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Interest Rate Increase Unlikely To Slow Down Car Sales

Dec 23, 2015

The Federal Reserve increased interest rates by .25% last week, the first increase since June 2006. The recovery from the 2008-2009 recession has been gradually improving and the Federal Reserve has been nurturing that growth by holding interest rates near zero.

Industry observers say that automotive sales (and auto parts sales), which account for about 20% of U.S. retail sales, will be critical to the Fed’s success in both “normalizing” rates and keeping the recovery on track. Low unemployment, a slight rise in wages, low gas prices and greater consumer purchasing power, combined with continued demand for light vehicles, could drive sales to a record of 17.4 million this year.

The gradual rate hike approved last week and other bumps over the next year are not expected to significantly crimp demand, or cool a housing market that has also propped up recent growth. A recent J.D. Power survey estimated that if interest rates rise 0.5 percentage points next year, it would curb auto sales by just 150,000 vehicles, leaving them well above the average of 15 million a year since 1990. Economists at Standard & Poor’s predict that interest rates will likely remain low (by historic standards) for another two years.

Over the last year business investment has contributed little to economic growth. Government spending has also been flat and foreign trade has acted as a drag on growth, given the weak state of the global economy and the strong dollar. Domestic consumption has picked up the slack, and the Federal Reserve is confident it will continue, thanks to further job gains and accelerating wages.