Auto Industry Has Many Levers to Pull if Federal Reserve Lifts Interest Rates

If the Federal Reserve raises interest rates this summer as some expect, the impact is likely to be immediate, though slight, on motorists, shoppers, dealers, carmakers like General Motors (GM) and Ford (F) and other stakeholders in the nation's automotive industry.

Car shoppers will discover quickly that loans and leases for new and used vehicles are more expensive and, therefore, monthly payments will be higher. Dealers -- such as AutoNation (AN) , Penske Automotive Group (PAG) and Group 1 Automotive (GPI)  -- will be paying more for their "floor plan" loan financing on inventories, and automakers and their suppliers should see rates rise on all interest-sensitive corporate borrowing.

A study by Cox Automotive forecast that a quarter-point bump in interest rates would add about $17 to the average monthly payment of a car.

"We do not expect (a quarter-point increase) to have an impact on car sales," said Michelle Krebs, an analyst for AutoTrader.com, a unit of Cox. "The industry has many levers to pull as well -- longer terms and leasing -- which it already is doing." 

A "potential concern," however, is the effect a quarter-point increase might have on household mortgage and credit card payments, thereby reducing overall purchasing power, Krebs added.

"The purchasing power of the average middle class household is not what it was," she said. "We do think that car sales would be higher if disposable income and purchasing power were greater."

Mustafa Mohatarem, chief economist for GM, said a Fed interest rate hike is more likely in July, after the "Brexit" vote on June 21, when the U.K. decides whether to leave the European Union. Even so, "its effect on the auto industry barely would be measurable," he said.

"The point is there are two offsetting effects," he said. "One is higher interest, but that would be happening because the U.S. economy is getting stronger." The salutary effect of a stronger economy more than makes up for higher rates, he said.

In May, the seasonally adjusted yearly pace of vehicle sales in the U.S. dipped to 17.45 million from 17.7 million a year ago. Deliveries for the month were down 6% from the previous year. Still, analysts' consensus is that the U.S. vehicle market is showing signs of endurance and strength in its sixth year of expansion after the global financial crisis.

One positive sign for the market has been rising average transaction prices on new vehicles, reflecting consumers' willingness to choose pricier models and more extensive option packages. Higher deal prices have resulted in more borrowing, pushing the total balance of retail automotive borrowing up 11.1% in the first quarter to more than $1 trillion for the first time, according to Experian, an automotive credit information service.

Experian warned of one troubling sign, however -- an increase in loan delinquencies that often sets the stage for a credit crunch, loss of confidence or other economic challenge.

"With more and more consumers relying on financing, it is important for lenders to keep a close eye on delinquency trends to ensure the market remains healthy," said Melinda Zabritski, Experian's senior director of auto finance. "Likewise, consumers need to continue making their monthly payments on time to keep affordable financing options open and available."

See TheStreet's full coverage on the Fed's upcoming interest rates decisions.

Doron Levin is the host of "In the Driver's Seat," broadcast on SiriusXM Insight 121, Saturday at noon, with an encore Sunday at 9 a.m. An independent contributor, he held no position in the stocks mentioned at the time of publication.

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