New vehicle sales in the U.S. are accelerating to pre-recession levels—a trend that is expected to continue through 2018, even as the U.S. economy continues to run in low gear.
The vehicle market has been booming, with light vehicle sales expected to hit about 17.4 million units in 2015, increase to 18 million in 2016 and peak at 18.1 million in 2017, according to a University of Michigan (UM) analysis.
CUVs and SUVs are the main drivers of growth in the light vehicle category, the study shows, with the truck share of light vehicles projected to increase to 58 percent in 2017 from 53 percent in 2014.
Meanwhile the overall U.S. economy is expected to continue its moderate pace of recovery from the Great Recession, with an anticipated 2.4-percent GDP growth in 2016, according to Conference Board Inc., a business membership and research association.
Labor market conditions are improving, along with wages, consumer spending and housing starts, but these positives are offset by oil-related cuts to investment, a stronger dollar that dampens exports, weak international markets and ongoing inventory correction, according to the New York City-based Conference Board, a tax-exempt non-profit business membership and research group organization that counts about 1,200 public and private corporations and other organizations as members in 60 countries.
Conference Board is predicting the economy will grow 2.5 percent in 2015, slightly faster than the average of the years of recovery from the so-called “Great Recession.” Government spending at the state and local level should also contribute to this growth. However, federal government spending and business investment will remain low and volatile oil prices could hamper growth.
“Overall, expect an economic performance slightly above the long-term trend of 2 percent next year (2016), with continued low retail inflation. For now, on growth, on jobs, on wages, on inflation, 2016 could be as good as it gets,” Conference Board said.
(See a related forecast story citing an IHS Automotive expert on page 11.)
Disappointment over a struggling national economy last year likely will continue into 2016, as any gains are likely to be modest, according to the Indiana University (IU) Kelley School of Business.
There had been optimism that the economy could register something more than a “post-recession 2 percent slog,” but negative international conditions and revisions to 2013-14 data from the Bureau of Economic Analysis suggest that was merely an illusion.
“Looking to the year ahead, we see little reason for any real optimism,” said Bill Witte, associate professor emeritus of economics at Indiana University Kelley School of Business. “We think the economy can match the past year, or perhaps do a little better.
“For growth to move significantly higher, some sectors will need to improve relative to this year,” Mr. Witte added.
“The sectors that have been solid, such as consumer spending and housing, could hold their own but realistically have only limited upside. Other sectors, including business investment, international trade and government spending, seem unlikely to fill the void.”
IU Kelley School economists expect real output growth in 2016 will average about 2.5 percent—slightly improved over 2015 and equal to 2014. It also continues a pattern that has been in place since 2011, they said.
IU economists predicted that inflation may rise slightly and that the Federal Reserve may raise interest rates in early 2016—as it turned out, the Federal Open Market Committee hiked rates in December, for the first time since 2006—but that it will have minimal direct impact.
Business investment and governmental spending is forecast to be limited.
Corporate earnings are expected to rebound from disappointing levels in 2015, IU economists said, and global economic growth will improve but still remain weak in 2016.
U.S. Gross Domestic Product (GDP) growth is expected to range around 2.4 percent, according to Wallet Hub, a finance website run by Evolution Finance Inc.
“The United States economy is widely expected to be characterized by slower growth during 2016, with the word 'tepid' frequently being employed in the context of projections,” said analysts at Wallet Hub.
The recent sharp appreciation of the dollar and the ongoing collapse in oil prices reduced inflation and adversely affected net exports, according to economists at the University of Michigan (UM), noting that weak growth in Europe and developing economies contributes to a strong dollar that hurt U.S. exports.
Commenting prior to the Fed's recent hike in interest rates, UM said it expects that the improvement in labor markets will push the Fed to act “cautiously given muted inflation and jittery global financial markets. We anticipate a 25 basis point hike in the target range per calendar quarter.”
UM predicted GDP will grow 2.6 percent in 2016—which it said would be the fastest the economy has grown since 2006—and 2.9 percent in 2017. The housing sector continues to contribute to overall economic growth, with housing starts expected to grow at a solid pace, rising to 1.47 million in 2017 from 1.31 million in 2016. Nearly 70 percent of the increase will come from new single-family homes, the UM predicted.
Meanwhile, capital expenditures, a major driver in the U.S. economy, are expected to increase by 1 percent in the manufacturing sector and by 7.5 percent in the non-manufacturing sector, according to the Institute for Supply Management (ISM) survey of purchasing and supply management executives.
