2016 automotive sales will struggle to match last year’s record pace.

The numbers are in for 2015 and they’re simply outstanding for automakers.

Manufacturers hit record sales as Americans went on a big time buying spree for both cars and light trucks.

Take a look at the chart below. Good times, right?

$34,000 is a Troubling Number

Well, there’s another set of statistics that in my opinion is a real predictor of the future of light vehicle sales in the US and it comes from an unusual source: Kelley Blue Book.

Kelly is famous for it’s used vehicle valuation services, but they also track transactions for new cars and light trucks. The average transaction price of new light vehicles in America was just over $34,000, slightly up over 2014. To me, this number is surprisingly high and it reflects the influence of low interest rates and manufacturer financing deals more than a real boost in consumer disposable income.

In fact, with real wages flat to falling for the last three decades in the US, it’s interesting that vehicle sales have been consistently strong. One reason is the heavy weighting of luxury models, which Kelly stated now exceed 15 percent of the market.

For the other 85 percent, however, $34,000 is a troubling number.

Even at zero percent financing, borrowing over six years still generates a $472/month payment and at two percent financing, it’s $505/month. For lower income earners, the subprime lending industry operates with significantly higher interest rates, making the problem worse.

Put simply, buyers are financing over longer terms to keep monthlies affordable, which has two possible outcomes for the auto industry:

1.       Owners keep their cars and trucks longer, extending the trade-in cycle and supressing demand over the medium term. This reduces the value of the trade-in vehicle, creating another cycle of debt for motorists.

2.       Lease rates are presumably cheaper than payments. Their growth of leasing is built on the expected residual value of the vehicle at the end of the term, which might be speculative at best in an uncertain economy.

As Vehicles get Better, We Keep Them Longer

Put simply, as cars and light trucks get better and more expensive, we keep them longer, stretching the industry business cycle over a longer term at a time where technological developments are shortening the design and production cycle.

Something’s got to give and I expect it to be a lengthening of the product life cycle with platforms and powertrains evolving rather than giving way to clean sheet designs. From an engineering viewpoint, it may be similar to the way Ford and GM recycled the base engine architecture of small block V-8’s over decades.

Of course there is another way: shorten the refresh cycle for the body exterior and drop the price to make it possible to trade in over a shorter financing term. Consumers in a low interest rate world however, don’t seem interested in basic, low cost transportation.

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