Lower gas prices could help rev up car sales

A customer looks at a Ford vehicle on the showroom floor at a Ford AutoNation car dealership in North Miami, Florida.
Joe Raedle | Getty Images
A customer looks at a Ford vehicle on the showroom floor at a Ford AutoNation car dealership in North Miami, Florida.

Add the auto industry to the list of beneficiaries from lower gasoline prices.

Car sales were on a roll well before oil prices began crashing this summer, bringing gasoline prices with them—albeit with something of a lag. Since July, the average price of a gallon of regular has fallen by more than 40 percent—with no floor in sight.

Meanwhile car sales have zoomed back from the steep slowdown brought on by the Great Recession. After hitting a low point in July 2009, the pace of monthly sales has more than doubled to levels not seen since before the recession hit in 2007.

Early in the recovery, those gains were driven by pent-up demand, as an aging fleet of cars and trucks forced drivers to replace worn-out vehicles. A government-sponsored "cash for clunkers" program helped spur some of those trade-ins.

More recently, easy car loan termsespecially for borrowers with less than perfect credithave fueled growth in sales. Ultralow interest rates have reduced financing costs for all car buyers.

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And the ongoing pickup in the job marketlast year employers added new workers at the fastest pace since 1999has boosted consumer confidence and put many of them in a car-buying mood.

Now, the plunge in fuel costs will likely add momentum to the car sales rebound, according to Capital Economics economist Paul Diggles.

"Lower gasoline prices should give a particularly big boost to sales of less fuel-efficient light trucks, which already slightly exceed sales of cars," he said in a recent note. "Not only are light trucks less fuel-efficient, they are, on average, more expensive and more profitable for manufacturers too."

That should also help keep the U.S. economic recovery on track. Diggles figures the rebound in car sales has added about a quarter point to gross domestic product growth since 2009. He figures the annual sales pace, which hit 16.9 million vehicles in December, will soon top the 17.4 million peak pace hit before the recession.

Still, the growth may begin to decelerate if the Federal Reserve, as expected, begins raising interest rates later this year. U.S. carmakers may also face some bumps in the road from a stronger dollar. The increased buying power of the U.S. currency has helped lower the cost of parts made outside the country. But it makes U.S. cars more expensive to overseas buyers compared to foreign-made cars and trucks priced in weaker local currencies.

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After the big snap back from deeply depressed Great Recession levels, the slowdown in future sales growth shouldn't be a surprise, according to RBC Capital auto analyst Joseph Spak.

"So, from here, we mostly see U.S. auto sales growth in line with U.S. GDP growth," he wrote in a recent note.

Spak notes there are other forces at work that could slow the pace of car sales growth from here.

Relatively high levels of unemployment among younger drivers has curbed their purchasing power. The emergence of ridesharing services and great reliance on mass transportation in cities have given some potential car buyers alternate ways of getting around.

And greater reliance on telecommuting and online shopping have cut the number of miles driven per person, reducing the wear and tear on cars. That, along with the improvement in vehicle quality and life spans, could reduce the pace of trade-ins down the road.