More than 80 percent of U.S. business owners and executives expect the U.S. economy either to improve or stay the same in 2016, while 17 percent expect the economy to get worse, according to a BMO Harris Bank survey.
Also, 70 percent of respondents believe their businesses will grow in the coming year, with 2 percent forecasting a decline in business growth.
“The survey results reinforce what we are hearing from our commercial customers, who continue to invest in their businesses and drive our economy forward,” said David Casper, president and CEO, BMO Harris Bank.
The survey asked 839 business owners and executives if they believe the U.S. economy will improve, stay at the same level or worsen in 2016:
c 49 percent expect the economy to improve (up from 38 percent last year);
c 34 percent expect the economy to remain the same (vs. 41 percent last year); and
c 17 percent expect the economy to worsen (vs. 21 percent last year).
The survey also asked the same respondents if they believe their business will grow, stay at the same level or shrink in 2016:
c 71 percent predicted growth in 2016 for their business (up from 56 percent last year);
c 27 percent expect their business to remain at the same size (down from 37 percent last year); and
c Only 2 percent believe their business will shrink in 2016 (vs. 7 percent last year).
“Businesses are reaping the benefits of investments and productivity improvements, and buoyant consumer demand is creating opportunities,” said Michael Gregory, head of U.S. economics, BMO Capital Markets.
“However, as we look ahead to 2016, we see challenges for businesses, including a strengthening U.S. dollar and escalating labor costs.
“As such, economic prospects depend critically on continued business investments and productivity improvements.”
The BMO Capital Markets survey was compiled from a random sample of owners or senior decision makers from 839 businesses across the U.S.
The good news for the economy is that the unemployment rate fell significantly during 2015, dropping to about 5 percent in November, which the federal government considers nearing “full employment.”
This trend is expected to continue during 2016, according to Wallet Hub.
The average monthly payroll jobs gain for 2015 is the second highest since 2006, and the monthly average of initial jobless claims for October was the lowest it has been since 1974, according to economists at UM.
Real hourly wages—nominal wages deflated by CPI—accelerated, growing at a nearly 2-percent rate, bolstered by the unexpected decline in inflation, according to the UM.
“While still slow by historical standards, this 2 percent pace is better than the 1 percent growth we saw during most of the recovery. Nominal wage growth also accelerated in recent months, suggesting that real wage gains may sustain their recent pace,” the UM said.
The UM expects the unemployment rate to continue to fall to 4.9 percent in 2016 and 4.6 percent in 2017.
The manufacturing sector expects that its employment base will grow by 0.2 percent, while non-manufacturing expects employment growth of 1.7 percent, according to the ISM.
Annual vehicle sales is nearing a record set at 17.4 million units in 2000, which some analysts predict could be broken in 2016, if not 2015.
The sales surge is fueled by consumers replacing their aging vehicles with more fuel-efficient models, employment and wage gains, and desires to obtain financing ahead of interest rate hikes, according to analysts.
“We foresee a very cautious bump in rates during 2016. This would represent a welcome development for borrowers, in terms of both minimizing the cost of credit card debt and financing major purchases, such as a home or a car—especially with some short-term interest rates already reflecting an expected Fed rate hike,” according to WalletHub.
New light-vehicle sales in December were expected to be the strongest of any month since 2005, according to J.D. Power and LMC Automotive. They predicted 2015 would end with an annual record of 17.5 million unit sales.
“As 2015 comes to a close, the industry is expected to post its strongest sales month of the year,” said John Humphrey, senior vice president of the global automotive practice at J.D. Power. “With continued record transaction prices, consumers are on pace to spend more than $44 billion on new vehicles in December and $437 billion on new vehicles in 2015, both record levels.”
The previous record of consumer expenditures was set at $407 billion in 2014. He noted that the recently announced Federal Reserve increase in interest rates would probably have a minimal impact on new-vehicle sales.
In December, J.D. Power surveyed 2,301 consumers who said they expect to be in the market for a new vehicle in the next 12 months, asking them how a Fed rate hike would affect their purchase decision. In a scenario where the Fed would raise interest rates by 1 percent (higher than the actual 0.25- to 0.5-percent rate increase), 80 percent of respondents said this would not change their buying intentions; 13 percent said they would look for a cheaper car; and 7 percent would consider buying a used car.
“There is the risk of a knee-jerk reaction from consumers to big economic news, leading them to delay buying, but the survey suggests it's a very small proportion of shoppers who are concerned about rates, particularly at this low level. In other words, we're not expecting much of a negative impact,” Mr. Humphrey said.
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