DETROIT -- An incoming "tsunami" of returning off-lease vehicles could send U.S. new-vehicle sales tumbling as low as 13 million by 2021, according to one Wall Street analyst.
John Murphy, an analyst at Bank of America Merrill Lynch, said weaker new-vehicle demand so far this year could spell trouble for the industry moving forward. That's because the market might not prove to be large enough to absorb roughly 3.5 million off-lease vehicles set to return to dealership lots this year.
Murphy said his new-vehicle sales forecasts of 17.9 million in 2017 and 18 million for 2018 could prove to be too optimistic, given that the industry is on pace to generate sales of 17.1 million units this year, down from a record 17.5 million in 2016. That could prove problematic, since the industry needs to sell at least 17.5 million new vehicles this year to absorb the off-lease vehicles and prevent a significant decline in used-vehicle pricing.
"The industry is getting a little bit too comfortable with the idea that a 17.1 million sales rate through the first four months of the year is a reasonably good number," Murphy said Thursday at an Automotive Press Association meeting in Detroit. "Because that number, relative to what we're seeing on the leasing side … is putting the industry at some pretty extreme risk."
That could create a downward cycle as lease returns climb to a record 5 million cars and light trucks by 2021. Should the market not be able to absorb the huge number of lease returns over the next few years, low used-vehicle pricing could send new-vehicle deliveries falling to 13 million units by 2021, well ahead of the bank's current forecast -- between 13 million and 14 million units in the mid-2020s.
"If the industry is not large enough to absorb the 3.5 million units coming off lease this year, we may see significant pressure on used-vehicle pricing ensue this year in a very material way and spike down the cycle faster and more furiously than even we're expecting," Murphy said.
Murphy's comments reflect growing concern in the U.S. auto industry that the market is at the beginning of a downward cycle following seven years of growth. The seasonally adjusted, annualized sales rate is expected to fall below 17 million for a third consecutive month in May, matching the total number of months with sub-17 million rates seen in the previous two years combined.
Murphy said other risks to the industry's sales outlook include the possibility of a significant tariff on light-vehicle imports as the Trump administration targets trade deals to boost U.S. factory jobs, the effects of Brexit on the marketplace and a potential spike in raw-materials prices.