Auto Sales Rise in June: Can Tariffs Stall Momentum?

U.S. auto sales surged in June and have remained strong through the first half of the year. In doing so, they have defied projections that demand for autos would begin to cool through the year. A spike in interest rates and a large supply of late-model used vehicles were expected to weigh on sales of new automobiles.  

Analysts now feel that a resilient economy, record low jobless rate and tax cuts have supported auto sales. These factors have helped sales sustain their record pace over an extended period despite the cyclical nature of the auto industry.

However, industry insiders believe that President Trump’s proposed tariffs could ruin momentum in the months ahead. His administration’s actions could add billions of dollars in costs for the auto industry. Analysts estimate that this in turn could raise car prices by almost several thousand dollars per unit.

Sales Surge in June, Remain Resilient in 1H18

June sales for new vehicles in the United States grew an estimated 5%, per analyst estimates. The figure was boosted by an additional selling day compared to the year ago. U.S. auto sales also advanced 1.9% over the first half of 2018.

According to Autodata Corp., June U.S. auto sales hit an annualized pace of 17.5 million, the sharpest pace since March. The figure exceeded analyst estimates of 17 million and is higher than last year’s pace of 16.7 million.

In June, Ford Motor Company F reported retail sales of 230,635 units, 1.2% higher than the 227,979 units sold a year ago. Sales of SUVs increased 8.1% for the second largest U.S. automaker, to hit a record monthly level of 77,453 units.

The largest U.S. automaker General Motors Company GM, which ceased to report monthly sales starting April, also experienced an increase in sales. Strong demand for its trucks and a slew of new crossover vehicles helped lift sales by 4.6% to 758,376 for the quarter ended June. General Motors has a Zack Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank stocks here.

Fiat Chrysler Automobiles N.V. FCAU reported an 8% rise in its June auto sales, which rose to 202,264 units. Sales of its Jeep brand increased by 19% to post its best ever performance for the month of June. Sales of the RAV4 and Highlander sport utility vehicles helped lift Toyota Motor Corporation TM June sales by 3.6% to 209,602 units.

Tariffs Could Stall Momentum

In June, the U.S. Department of Commerce launched an investigation which could impede auto companies’ momentum. President Trump asked the Commerce Department to scrutinize if cars imports are posing a threat to national security. If this is indeed true, his administration could impose tariffs of 25% on imported cars.

Further, Trump has recently threatened to impose a 20% tariff on vehicles imported from Europe. Meanwhile, the United States and China are at the brink of a trade war. The Trump administration is set up impose tariffs on $34 billion of Chinese goods from Friday. Auto parts companies and car manufacturers alike believe that such actions could be ruinous for the industry.

According to Jeff Schuster, who heads global vehicle forecasting at LMC Automotive, U.S. vehicles sales could fall annually by two million units, or 11%. Schuster believes that even if automakers decide to pass on only half of the higher cost to customers, sales could fall by 917,000 units on an annual basis.

Conclusion

Dealers across the United States feel that potential car buyers have been become extremely price sensitive recently. In case tariffs bump up prices by a few thousand dollars, the pace of car sales could begin to decelerate.

Industry watchers can only hope that better sense prevails and the imbroglio is sorted out through negotiations. Otherwise, such good times may not last for auto companies.  

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