As automakers seal their first annual U.S. sales decline since2009, expectations for more interest-rate hikes are contributing tothe nearly unanimous view that car demand will drop again in2018.

Few analysts anticipate sales this year will reach 17 millionvehicles, which was just achieved for a third-straight year andonly the fifth time in history. The Federal Reserve forecasts threerate hikes in 2018, crimping the free-flowing credit that helpedfuel a record streak of demand growth now coming to an end.

“Consumers could face slightly higher costs for all theirborrowing: credit-card balances, student loans, financing a houseor a car,” said Charlie Chesbrough, senior economist at CoxAutomotive, which owns websites including Kelley Blue Book andAutotrader. “At the same time, higher rates drive up the cost toprovide low-rate financing, which eats into profit margins andhurts the carmakers as well.”

The central bank, which hiked rates three times in 2017, raisesinterest rates to keep the economy from overheating and leading tohigh inflation. For consumers, those protective measures make itmore expensive to take on new car loans or leases.

Monthly Payments

“The monthly payment matters,” said Jonathan Smoke, Cox’s chiefeconomist. “When rates rise, many consumers do not have an optionto pay more. We believe higher rates have already led theautomotive market to see some shift” toward used-vehicle purchasesinstead of new ones.

The final tally for 2017 industry deliveries will be reportedWednesday when automakers announce December results. Analystsproject that all major carmakers will report declines compared withthe blowout final month of 2016, which benefited from an extraselling day.

Industrywide, December sales probably ran at about a 17.7million annualized rate, analysts estimated in a Bloomberg Newssurvey. That would be down from the nearly 18.2 million pace loggedthe previous December but still among the top months of theyear.

Analysts project that sales may drop to about 16.7 million in2018, from roughly 17.2 million last year.

With a record-high stock market and low unemployment, theFederal Open Market Committee is expected to stay the course andkeep raising rates slowly as the chairmanship passes to JayPowell from Janet Yellen this year.

A quarter-point increase in interest rates typically adds $8 to$20 to the monthly payment on a new vehicle, according to IvanDrury, senior analyst with car-shopping website Edmunds. Throw ahandful of those at a consumer this year and the higher paymentscould lead shoppers to give up options like heated seats andsatellite radio, or move down in vehicle size, pinching automakerprofits.

Still, interest rates are considerably lower than in 2000 and2001, the only other period that annual U.S. sales topped 17million, Drury said. At that time, typical auto loan rates were inthe range of 6% or 7%, compared with about 4% now, he said.

“These numbers aren’t high enough to really deter anyone frompurchasing a vehicle,” Drury said on a conference call last month.“I mean, you’re talking still about record low interest rates,especially for auto loans.”

Bigger Picture

Borrowing costs are just one part of a mixed policy outlook forthe U.S. auto market. Carmakers have warned the Trumpadministration’s approach to renegotiating Nafta could increasecosts. On the other hand, the companies have thanked the presidentfor reinstating a review of fuel economy standards that could beweakened to cut lucrative trucks and SUVs some slack.

The tax bill President Donald Trump signed last month also couldhelp offset the interest rate hikes expected this year byprolonging an era of consumers opting to buy new instead of usedcars, Cox’s Smoke said.

“It’s going to postpone the pain of ‘I want a better vehicle’and give us another year of trucks and SUVs and luxury carscapturing more growth,” he said.

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