Auto Sales Numbers Offer False Economic Hope

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of “The Up Side of Down: Why Failing Well Is the Key to Success.”
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Auto sales have recovered in a big, big way -- on track to hit 16 million cars this year, which is a post-recession record. Kevin Drum cites this as one of three rays of economic sunshine. But as the New York Times points out, if you look closer, you see a little cloud hanging near our sun: Sales are more dependent than ever on leasing deals:

In 2013, leasing has accounted for 26 percent of new-vehicle purchases, according to In the years before the recession, leasing accounted for 16 percent to 20 percent, with activity focused on high-end cars and trucks.

The luxury car market has long survived on leasing; luxury car drivers often want to have the latest model every few years, and if you're one of those people, leasing is a relatively affordable way to do it. And, of course, people who can't actually afford luxury cars often use leases as a way to project the image of someone who can.

But the new leasing business is disproportionately coming from farther down the food chain: Chevrolet Malibus, Honda Accords and Toyota Camrys. While it's boosting sales right now, that's not necessarily a good sign for the auto industry. It's long been a danger sign when companies had to put a lot of "cash on the hood" -- incentives, like rebates, no money down, or zero percent financing -- in order to move cars. In some sense, leasing is just a slightly more exotic form of "better financing terms." Think of them as the option ARMs of the auto market.

As with any financing arrangement, this makes sales dependent on interest rates. Of course, that's always true to some extent. But the more reliant your sales are on exceptionally low financing costs, the more trouble you have when interest rates rise.

And interest rates are going to rise. Not immediately -- unlike mortgage rates, auto loans and credit cards will stay low in the near term. But come 2015 or so, they're going to be going up. Can U.S. automakers and U.S. consumers support these sorts of sales when interest rates aren't at rock bottom?

Perhaps by 2015, they can. But until then, I'm not ready to celebrate.

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