The steadily rising trends in U.S. employment and household incomes are well established and they will persist in 2016. In fact, the U.S. economy is at long last expected to reach a level of full employment later this year. The growth trend in the U.S. wage data has already started to accelerate, and the tightening of the labor market will push wage gains even higher. Rising trends in these data always bode well for the auto market, and this year should be no exception.
Interest rates that were down at historically low levels and falling gasoline prices were two other factors that spurred market demand for vehicles in 2015. The trends in both of these data in 2016 will not be quite as favorable as they were last year, but they should not be much of an impediment in the near-term. Thanks to the stated intentions of the Federal Reserve, we all expect that interest rates will rise. But the expected increases will be modest — in the range of 1 percentage point or less over the next year. Such a modest rise will have only a small effect on the purchasing power of consumers, and this can be offset by dealer incentives if necessary.
Most analysts also expect gas prices to rise, but the current consensus calls for only incremental gains. The effects of falling gasoline prices last year had an interesting effect on the data for vehicle sales, and this offers some insight about what to expect this year if the trend in gas prices changes significantly.
Gasoline prices declined sharply in the second half of 2014, but they actually increased a bit in the first quarter of 2015. They started to drop again in the second half of last year, and the acceleration in the vehicle sales data started shortly thereafter. Just looking at the chart, the sales gains in the second half of 2015 appear outsized compared with the underlying trend. This outsized gain in vehicle sales in the second half of last year is the main reason I am forecasting a modest decline in the annual total for this year. I do not expect gas prices to drop like that again.
Falling gas prices not only affected the volume of vehicle sales last year, it also had a strong impact on the type of vehicles sold. In 2015, all of the growth in the light vehicle sales data was due to a large increase in demand for light trucks (pick-ups, SUVs and vans). The number of passenger cars sold last year actually declined by 2 percent when compared with the total from 2014. In contrast, sales of light trucks jumped 13 percent in 2015.
Some of the recent rise in sales of light trucks is due to increasing demand from both the construction trades (plumbers, electricians, HVAC, etc.) and companies that provide delivery services. But a substantial amount of the growth in light truck sales last year came from customers that might have purchased a car if gas prices had been higher. That is the only way to explain the decline in car sales during a year of record vehicle demand — Americans prefer larger, less fuel-efficient cars as long as gas prices are accommodative.
If the law of supply and demand has anything to do with it (and it does), then we should expect gas prices to start heading upward in the near-future. At this moment, I only expect a moderate rise in gas prices this year. This rise in gas prices should be offset by gains in both the number of people with jobs and the wages they are paid. Vehicle demand will also get a boost from a significant amount of pent-up demand (evidenced by the fact that the average age of a car on the road is still over 10 years). So it will be another strong year for light vehicles sales. But we all know how quickly the trend in gas prices can change, and if it does, the trajectory of the trends in demand for both the volume and type of vehicle will also change.