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TEXT-Fitch: fiscal cliff could put brake U.S. auto sales growth

Oct 4 - Although sales of cars and trucks in the U.S. took on speed last month, Fitch Ratings notes that industry enthusiasm should be tempered as meaningful near-term risk remains as long as the U.S. fiscal cliff remains unresolved.

Improving consumer confidence, pent-up demand, and widespread availability of financing have all helped drive U.S. car and truck sales beyond expectations earlier in the year. Should the combination of tax hikes and spending cuts come into force at year end, we believe it could lead to an unraveling of some of the factors that have clearly helped buoy the industry over the past couple of years. To be sure, U.S. auto sales in September showed a nearly 13% year-over-year improvement, and sales figures have been growing steadily for several years. Regarding the fiscal cliff, in our opinion, it is likely that all or some of the tax increases and spending cuts will be resolved or at least temporarily deferred. With that said, the possibility of a nonresolution to the U.S. fiscal cliff could precipitate some detrimental knock-on effects for the auto industry that could potentially put the brakes on continued growth.

In our most recent "Global Economic Outlook," we projected that an unresolved fiscal cliff would push the U.S. economy into another recession and lead to a 3% cumulative loss of output by 2014. Tax increases would cause an immediate hit to a majority of American incomes, forcing consumers to practice spending restraint that would only be magnified when considering big-ticket items like cars and trucks. In addition, a tapering off in consumer confidence and an increase in unemployment would likely lead to further demand concerns for auto manufacturers, who would likely increase incentives in an attempt to prop up demand.

We note that, although the pricing environment has held up well over the past several years, it could also change quickly should government spending cuts and rising taxes take effect. Combined with the ongoing weakness in Europe and the slowing of demand in most developing markets, an unresolved fiscal cliff could severely hit U.S. auto manufacturers and parts suppliers just as they appear to be hitting their stride.

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. All opinions expressed are those of Fitch Ratings. (New York Ratings Team)

((e-mail: pam.niimi@thomsonreuters.com; Reuters Messaging: pam.niimi.reuters.com@reuters.net; Tel:1-646-223-6330;))