Will Trump's Key Economic Growth Plans Foster New Car Sales? | Edmunds

Will Trump's Key Economic Growth Plans Foster New Car Sales?

What would push new-car sales beyond the peak they achieved in 2016? The key may lie with President Donald Trump's "Make America Great Again" agenda for new jobs and economic growth, Edmunds Chief Economist Lacey Plache says in a new four-part analysis.

The articles examine the current economic landscape and the challenges carmakers face in increasing sales. Plache examines three of Trump's signature policies for economic growth — infrastructure spending, tax cuts and import tariffs — and assesses their potential effect on new-car sales.

The ability of carmakers to surpass "Peak Auto" — the 17.5 million annual sales achieved in 2016 — is not a foregone conclusion, according to Plache.

"While economic conditions are supporting current sales, driving higher auto sales will largely depend on economic growth that brings new buyers into the market," she writes in the analysis overview, "Peak Auto Sales Still to Come."

The U.S. economy is strong, Plache writes, but there is room for growth, both in labor force participation and in median household income. With more people working and earning higher incomes, there's the possibility of greater car sales.

Additional sales could come from two groups that are underrepresented as new-car buyers. One is millennials, who account for 29 percent of the population but just 11.5 percent of new-car sales. The other is consumers in households with an annual income of $50,000 or less. They account for 45 percent of the population but just 26.5 percent of new-car sales.

"Economic policies that successfully impact these and other underrepresented segments have the greatest chance of increasing new-car sales," Plache writes.

Infrastructure Spending Could Ignite Auto Sales
The most promising of Trump's three policies for economic growth, including greater employment, is his plan to massively increase infrastructure spending, Plache writes. In the analysis' second article, "Beyond Roads and Bridges: How Trump's Infrastructure Spending Plan Could Grow Auto Sales," she describes the plan's potential for job creation and the possibility of additional new-car sales stemming from that.

"Lowering unemployment with the proposed good-paying, middle-class jobs has high potential to bring additional new-car buyers into the market," Plache writes. "In fact, based on Edmunds' analysis, new-car sales could increase at a rate ranging from 1 percent to 3.75 percent in the first year of the program alone, just based on higher retail purchases."

Plache notes that there are caveats to her estimate of job creation stemming from the infrastructure plan.

"First, opinions are mixed about whether sufficient skilled labor exists in the construction industry to meet expected demand," Plache writes. "Finding and training new labor would require time, potentially delaying the impact of the policy on car sales. Second, the impact also depends on how the program is structured."

Plache says that her analysis assumes that the infrastructure program would support new projects. "It is unclear how much job creation would occur if tax credits could benefit only existing projects, for example, due to requirements to implement the projects within a certain time frame."

Tax Cuts Are Unlikely to Help
In the third article, "Trump's Tax Cuts Are Not Likely to Bring Much Windfall to Auto Sales," Plache concludes that the tax plan would likely result in less than 1 percent growth in new-car sales. The proposed tax cuts don't sufficiently affect the groups that would need to realize more income in order to buy new cars, Plache writes.

"The proposed cuts will most benefit the car buyers who least need them — the wealthy — and not the groups who are underrepresented among new-car purchasers and more likely to spend the extra money on both non-durables and durables, including autos," Plache writes.

There is the possibility of a stronger impact, 0.6 percent to 2.25 percent growth in new-car sales, if Trump's prediction of 3 percent economic growth because of tax cuts become a reality, according to Plache. There is a big if, however: "whether or not it is possible to achieve 3 percent economic growth with this tax-cut plan in the current economy at full employment."

Tariffs Could Tank Car Sales
In the fourth article, "Trump's Tariffs Could Import a Big Hit to New-Car Sales," Plache says that this is the proposal that could have the greatest negative effect on new-car sales.

Edmunds estimates that 47 percent of new cars sold in the U.S. are made elsewhere. The remaining 53 percent of cars contain a significant share of imported parts as well, due to the globalized supply chain in the auto industry. Given that reality, Trump's proposed tariffs would "dramatically increase" new-car prices, Plache writes.

For imported vehicles, a 20 percent tariff could increase the average transaction price of a typically equipped new car by about $7,000, from $35,000 to $42,000, assuming that automakers pass on the entire cost of the tariff to consumers. Because shoppers are extremely sensitive to price increases, new-car sales could drop by 2 million annually.

Plache notes that if tariffs are imposed, it's likely that there would be a carve-out for the automotive industry.

"Automotive is the largest manufacturing industry in the U.S., contributing 3 to 3.5 percent to GDP," Plache writes. "Any hit to this industry resonates in a big way through the economy. As a result, we believe that any tariff policy will be designed to not derail auto sales."

Read More
All the articles in the series can be found here: Peak Auto Sales Still to Come | Beyond Roads and Bridges: How Trump's Infrastructure Spending Plan Could Grow Auto Sales | Trump's Tax Cuts Are Not Likely to Bring Much Windfall to Auto Sales

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