Economy Will Miss That New-Car Smell

Slowing car sales may not be replaced by other consumer spending, which would weigh on the economy

By Justin Lahart

     A General Motors Chevrolet dealership in California Photo: David Paul Morris/Bloomberg News        

If Americans don’t buy so many cars and trucks, will they buy other things instead? The answer could matter a lot for the economy.

The auto business is shifting into lower gear. The annual pace of light-vehicle sales fell to a seasonally adjusted 17.2 million in the first quarter from 18 million. That the decline has come despite generous incentives from car companies and still-low gasoline prices suggests that sales are past their peak.

The upshot is that the deferred purchases that helped bolster business coming out of the recession have been made, and it will be up to replacement demand and a slowly growing population of registered drivers to fuel auto sales. If car makers are lucky, sales might stay on their recent level. If they aren’t—and the recent drop in used-car prices raises that prospect—the trend could be lower.

In either case, autos might count as a negative for consumer spending and the industry, a big driver of economic growth, could be an outright drag on the economy for the first time since 2009.

Still, if consumers take the money they might have spent on cars and used it elsewhere, the overall economy would be unaffected. But recent trends argue otherwise.

Even as the job market has improved since the recession, Americans have remained much more reluctant shoppers. So just because they’re not heading to the auto dealership doesn’t mean they will be going to the mall. Instead, they are more likely to save or pay down debt than spend.

Another big change is the incredible growing terms of auto loans, which means people can still be paying off a car seven years after they bought it. In the fourth quarter of last year, 32.1% of new car loans had terms of 73 to 84 months, according to Experian, versus 20.1% three years earlier and a negligible level before the financial crisis. Average monthly payment costs are also rising, and in combination with an increase in other types of consumer credit costs, are taking a bigger bite out of paychecks. In the fourth quarter, consumer debt payments reached 5.6% of after-tax income, according to the Federal Reserve—the highest level since the second quarter of 2009.

The glut of cars on the market won’t help either. Morgan Stanley predicts that used car prices will fall 20% by 2021 in its base case scenario, and will fall 50% in a bear case. With all of those bargains out there, car buyers can stay on the used car lot.

Auto sales have buoyed the economy in recent years. They could be a drag in the years to come.

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