Why Are Car Sales Down So Much?

By Wednesday, January 8, 2014

Soft Auto Sales Just the Beginning of a Poorer 2014All of a sudden, auto sales are declining…

Auto sales in the U.S. economy declined to an annual rate of 15.4 million units in December. In November, this number stood at 16.41 million units—a decline of more than six percent. (Source: Motor Intelligence, January 3, 2014.) Analysts were caught off guard by the decline in December auto sales; they were expecting an increase!

I see the decline in auto sales as being directly related to rising interest rates. And it’s not going to get any better.

For years now (since the Credit Crisis), auto sales have been increasing due to low interest rates. It’s very similar to what happened to the housing market prior to 2007. More and more people went on a house-buying spree when the mortgage rates were at record lows. When mortgage rates started to increase in 2007, the already-inflated housing market got hit hard. The same thing is happening to auto sales now.

Interest rates are rising again. Look at the chart below of the bellwether 10-year U.S. Treasury. Since November, the yield on the 10-year U.S. Treasury has gone up roughly 20%. The higher interest rates go, the weaker auto sales will get. (And we can already see the impact on the auto stocks. The stocks of America’s major car makers are off five percent from their 2013 peak, but key stock indices are near their peaks.)

10 Year Treasury Note Yield Chart

Chart courtesy of www.StockCharts.com

Rising interest rates will have the biggest impact on auto loans given to subprime borrowers (those who have a lower credit standing).

My readers should note that the delinquency rates on auto loans have been continuously increasing since the second quarter of 2012. TransUnion, a credit information company, expects delinquency rates on auto loans to continue rising right through to the end of 2014. (Source: TransUnion, December 17, 2013.)

I’m just not that bullish on the economy for 2014. Soft auto sales are just one factor to look at. But when we have a stock market that is topping out, a housing rebound starting to get sluggish in certain key markets (again, because of higher interest rates), and corporate earnings growth under pressure, I don’t see consumer confidence improving in 2014 to the point that it will positively impact consumer spending. In fact, I see the opposite: I see a pullback on consumer spending coming in 2014.

About the Author, Browse Michael Lombardi's Articles

Michael Lombardi founded investor research firm Lombardi Publishing Corporation in 1986. Michael is also the founder and editor-in-chief of the popular daily e-letter, Profit Confidential, where readers get the benefit of Michael’s years of experience with the stock market, real estate, economic forecasting, precious metals, and various businesses. Michael believes in successful stock picking as an important wealth accumulation tool. Michael has authored more than thousands of articles on investment and money management and is the author of several successful... Read Full Bio »

  • robert corbett

    I agree only housing is more sensitive to high interest rates than cars. My wife and I purchased 3 cars between spring 2012 and summer 2013. Each loan was under 3% for 72 months plus each car had a $3k to $4k rebate. Needless to say we are all set for cars and have no plans to buy any thing for 5-6 years. The discounts these days on the same cars is very small and the loan rates are much higher. Cars will probably not be a good deal again until the next major recession. Furthermore I live in Michigan and our state goes into recession one year before the country overall and usually recovers 1 year sooner. A slowdown in auto sales is concerning since it may indicate a recession is on the way in 2015 or 2016..

  • TballEconomy77

    I assume you meant to say the "bull" market rally is coming to an end…?

    Immediate term outlook:

    The bear market rally in stocks that started March 9, 2009 is coming to an end. Gold bullion is up $900 an ounce since we first recommended it in 2002 and we are still bullish on the metal.

    Great site, great commentary, thank you!