New fuel efficient SUV's on a car dealers lot for sale.

The Political Climate of the U.S. Auto Industry

2016 was a great year for the US auto industry. New car sales reached a record high of 17.55 million vehicles, topping the 2015 record of 17.47 million, and used car sales experienced similar growth, reaching a record of 40.6 million, topping the 2015 record of 38.3 million.  Low gas prices, low interest rates, and lower unemployment rates all contributed to the rise in sales and kept consumers buying throughout 2016. Most consumers opted to buy big—over 60% of new car buyers bought larger vehicles like SUVs, pickup trucks, and vans, instead of smaller cars and sedans.

U.S. Light Vehicle Sales (in Millions)Vehicle Sales by Type 2016

While many in the auto industry were hoping to extend this growth into 2017, analysts at NADA (the National Automobile Dealers Association) predict that the sales will likely “level off” and slightly decline to reach a total of 17.1 million new-vehicle sales and 40 million used vehicle sales for the year. January, while usually a slow sales month, saw a 1.8% decline when compared to January 2016.  Further complicating the forecast is the uncertainty about some of the proposed economic policies of President Trump.  Promised tax cuts and infrastructure spending could increase demand for new cars, but his threatened tariffs may make cars more expensive.

Whether President Trump passes the proposed tax cuts or reconfigures NAFTA, many of the actions he takes will have a direct effect on the auto industry. While a lot of the changes will primarily affect the auto manufacturing industry, many changes will trickle down to independent auto dealerships.

Here’s how some of President Trump’s proposed policies and actions could potentially affect auto dealerships:

1. Renegotiating NAFTA

NAFTA, or the North American Free Trade Agreement, was implemented in 1994, and has eliminated most tariffs and taxes on imports and exports between the U.S, Mexico, and Canada. President Trump has long voiced his disapproval of NAFTA, calling it “the worst trade deal maybe ever signed anywhere”, and blames the deal for eroding America’s manufacturing sector. He signed an executive order to renegotiate NAFTA in January, and has said that if he “can’t make a great deal, [he’s] going to tear it up”. President Trump has also made threats that he will impose a 35% tariff on products (including vehicles) imported into the US from foreign countries, which would lead to higher production costs for many auto manufacturers. Many auto manufacturers not only have plants in both Canada and Mexico, but also use auto parts created in both countries for cars assembled in the United States. These higher production costs would eventually be passed on to the consumer and increase the sticker price of many new vehicles. This also has the effect of increasing the value of all US cars, including used cars.  Additionally, analysts predict that the auto industry will see a large number of vehicles coming off lease in the next couple of years, which will lead to more used car inventory. This, coupled with a higher sticker price on new cars, may have more buyers looking to purchase used and Certified Pre-Owned vehicles. Dealerships that have used car inventory that tailors to consumers’ buying habits (currently SUVs and trucks), will be most attractive to buyers.

2. Higher Interest Rates

High interest rates affect everything from credit cards and auto loans to mortgages. While the Fed only forecasts 3 interest rate hikes in 2017, many are speculating that Trump’s policies may cause the Fed to start raising rates higher and faster. And even if that does not prove to be true, the Fed, while committed to making gradual adjustments, has predicted that interest rates will continue climbing into the next decade. Consumers may, on the one hand, run to dealerships to make a car purchase before interest rates rise too much, or they may put off buying a car and stay in their aging cars longer. At any rate, the lower price tag of used cars and Certified Pre-Owned cars may help dealerships entice consumers into purchasing a car. New car dealerships can continue to entice consumers with lease deals and financing incentives.

While small interest rate hikes aren’t likely to affect consumers’ overall purchase price too much, the thought of having a higher interest rate may make consumers more reluctant to car purchases. Dealerships can combat this by being extremely transparent and thorough with their customers when explaining financing options and monthly payment options.

3. Easing Fuel Efficiency Requirements/ Eliminating EV Tax Credits

Many auto manufacturers are hoping that President Trump will ease fuel economy regulations that require automakers to boost their fleet’s fuel efficiency to an average of 51.4 mpg by 2025.  If the regulations are not re-evaluated, automakers say that meeting current EPA standards would add hundreds of dollars to the price of a vehicle. Ford’s CEO Mark Fields has said that while increasing fuel economy is important, he believes there should be a balance between the cost of cars, creating jobs and protecting the environment.  If President Trump implements less restrictive fuel economy standards, it would allow automakers to keep vehicle costs low, and help them focus on creating more jobs and investing more in autonomous vehicles. Additionally, automakers are finding it difficult to sell the electric vehicles that are needed to increase their fleet MPG. Consumers, in recent years, have opted for buying lower-MPG SUV’s and pickups, making production of electric vehicles costly and unprofitable.

Another uncertainty with electric vehicles is when consumers will lose their $7,500 tax credit towards these vehicles. The credits are phased out after manufacturers sell 200,000 cars, which analysts believe both GM and Tesla will reach next year. Additionally, there is some question as to whether or not the new administration may seek to eliminate the tax credits entirely.  Without these credits, electric vehicles may become less attractive and less accessible to many consumers. Consumers searching for vehicles with higher MPG may turn to hybrids or smaller sedans with higher MPGs. As long as gas prices stay low, however, SUV’s and other lower-MPG vehicles will continue to lead market share. Used car dealerships can grow sales by, again, looking for inventory that mimics these consumer preferences, and pricing them competitively.

Although these are not the only issues or policies that will affect car sales in 2017, they will certainly influence the US auto industry. While no one can predict the outcome of these proposed policies, both new and used car dealerships can help increase sales this year by focusing on other areas of improvement, such as improving their inventory on hand, pricing their inventory competitively, and establishing an online presence for their dealership. However, despite the uncertainty and challenges the auto industry faces this year, 2017 is still expected to be another strong year for vehicle sales overall.