With the election in the rearview mirror, the auto industry is barreling toward 2013 with visions of more sales growth, a gradually healing housing market and easier credit that could shield the industry even if President Barack Obama and Congress don’t resolve their budget impasse by year’s end, according to analysts.
On Friday, the Thomson Reuters/University of Michigan preliminary consumer sentiment index climbed to 84.9, the fourth straight increase and the highest since July 2007. Strength in the housing market is brightening consumers’ outlooks, and auto companies expect that to translate into more shoes in the showroom.
Even with the so-called fiscal cliff looming as a threat to the economy, the auto industry’s momentum is based on several factors that may continue regardless of whether Washington reaches a compromise on tax increases and spending cuts.
“I think the fiscal cliff would just cause a hiccup for a few months at the beginning of the year in a worst-case scenario,” said Morningstar analyst David Whiston.
GRAPHIC: What is the fiscal cliff?
Here are the forces that are stronger than Washington’s dysfunction:
• Cheap credit. Consumers are getting loans fairly easily now, bringing a broader swath of car buyers into dealerships. Interest rates remain near record lows.
• Pent-up demand. It’s a cliché to industry observers at this point, but automakers are still reporting a surge of buyers who just can’t hold onto their aging wheels any longer.
• The housing market’s recovery. Although we’re not returning to the bubble of a decade ago, home prices in most regions aren’t falling any more, and in many metropolitan areas they are rising. Increased new housing starts will boost truck sales, the most-profitable segment for auto companies.
Morgan Stanley analyst Adam Jonas estimated in a research report that in 2013, every 100,000 in new housing starts translates into 300,000 vehicle sales. And the investment bank’s researchers projected housing prices could increase 4% to 9% in 2013, encouraging consumers to buy up to 200,000 more vehicles.
The median value of homes has risen 3.2% so far this year nationally and 6.4% in metro Detroit, according to Zillow.com’s Home Value Index.
“A recovery in U.S. housing is having a significant impact on borrowing and lending attitudes just as pent-up auto demand sits at historic proportions,” Jonas said.
The S&P/Case-Shiller Home Price Indices recorded a fifth consecutive month of growth in August, the latest month for which statistics are available, pointing to a sustained recovery.
“When you look at the impact the housing recovery has had on sentiment, and the impact sentiment has on consumer spending, if we can keep this momentum going, it’s going to lift other sectors of the economy as well,” General Motors spokesman Jim Cain said.
Still, the auto industry is watching Washington closely for signs of a consensus that would resolve the fiscal cliff, a term experts are using to refer to automatic tax hikes and massive spending cuts that would kick in at the end of the year if lawmakers can’t stop it by reaching a compromise.
“Certainly for the short run, I absolutely don’t think the fiscal cliff is going to have that much of an impact on auto sales,” said Lacey Plache, chief economist for Edmunds.com. “The way people will be hit — and this will take longer to come in — is through effects in the economy in general.”
Washington’s reaction could spark a selloff in the stock market, spooking consumers and crimping auto sales, for example.
“Unabated partisan strife in Washington could mean that business and consumer confidence will remain weak, undermining the recovery in light-vehicle sales in the U.S.,” Standard & Poor’s analysts wrote Thursday in a broad assessment of the election’s economic impact. “The most significant risk of gridlock could be to the economic recovery, which has supported this sales increase.”
After winning re-election, Obama is expected to push for an extension of the Bush tax cuts for the middle class and the expiration of tax cuts for families making more than $250,000 a year.
For the auto industry, that could be problematic if wealthy families scale back their spending. But Plache said 50% of car buyers have household incomes between $50,000 and $125,000, with 16% above $250,000.
“In terms of sheer number of cars being bought, there aren’t as many people on the upper end who would be affected by a rise in tax rates,” she said.
Plache pointed out that an expiration of a temporary 2% payroll tax cut would hurt middle-income taxpayers, but “I don’t think that will be such a big hit because that was a short-term measure and people tend not to spend based on short-term measures.”
Edmunds.com is projecting a 4% increase in yearly U.S. auto sales to 15 million in 2013, up from a projection of 14.4 million for 2012. That would represent a drop-off from 2012’s 13% gain.
But Barclay’s analysts recently upgraded their forecast from 15 million to 15.5 million, pointing to pent-up demand and easing credit standards.
Other factors are contributing to sales growth, too. One reason sales could tick higher is Superstorm Sandy destroyed as many as 200,000 vehicles in the Northeast, according to an estimate by the National Auto Dealers Association. That could boost sales in the fourth quarter of 2012 and into 2013.
“Some people did get their cars wrecked,” Whiston said. “Some of them are going to buy used and some of them are going to end up buying new.”
Cain, the GM spokesman, said GM is confident that Washington will find common ground to avert the fiscal cliff.
“There’s no reason why we can’t continue to grow if we can work through these issues and challenges,” Cain said. “We believe there will be a solution.”
Nathan Bomey, Detroit Free Press