Car sales show sensitivity to rising interest rates

SUNDAY OUTLOOK

January 29, 1995|By Ted Shelsby

There are signs that some of the shine is beginning to wear off the new-car sales boom. Ford Motor Co. announced recently that it is cutting production of its new front-wheel-drive Windstar van. It also has eliminated overtime production of its new Contour and Mystique compact sedans.

Chrysler Corp. has sweetened the rebate on its Neon subcompact car to boost sales and General Motors Corp. has trimmed production at a Cadillac plant in Detroit and laid off 200 workers. Last week Chrysler warned that the Federal Reserve Board could push the auto industry into a recession if it raises interest rates again. Are interest rates beginning to drive customers away from showrooms?

Peter Brown

Editor, associate publisher, Automotive News

I think they are just beginning to have an impact on sales. One place in the market that is soft at this time is at the bottom of the market -- the sale of smaller cars, but expensive cars.

The industry is finding that by the time the Fed adds a point or two to interest rates you're starting to add 20 bucks, 30 bucks or even 40 bucks to a car buyer's monthly payments. And for the people for whom this is really critical, it is starting to take some of them out of the market.

The market is still a strong market and the rise in interest rates is not yet hurting the haves in our society who still want to get their hands on a new Ford Explorer or a Jeep Grand Cherokee. But you have got to attribute some of that softness at the bottom of the market to the interest rate hikes.

The auto industry always likes low interest rates. That automatically solves a lot of problems for them. It makes a monthly payment $50 lower without the auto industry doing a thing.

They want to see a long and gradual period of growth which is the same thing the Fed wants.

Alfred Shockley

President, Maryland New Car and Truck Dealers Association

Not yet. At this point I don't think they have had a big impact on sales.

I think all of this talk about the possibility of higher interest rates is actually helping dealers at least at this time. It is having a positive impact on sales.

I was with a lot of dealers last week and they say they are experiencing one of the best Januarys they have ever had. I'm not sure what is driving it. It could be consumer confidence. It could be that people are happy with the recently elected Congress or it could be that people are driven by the fact that if they were going to buy a new car maybe they had better buy it while rates are still reasonable.

I think we still have the potential of doing at least as well in 1995 as we did in 1994.

Jacob J. Cohen

Partner, Walpert, Smullian & Blumenthal

I think business auto sales are off in January. In the past, dealers would say that the snow and sleet was driving away customers. But the weather has been very warm. There is no excuse.

I, personally, think the raising of the interest rates has had some impact on sales.

The auto industry is a very leveraged industry. The inventory of new cars is fully financed, and a 1 percent increase in interest rates will adversely affect dealers because that will hit the bottom line immediately.

Dealers can adjust for this by tightening their belts and ordering less cars, but in reality if they tighten their belts too much it will affect the selection of cars in stock, and they could lose business.

Dealers are concerned about the Fed taking new steps. They are all sitting down trying to figure out how many times it will raise rates in 1995.

David B. Healy

Analyst, S. G. Warburg & Co.

I think they probably are, but it is a little hard to measure. The sales statistics don't come out with little asterisks explaining what made them go up or down.

MA I think the impact has been fairly mild up to this point. The

way I look at interest rates and their effect on car loans is that there is about a 300,000 drop in new car and truck sales a year for every one point change in interest rates on car loans. That has been the historical trend.

You've had car loans go up by about one and a half percentage points. Basically, they have gone up from 8 percent to about 9 1/2 percent. I think they are beginning to cause a drag on car sales.

On the other hand, some other factors, like the sharp rise in the price of used cars and the decline in the unemployment rate, are still helping auto sales.

I think the car market is beginning to level off. The monthly sales increases are slowing down to zero. Sales growth will be flat, but they will continue at a good level.

This will be another good year for the industry, but not that much better than 1994 as far as total sales are concerned. The past year was a pretty good year.

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