What an automotive downturn could do

What an automotive downturn could do

As a result, many vehicle shoppers would be denied financing as they’re priced further out of the market. The looming downturn would be far less dire than the Great Recession, but changes to the tax law and the impact of steel and aluminum tariffs add pressure that the auto industry never faced then.

If the Trump administration creates a 25 percent tariff on imported goods, using Section 232 of the Trade Expansion Act of 1962, new-vehicle prices could skyrocket, plunging sales volume by 2 million to 4 million vehicles.

Not only would tariffs do more damage to new-vehicle sales than an actual recession would, Smoke said, but they could trigger a recession.

Over 80 percent of the more than 500 CFOs that responded to a Duke University/CFO Global Business Outlook survey predicted that a recession will begin by the end of 2020. Some of them believe it could start as early as this year.

“The tariff effect would be so bad that if you did the corresponding impact on the U.S. economy, suddenly you’re selling 4 million less vehicles,” Smoke said. “That not only impacts the OEMs and their production and all of their suppliers, it cascades to the dealers; it cascades to the financial markets and all the lenders who are involved.”

A report from the Center for Automotive Research estimates that as many as 366,900 U.S. jobs will be lost if tariffs are enacted, including as many as 77,000 in franchised dealerships. Dealerships will lose $43.6 billion — or $2.6 million on average, the report says.

New-vehicle buyers would be hit hard by tariffs. The price of a U.S. light-duty vehicle would increase by $2,750 on average. Many consumers would be forced into the used-car market, where the cost of maintaining and repairing vehicles also would rise.

On Feb. 17, the U.S. Commerce Department delivered to the White House its report on whether imports of auto products weaken the U.S. economy and pose a national security threat. President Donald Trump has 90 days from Feb. 17 to respond.

Some analysts disagree the sales drop would be enough to prompt the next downturn. Section 232 tariffs would be “significantly disruptive”to the new-vehicle market, but not catastrophic, according to Peter Nagle, senior automotive economist for North America at IHS Markit.

IHS Markit already anticipates a sales decline to 16.9 million vehicles in 2019, compared with 17.3 million in 2018, according to the Automotive News Data Center. But with tariffs, IHS predicts sales will drop to 15.9 million. The decline would be significant, but not be enough to thrust the market into chaos, it says.

Still, other actions taken by the administration may make recovery from an economic downturn more difficult. Nagle says the country is less prepared to help those in financial need during a recession today than it was in 2008 because of changes in the tax policy.

In part because of the new tax law, Americans have more money in their paychecks now than in 2008, but the federal government has been taking in less revenue, which feeds into programs such as Social Security, disability and short-term unemployment. For those who rely on government aid, an economic downturn could have a lasting impact, Nagle said.

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