Dealers will have another prosperous year in 2004 but face tougher prospects in following years, the National Automobile Dealers Association chief economist says.
The likely culprit? Rising interest rates.
Paul Taylor said Saturday that dealers have experienced "the best five years in history" from 1999 through 2003, with annual U.S. light-vehicle sales staying above 16 million.
The Federal Reserve Board brought interest rates to a 41-year low even as sales stayed robust - an unusual combination, Taylor said. Automakers have used low rates to stoke sales with 0 percent car loans, and dealers' floorplan interest has been unusually low.
"Really, for new-car franchise dealerships, the stars have aligned in a way that apparently they do only every 40 years," Taylor said at a press briefing. "I would be remiss if I didn't say there are going to be some challenges going forward."
The key change is likely to come late this year or early in 2005 when the Fed begins raising interest rates. Taylor predicts a 1 percent raise in each of the next two years.
"They will do so in small increments but will continue to do so for those two years," he said.
That will make incentives more expensive and increase dealers' operating costs in 2005 and 2006, Taylor says.
But for 2004, Taylor sees continued healthy sales. He projects U.S. light-vehicle sales of 16.8 million - an estimate he says he bumped up after seeing automakers start incentives in January.
"I would probably have chosen a number that was a little smaller had I not seen that surge of enthusiasm for incentives early in the year," Taylor said.
Taylor predicts that incentives will decrease slightly this year. Citing data from Autodata, he said average Big 3 incentives averaged $3,712 per vehicle in 2003 and overall industry incentives were $2,664. He expects those to fall but stay over $3,000 for the Big 3 and over $2,000 for the overall industry in 2004.