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Non-Cycle Auto Paralysis

In December 2015, automakers were still riding high. Auto sales that year were to be another record, both in terms of units as well as dollars. Americans had spent about $437 billion on new vehicles in those twelve months, up from $407 billion the year before. Though there were notable disturbances throughout especially the second half of 2015, that December more economists and therefore carmaker projections were focused on the Federal Reserve.

John Humphrey, Senior VP of the Global Automotive Practice at JD Power, assured his industry audience that the first rate hike in a decade “should have a minimal impact on new-vehicle sales.” Consumer surveys about monetary policy were encouraging for 2016.

There is the risk of a knee-jerk reaction from consumers to big economic news, leading them to delay buying, but the survey suggests it’s a very small proportion of shoppers who are concerned about rates, particularly at this low level. In other words, we’re not expecting much of a negative impact.

The big economic news in reality had little to do with the Federal Reserve apart from why the central bank hesitated so much in 2015 and again in 2016; and why it doesn’t think it will ever get to normalize monetary policy at all. There was already at that time a sizable downturn, a near-recession even, that economists just missed because the Fed was ready to “raise rates.” Downturn and less “accommodation” just don’t go together in the Economics textbook.

It wasn’t actually a cyclical downturn which for the auto industry has left it in paralysis. A year ago, Ford Motor (F) declared, hopefully, that auto sales had plateaued. That was a benign way of describes changing fortunes. The auto sector had been practically the only industry to actually recover from the Great “Recession”, prosper even. Plateau was the nice face to sudden economic uncertainty.

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