U.S. auto sales are finally set to decline in 2019, although the end of the current boom has often been predicted and failed to materialize.
Most experts had expected sales to decline in 2018, but they were proven wrong as they reached 17.3 million, a gain of 0.6%. That marks the 4thstraight year sales have breached 17 million.
This time, a combination of rising interest rates and prices will finally push sales growth into reverse, while a slowdown in China and stagnation in Europe will undermine balance sheets. U.S. sales are predicted to fall by between 1.2 and 4% in 2019.
The Detroit Auto Show, opening January 14 through January 27, will echo to profit warnings from the big car makers.
The Center for Automotive Research (CAR) at Germany’s Duisberg-Essen University expects sales of U.S. light vehicles to fall 4% in 2019 to 16.6 million and slip to 16.5 million in 2020. CAR said in a report that its forecast doesn’t include the impact of a possible trade war with Europe.
President Trump might finally try and right the imbalance which allows European cars to sell in the U.S. with a 2.5% tariff, while U.S. made ones carry a 10% tax in Europe.
Fitch Solutions predicts a smaller fall in U.S. sales.
“In 2019, the U.S. light vehicle market will drop below 17 million for the first time since 2014, as deals to encourage purchase in the latter months of 2018 and the prospect of higher interest rates will result in sales falling 1.8%,” Fitch Solutions said in a report.
Moody’s Investors Service expects light vehicle sales – sedans, SUVs and pickups – to fall 1.2% in 2019.
“The accommodative financing environment that had helped buoy U.S. car sales is receding. Maintaining operating and financial discipline will be crucial (in 2019),” Moody’s said.
Despite the years of record sales, auto manufacturers find their stocks shunned by investors as their finances are perceived to be in less than stellar shape.
“Not since the Great Recession (starting in 2008) have autos been so out of favor,” Barclays Equity Research analyst Brian Johnson said.
“Autos were the worst performing sector in 2018, and valuations for both auto parts and (manufacturers) are at trough levels. We expect North America to enter an eroding plateau in 2019 as higher interest rates and vehicle pricing impact consumer demand. We see risk of further downward earnings revisions near term, while the risk of U.S. recession at some point keeps investors away,” Johnson said.
Morgan Stanley expects profit warnings sooner rather than later.
“We see ideal conditions for a high number of profit warnings by auto companies during the Detroit auto show on January 15 and 16 . We would avoid the sector at least until the dust clears,” Morgan Stanley analyst Adam Jonas said in a report.
In another report published just before the Christmas break, Jonas detailed his worries about the prospects for 2019.
“We believe potentially less favorable credit conditions could prove to be biggest driver of U.S. vehicle unit demand and auto share price performance throughout the value chain into 2019 and over the next 2 to 3 years,” Jonas said.
- “Auto companies profits are peaking, we expect profits to fall 20 to 40% in 2019 with cash flow falling 50 to 100%.
- All time high used car prices indicate that new car prices are too high and must come down, further hurting (manufacturer) and supplier profits.
- Consumer tastes are changing. There is far too much capacity to produce vehicles that consumers don’t want.
- We expect (manufacturers) to collectively spend tens of billions of cash on restructuring their global operations to address unused capacity, obsolete tooling (diesel), and excessive headcount,” the report said.