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Despite strong consumer sentiment, will interest rates weigh down auto sector?

November 16, 2018
Comerica Bank’s chief economist expects that the U.S. economy could be headed for a "fiscal cliff" by 2020. Despite a somewhat confident consumer segment, Robert Dye said the weight of interest rates on the auto industry will soon take effect.
Dye said that when it comes to consumers, "It is the best of times and the worst of times." 
He said: "There is a strong job market, a very high consumer confidence, building equity in homes and 401k, and consumers are adding savings. But there are key consumer sectors where I think there are some risk factors. My sense is we’re past the peak in the auto cycle."
Macroeconomic factors also will shape how the auto industry performs.
"As we all know, the Federal Reserve is engaged in a monetary tightening cycle, which means they’re increasing interest rates gradually," he said. "This means a 25-basis point increase of Fed funds rates every other meeting. That will push up short-term interest rates, and auto funding interest rates as well."
The three federal interest rates increased proposed will be felt in the form of a lower number of units sold. "I’m expecting to see a bit of tail off, when we get into the 16-million units sales range," he said. "We’re vulnerable to a steeper tail off, we’re not there yet but that’s what I’m looking for."
Positive consumer sentiment and higher savings may not be enough to cushion the auto industry in the anticipated downturn. "Two key areas [auto and home] of consumer spending are not looking as strong as we would expect," said Dye.