Demand is already strong
The strong demand is due to a combination of factors, according to IHS’ senior principal economist, Charles Chesbrough. He cites low gas prices and favorable auto financing rates, as well as increased consumer confidence.
Reason for optimism already exists, with automakers selling 15.8 percent more new cars and trucks in October when compared with the same month a year ago. The increase is partially attributable to a rise in the number of new cars and trucks being offered, according to IHS. Even more new vehicles are expected to be introduced next year, which is expected to further drive consumer interest and sales.
Production will need to be ramped up, and IHS believes it will increase globally. Much of the increase in inventory is expected to come from China, with North America also producing more vehicles. Mexico in particular is expected to see increased production, since many automakers have opened plants there due to lower labor costs. Honda, Hyundai, and Volkswagen are likely to lead the way in new production because they have spots in their lineups that they need to fill, IHS analysts say.
Interest rates and prices could curb some of the increased demand
Consumers are able to afford vehicles more easily due to lower interest rates as well as longer loans. The average new vehicle loan is already for a term of almost 5.5 years and a value of $27,000 and will probably increase, according to Chesbrough. Consumers are focused on lowering their monthly payment while still trying to buy as much vehicle as they can afford, he says.
Ultimately, though, he cautions that sales could slow if interest rates rise. If the Federal Reserve raises interest rates by a few percentage points, this could have a large impact on the amount consumers will have to pay and cause them to turn away from new vehicles.
Another area to watch is in vehicle prices. Buyers are likely to be faced with higher prices over the next decade as automakers have to meet tougher fuel economy and emissions standards. Automakers may not only meet minimum requirements but exceed them, and prices are likely to increase as a result, according to IHS. Consumers will probably have more electric cars and hybrids from which to choose, but they’re likely to cost more.
Overseas growth will also improve
Overseas growth will still be available to automakers, with Asian and European markets leading the way. Russia’s economy may also improve, opening up opportunities there, according to IHS.
Ultimately, the outlook for auto sales is outstanding and will likely to remain that way for years to come. Changes may cause the growth to scale back, but that’s not likely to happen for several years.