Predicted auto sales in the United States during Q4 are uncertain to increase significantly following the Federal reserve's rate reduction.
The Federal Reserve Board made a significant move on September 18, 2022, by lowering its main interest rate. This decision, aimed at boosting economic growth, could have far-reaching implications for various sectors, particularly the housing and auto industries.
In the wake of the interest rate reduction, credit card interest rates are unlikely to decrease significantly in the short term. However, lower interest rates on home mortgages and credit cards could potentially stimulate home sales and, in turn, improve new vehicle sales in the U.S. next year.
The lower interest rates have already started to make an impact. The average auto loan interest rate for new vehicles dropped by 41 basis points in August 2022, and home mortgage rates have fallen by more than 1 percentage point compared to last year. This has led to new vehicle affordability reaching its best level in 39 months, according to the Cox Automotive/Moody's Analytics Vehicle Affordability Index.
However, the lower interest rates come at a time when personal savings have decreased significantly. From $830 billion in January to $599 billion in July, savings have taken a hit, according to a report by the U.S. Bureau of Economic Analysis. This could mean that consumers are putting down less on new vehicles due to lower savings.
The impact of the interest rate lowering may take until 2025 to be fully realised, particularly for the auto industry. Any real impact to automakers could be seen as 2025 models begin to flood dealer lots, prompting automakers to increase incentives to stabilise inventories.
Market conditions for car sales may vary by region. While higher unemployment and cost of living are slowing sales in western states like California, sales in the Midwest and South are buoyed by population growth, a strong job market, and lower cost of living, despite lower incomes.
The Fed plans to lower the federal funds rate through the end of 2025. This could lead to financial conditions loosening further, potentially increasing new vehicle affordability even more in 2025, according to J.P. Morgan. Financial lenders and consumers are expected to adjust based on the Fed's future rate cutting expectations.
The lower interest rates could also have an impact on commercial vehicle demand. Construction professionals and contractors contribute significantly to commercial vehicle demand, according to Jonathan Smoke, chief economist at Cox Automotive.
In conclusion, the interest rate lowering by the Fed could provide a much-needed boost to the housing and auto industries. However, the full impact of these rate cuts will unfold over the next few years, and consumers and businesses will need to adapt to the changing financial landscape.
