One of the ways in which corporations try to show you their business is doing well is to release the sales figures. Even though the profit may be poor, a rise in the number of units sold always encourages investors the business model is sound and the company will soon be declaring dividends. You only have to look at Amazon to see this philosophy in action. It consistently boasts the volume of sales exceeds expectations and that the resulting revenue is invested in the development of new products and services. Just wait a little longer, it says, and the profits from this strategy will blow your mind. Well the motor manufacturers are not far behind. If you look at their published sales figures, this is a business in rude health. Indeed, with June sales at their highest levels in eight years, it looks as though the manufacturers are struggling to keep up with demand.
Except, of course, nothing is quite as simple as it seems. Indeed, if you talk with a few Wall Street analysts, they are cautious. The reason is the current promotional strategies which have been extending the term of the loans, reducing the interest rates, accepting borrowers with lower credit scores, and offering incentives to dealers that enables them to keep secondhand values higher than they should be. The result is many more Americans are able to buy new cars, so they do. The effect is artificially pushing up demand. This is a wonderful strategy so long as the Fed keeps cheap money flowing into the economy and does not increase interest rates. Should Fed policy change, the demand for new vehicles could collapse and all the new capital invested in production will be wasted.
When it comes to leasing side of the business model, the numbers are even more skewed with inflated residual values booked for older vehicles on the books and subsidized annual lease or rental values. When you put both sides of the business together, you are looking at exactly the same situation just before the housing bubble burst in 2008. If it continues, there could be a serious crash that will leave the manufacturers with a vast unsellable inventory, and customers with vehicles suddenly worth far less than their resale values.
Despite this, the analysts are not predicting a collapse this year. Indeed, the prediction is annual sales of about 15.3 million vehicles in 2014. This would be the highest sales volume since 2006. But next year may be the last of the peak years as regulators begin to look more carefully at the terms of auto loans. General Motors is currently being investigated for subprime lending practices. Hopefully we’ll just see a cooling of demand rather than a collapse, but if the Fed makes credit more expensive, household budgets may not be able to cope with the underwater auto loans. So the moral of this story is not to be hooked on cheap money, and only to buy when you know you can afford the loan not just today, but towards the end of the term of the loan.