Automakers managed to eke out a second consecutive record sales year in 2016, and most predictions are for 2017 to be at or near that 17.5 million vehicle level. That strength is leading to confusion for people trying to predict what’s going to happen during the next few years.

Typically, automotive sales cycles are a few years up, a few years down, rinse, and repeat. Since the end of the 2008-2009 recession, however, dramatic growth in automotive sales have strayed from that pattern. Instead of hitting a peak and falling, sales appear to have hit a plateau, with all indications that they’re going to stay at that level for some time.

General Motors Chief Economist Mustafa Mohatarem says record sales for the past few years come despite “this having been the slowest economic recovery since World War II. It’s almost like the auto industry is decoupled from the challenges in the broader global economy.”

Predictions for 2017 range from the North American Automobile Dealers Association’s 17.1 million vehicles to UBS Analyst Colin Langan’s 17.8 million vehicle forecast. Either way, staying higher than 17 million units for a third consecutive year would be unprecedented.

Langan says his outlook is more bullish than his peers, but he thinks they’re discounting how much the economy has already improved and the potential for further strengthening. Positive factors include improving consumer sentiment, relatively low consumer debts, low scrappage rates for used cars, increasing credit availability, and the likelihood that interest rates will go up this year.

“Historically, auto sales rise as interest rates rise. Even though higher rates make it more expensive to buy, rising rates reflect a stronger economy,” Langan says. “The market is a lot more healthy than people give it credit for.”

The Trump effect

The biggest question for industry watchers is what President Donald Trump does. During the campaign, Trump promised massive changes that could affect the auto industry – pledging a 35% tariff on products imported from Mexico, threatening trade sanctions on Chinese goods, promising to roll back environmental regulations, building a giant wall along the U.S. border with Mexico, lowering corporate taxes, and increasing infrastructure spending.

IHS Markit Automotive Consulting Managing Director Michael Robinet says there are three possible outcomes of a Trump presidency – he gets everything he promised during the campaign; opposition lawmakers block every initiative; or most likely, he’ll succeed with some initiatives but fail at the more outlandish ones. Analysts agree that a trade war with Mexico or China, resulting from Trump’s legislative actions, is the biggest risk to the automotive industry, but they also feel that the risk is relatively low.

“It sounds more likely that level heads will prevail here. It would be very difficult to hit Mexico with a 35% tariff without sending the U.S. economy into recession,” Langan says. “The risk with Mexico policy is moderate, not high because in reality, production in Mexico is structurally entrenched at this point.”

On the positive side, infrastructure spending, economic growth, and lower taxes could make it easier for people to buy new vehicles. As Mohatarem puts it, the good for the auto industry could outweigh the bad.

Trends

While Trump has called for the rolling back of environmental regulations, industry observers expect automakers to continue to improve fuel economy, lower vehicle weights, and invest in hybrid and electric vehicle technologies.

Robinet says original equipment manufacturers (OEMs) “are continuing to trudge forward with fuel economy improvements. China and Europe are still demanding increases, so even if the U.S. slows down the regulatory requirements, the OEMs will have to continue to develop and produce more hybrids and electric vehicles.”

Robinet expects vehicle weights to fall 120 lb per vehicle within the next seven years as companies replace mild steel with high-strength steel, aluminum, and composites. Engine sizes will also continue to falls as turbocharging systems and power-boosting strategies improve.

There are trends that could increase the number of vehicles on the road throughout the next few years. Advanced driver assistance systems (ADAS) that warn drivers when they’re drifting out of lane or might hit the car in front of them could make driving more feasible to the older population who might otherwise give it up. Langan says the massive amount of data that ADAS collect could improve auto design and create new revenue streams for manufacturers in the years to come.

Further improving sales, Mohartarem says, is the youth market which had some industry watchers worried that environmentally conscious Millenials did not want vehicles at all.

“Millenials are finally buying more cars as their incomes improve,” Mohartarem says, adding that sales have been growing for that group the past few years.

General Motors

www.gm.com

IHS Markit

www.ihsmarkit.com

UBS

www.ubs.com

About the author: Robert Schoenberger, editor of TMV, can be reached at 216.393.0271 or rschoenberger@gie.net.