It’s a good time to be a car buyer

It’sagoodtimetobeacarbuyer.DealersareofferingthebiggestdiscountssincetheGreatRecession,andacombinationofhistoricallylowgaspricesandimprovementsinfuelefficiencymeanconsumerscanupgradefromcarstoSUVswithoutforkingoverahugechunkoftheirpaychecktogasstationseachmonth.ButthestoryisentirelydifferentforU.S.carmakersanddealers.Althoughtheautoindustryhasenjoyedrecordsalesrecently,thereareearlysignsthatthepartycouldsoonbeover.AndthatcouldspelltroubleforPresidentTrump’seconomicagenda.AlthoughhehascelebratedautomakersGeneralMotors,FiatChrysler,Ford,andToyotaforannouncingnewjobsatU.S.factories,thesemanufacturerscouldsoonbecaughtinabitofacontradiction,withweakerearningsaheadleadingtofurloughsorevenjobcutsifthey’reforcedtocutproduction.Broadlyspeaking,autosmakeupabout3%ofthecountry’sgrossdomesticproduct,butaccountforaslightlylargershareofinflationmetricsliketheConsumerPriceIndexandtheFed’spreferredmeasureofprices,knownaspersonalconsumptionexpenditures.Thismaysoundsmall,butit'senoughforasteepdeclineintheautosectortoshaveafewtenthsfrombothGDPandtheinflationmetrics,limitingTrump’sabilitytoreachtherapideconomicgrowthhehaspromisedandhamperingtheFederalReserve’stargetfor2%inflation.Here’showitcouldplayout.We’reatpeakautosales:Theautoindustryhasenjoyedaboomoverthelastfewyears.Vehiclesaleshitrecordsin2015and2016,asmorejobs,risingwages,lowinterestratesandhistoricallylowgasolinepricesfueledconsumerstoreplaceoldervehiclesandupgradefromcarstoSUVs.Meanwhile,arecoveryinthehousingmarketboostedsalesofpickuptrucks.Butnowindustryexpertssaythey’vereachedthepeakandthere’snowheretogobutdown.SpeakingTuesdayataforumaheadoftheNewYorkInternationalAutoShow,aToyotaexecutiveadmittedasmuch,forecastingU.S.salesfortheentireindustrywilldeclinetobetween17millionand17.2millionunitsin2017,downfromarecordhighof17.5milliontheyearbefore.BobCarter,presidentofToyota’sU.S.salesunit,calledtheindustry“overthetop”andnotedthatToyota’sdiscountsare“higherthanwe’veeverexperienced.”Toyotacertainlyisn’talone.DealersarehavingtoofferconsumersthebiggestdiscountssincetheGreatRecessiontomovenewcarsoffthelots.Thesediscountsaveragedabout$3,900pervehicleinthefirstthreemonthsof2017,orabout10.5%oftheaveragemanufacturer'ssuggestedretailprice(MSRP)foranewvehicle,notesJ.D.PowerforecasterThomasKing.“Theindustryisusingtacticstomaintaintheirsalespace,whichiscreatingchallenges,”hetoldFortune.“There’sariskofahangovertocome.”There’saglutofbothnewandusedcars.Partofthereasonwhydealersareofferingsuchdeepdiscountsisbecausethey’reproducingmorecarsthanthereisdemand.Afterrecordsalesfortwoyearsrunning,there’slessappetitefromconsumerstoreplaceoldervehicles.Inaddition,dealerssellingnewcarsarefacingincreasedcompetitionfromusedvehicles.Duringaweakjobmarketintherecession,driversheldontotheircarsforlongerthanusual,meaningthattherewerefewerusedvehiclesonthemarketandpricesclimbedtorecordhighs.Butnowthoseusedvehiclesarecomingbackontothemarket,drivingthepricesdown.Dealerssellingnewcarshavetocompetewithsomeprettyamazingdealsongentlyusedvehicles.“Ifyouwereshoppingforavehicle,andyouhappentolookattheusedvehiclelot,you’regoingtoseeamuchbiggerselectionofniceusedvehicles,”Kingsaid.What'smore,thisslumpinusedvehiclepriceshurtsconsumerswhowanttotradeintheiroldermodels.Asusedvehiclesdepreciatefaster,carbuyerswillfindtheyhavelessequitythantheymayhaveexpectedwhenturninginanoldervehicle.Longerloans,theFed’sratehikesandrisingdelinquencieswillallsqueezeautomakers’profitmargins.Inthefirstquarter,morethanathirdofnewautoloansweredated72monthsorlonger.Consumersarelockinginthesesix-yearloanstogetlowermonthlypayments,andasaresultarechoosingtobuymoreexpensivevehicleswithmorefeatures.Alotcanchangeintheeconomy,nottomentionanindividual’spersonalfinancesoveraperiodofsixyearsormore,anditcouldbearguedthatmanybuyersarespendingmorethantheycanafford.Theselongerloandurationsareincreasingtheriskofdefaults,andalreadytheFederalReserveBankofNewYorkdatashownewdelinquenciesarebackattheirhighestlevelssince2008.Higherdelinquenciescanforeshadowlossesforcarmakersandfinanciers,whohaverecentlymade0%financingawidespreadphenomenon.DelinquenciesandinterestratehikesfromtheFederalReservewillfurthersqueezeautomakers’profitmargins,limitingtheirabilitytokeepofferingdeepdiscountstocustomers.Finally,automakersanddealersareleftwithjusttwochoices:Eithercutproductionorintroduceevensteeperdiscountstokeepsellingrecordnumbersofvehicles.Overtheshort-term,thismixofstrategiescouldkeepautosalesstablearoundtheirlatestrecordhighs,butnotwithoutposinglongtermconsequencesontheindustry.“Thepiecesofthepuzzlearecomingtogethertopointtoweaknessaheadfortheautosector,butthereisthelingeringquestionofhowquicklythestorywillevolve,”BankofAmericaMerrillLyncheconomistsMichelleMeyerandAlexanderLinwroteinarecentnotetoclients,aptlytitled:“Areweheadingintoacarcrash?”Theanswer?Notyet,butstaytuned.“Sofar,theslowdowninthepaceofautosalesismanageablefortheeconomy,”theyconcluded.