Analysts expect economic factors to drive new-vehicle sales dip

DETROIT — Last year, U.S. light-vehicle sales beat analysts' expectations to finish slightly above 2017's level at 17.3 million. But for 2019, analysts and industry observers are again calling for a downturn, albeit a mild one, driven by a variety of economic factors.

Most analysts are forecasting between 16.5 million and 17 million new-vehicle sales this year. J.D. Power is projecting light-vehicle sales to finish between 16.9 million and 17 million, with retail light-vehicle sales projected between 13.6 million and 13.7 million.

Just like at the beginning of last year, a relatively strong U.S. economy belies concerns over record-high new-vehicle prices and rising interest rates. But there are other concerns heading into 2019, too, such as the impact of tariffs and the effect of tax reform.

Tax reform was one of the key drivers for the boost in 2018 sales, but it also could contribute to a decline in 2019, said Jonathan Smoke, Cox Automotive chief economist.

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Federal consumer spending data revealed 2018 tax reform gains spent during the year helped offset the pain of interest rate increases, though Smoke said consumers who anticipate and rely on sizable tax returns may be disappointed in the spring.

"The tax withholding tables were too aggressively adjusted, and when we look at the data, we actually have seen that withholdings have declined by a larger percentage than the tax rate change would have implied," he said.

That means many consumers could owe more in taxes or could receive lower tax refunds. The effect could also damage their credit. Americans that rely on tax returns to pay off credit card debt incurred through holiday spending won't receive the same cushion this year, nor will the potential down payment on a vehicle purchase be quite as robust. Last year, more than 102 million Americans received a refund. The average refund amount was $2,800, Smoke said.

At the same time, thousands of consumers are expected to be priced out of the new-vehicle market, and worsening financial conditions will peel off cash-strapped customers first.

"We may see that as interest rates start to rise as well as the economy starts to falter a little bit in 2019, companies may be a little less aggressive in trying to provide credit to lower-credit tier customers," said Charlie Chesbrough, senior economist at Cox Automotive.

Tariffs will also be a concern. Aside from news headlines potentially leading to some pull-ahead sales in 2018, there is the lingering prospect of duties on all foreign vehicles and parts. The U.S. Department of Commerce has not yet concluded its Section 232 investigation. A similar investigation led to import tariffs of 25 percent on steel and 10 percent aluminum.

Higher tariffs on imported vehicles would likely drive up prices for consumers and could lead to automakers further exiting certain vehicle segments, such as compact cars. U.S. trade talks with China have made progress so far this year, but European negotiations have not shifted into higher gear.

Other economic factors will only improve sales in the short run. For instance, the recent drop in gasoline prices benefits the average consumer, according to Chesbrough, but adversely impacts the overall economy amid a rapidly growing energy sector in the U.S.

Also of concern is volatility in the equity market and general weakness in the housing market.

"There are some signals there that suggest that these big, durable, expensive products — houses, cars — are starting to see some difficulty out there," Chesbrough said.

Still, even with multiple headwinds in the new-vehicle space, the market is otherwise in relatively good shape heading into the year. The status of the labor markets, consumer confidence and vehicle selection remain positive, Chesbrough said.