4 percent now, he said. “These numbers aren’t high enough to really deter anyone from purchasing a vehicle,” Drury said on a conference call last month. “I mean, you’re talking still about record low interest rates, especially for auto loans.” Borrowing costs are just one part of a mixed policy outlook for the U.S. auto market. Carmakers have warned the Trump administration’s approach to renegotiating NAFTA could increase costs. On the other hand, the companies have thanked the president for reinstating a review of fuel economy standards that could be weakened to cut lucrative trucks and SUVs some slack. Donald The tax Trump bill signed President last month also could help offinterest rate hikes expected set the this year by prolonging an era of consumers opting to buy new instead of used cars, Cox’s Smoke said.

“It’s going to postpone the pain of ‘I want a better vehicle’ and give us another year of trucks and SUVs and

luxury cars capturing more growth,” he said.