Cox sees strong 2018 auto sales, but with potholes

DETROIT -- Early economic indicators signal U.S. car dealers will sell more vehicles this year, but not on the new-vehicle side.

It will be a good year, but "it's an 'Oh, shift, moment,' " with credit being the most important thing to watch, Cox Automotive Chief Economist Jonathan Smoke told the Automotive News World Congress here Wednesday.

Smoke forecasts 16.7 million new vehicles will be sold this year, down from 17.1 million in 2017. But that dip will be offset by a 500,000-unit rise in used-vehicle sales to 39.5 million, he said.

Smoke is expecting that higher interest rates and tighter credit this year will drive many consumers to buy a used vehicle instead of a new one. Most of those buying used cars will be millennials, who are often saddled with student loans and remain credit challenged, he said.

The good news is there will be plenty of used vehicles available. Nearly 3.9 million leased vehicles will reach maturation and go into the used-vehicle lots this year. About a third of those coming off lease will be crossovers, Smoke said.

Make no mistake, the new-vehicle market is in good shape, Smoke said. Consumer confidence remains at a 17-year high and vehicle demand appears robust. Likewise, at the end of December, industrywide new-vehicle inventories were at a healthy 60-day supply compared to the 62-day supply a year earlier, Smoke said. Strong fourth-quarter new-car sales and a scaling back of production by automakers reigned in formerly troublesome inventory levels, he said.

Consumers' preference for crossovers over cars will continue this year, in both luxury and nonluxury segments, he said.

But -- expanding on his 'Oh, shift' theme -- he noted that existing crossover nameplates will face incredible competition this year from used ones, given the massive number of crossovers coming off lease, as well as newly launched rivals.

"Can everybody chase the growth that's attached to all the launches and [the] off-lease vehicles in the [crossover] segment?" Smoke asked.

Look for pressure on used-vehicle prices for the first three months of this year, Smoke said. Used-vehicle prices will buoy in the spring and summer, stabilize in the third quarter and end the year flat, he said.

The most daunting issue facing the industry this year is the chance of big rises in interest rates, he said.

"The era of low interest rates is over," Smoke told Automotive News. "The key question becomes how quickly do interest rates move."

Last year, the U.S. Federal Reserve raised rates three times for a total of 75 basis points, but auto loans for "super prime borrowers" increased by just 20 basis points, Smoke said. The Fed has said it will raise rates three times again this year.

But it is unknown if the market can absorb those hikes as it did last year, meaning there is a chance auto loan rates will climb higher and faster this year than they did in 2017.

"If interest rates move more rapidly, we have the potential of seeing new vehicle sales challenged even more than we're already assuming," Smoke told Automotive News.

Data show that auto-loan lenders have been tightening credit for six straight quarters, Smoke said, and that trend is likely to continue.

Smoke advises dealers to pay attention to monthly car payments when working a car deal because that is what most consumers will focus on.

"The payment is going to tell you a lot more about how healthy your customer base is" than the Federal Reserve's official interest rates, he said.

While some folks are nervous about how much longer the current auto-sales expansion can last, Smoke said, "The probability of a recession in 2018 is as low as it's ever been, so there's no need to panic yet. We should continue to see demand above 16 million in the United States," provided there's no recession. a