U.S. Light Vehicle Sales Expected to Rise for Sixth Consecutive Year, PwC Analysis Says

DETROIT, Feb. 11, 2015 /PRNewswire/ -- With the U.S. light vehicle market expected to have a historic sixth consecutive year of sales gains in 2015, to a projected 16.8 million units, optimism seems to reign supreme in the automotive industry. However, according to a new analysis from PwC, numerous factors are converging to create an uncertain and less optimistic outlook, warranting a more cautious approach in the face of falling residual values, increased interest rates and the changing demographic makeup of consumers.

"From a growth standpoint, there are many positive economic signs to note, however as we dive deeper into the data there are warning signs of potential potholes ahead. Industry leaders should remain prudent regarding inventory, investment and incentives," said Rick Hanna, Global Automotive Leader. "We certainly advocate continued cautious optimism and staying mindful of the factors outlined in our analysis to ensure appropriate business planning in the coming years."

Short-term factors that could affect vehicle sales, economic indicators include rising interest rates and falling residual values. This year, consumers may face increased interest rates as a result of inflation and unemployment, the Federal Reserve's two primary indicators which have kept rates low in recent years. This increase could deter buyers – used to historically low four percent average prime rates in recent years – from purchasing new vehicles.

Additionally, the relationship between used vehicle prices and residual values will likely play a large role in determining sales success in the next two to three years. As new vehicle prices continue to rise, the more economical option of purchasing a used vehicle is gaining favor with consumers.  Also, with new sales demand well above the scrappage rate, used vehicle prices are expected to decline, which could make this option even more attractive.

The flip side to lower used vehicle prices is the negative impact on residual values, which factor heavily into leasing. Leasing currently accounts for 30 percent of new vehicle financing, the highest the market has ever seen, but when residual values fall, leases become less attractive, making it difficult for consumers and dealers to reach desired payment amounts.

As for long-term obstacles that may impact new vehicle sales, the U.S. is expected to undergo a pivotal generational transformation in the next few years as 10,000 baby boomers reach retirement age every day. This will likely curtail their new vehicle purchases and reduce overall demand. To date, the millennial generation has not shown the willingness to replace baby boomers buying habits. Whether millennials suffer from financial instability or simply are disinterested in owning a vehicle, this integral group of buyers may take years to replicate the demand from baby boomers.

Looking even further ahead, the natural rate of demand for auto sales may continue to be ambiguous and volatile, with some forecasts predicting sales leveling off at approximately 17 million units, while more ambitious predictions anticipate sales to reach 20 million units. However, with strong economic indicators pointing to a potential decrease in sales over the next few years, industry leaders must use their best judgment in planning for the future to ensure the long-term success of their organizations.

For more information about PwC's Autofacts Analyst Note, download the February issue at www.autofacts.com or download the Autofacts app.

About PwC's Automotive Practice

PwC's global automotive practice leverages its extensive experience in the industry to help companies solve complex business challenges with efficiency and quality.  One of PwC's global automotive practice's key competitive advantages is Autofacts^®, a team of automotive industry specialists dedicated to ongoing analysis of sector trends.  Autofacts provides our team of more than 5,000 automotive professionals and our clients with data and analysis to assess implications make recommendations, and support decisions to compete in the global marketplace.

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This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

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