Pub. 12 2013-2014 Issue 4

N e w J e r s e y C o a l i t i o n O f A u t o m o t i v e R e t a i l e r s 17 new jersey auto retailer w w w . n j c a r . o r g crisis. The depth of the recession and the slow pace of the economic recoveryhas allowed theFed tokeep this lowinterest rate environment in place. Such a low interest rate policy is, however, untenable in an environment of rising economic activity. Rates, therefore,must go up and the question is WHEN rather than IF they will rise. This rise in rateswill be steady andwe believe that any suddenor dramatic shocks to rates or the U.S. economy will result in very swift Fed action to reduce rates rather than allow the U.S. economy to stall. Growth in the economy is expected to return to a very good 2.8% in 2014, rising to just over 3.0% in 2015. Motor vehicle sales are also expected to rise this year to another post-2009 record of 16.4 million light vehicles. While the interest rate environment will not be as favorable as it was from 2009-2013, there will be no large scale increases in rates. Rather, therewill be a slow, steady rise as Fedpolicy shifts to represent the economic fundamentals. While 2013 continued to be a year of transition, 2014 should be the year of recovery leading to stronger and more stable growth in 2015. The above article was written by Steve Szakaly, NADA Chief Economist. He can be reached at sszakaly@nada.org. Specializing in Franchise Automobile Dealership Brokerage &Valuations Serving New Jersey Dealers Since 1989 Confidentiality Assured D.T. MURPHY & CO. 973 809-9311 • dan@dtmurphy.com • www.dtmurphy.com change as the large overhang of excess homes is steadily diminished by a growing U.S. population. A growing population will lead to a steadily rising demand for housing, which will manifest itself in a housing market turnaround in 2014.. This is critical to understanding long term growth and is the foundation of growing optimism with regard to the improving economy. Of course, with the housing market turnaround, there is also the attendant increase in demand for employment. Manufacturing and retailing have been leading the recovery in employment, steadily building jobs since late 2009. Construction and government employment, on the state and local level, have been inconsistent. This is expected to turn a corner in 2014, as growth in housing drives demand for construction employment. Demand for housing will also establish some solid and strong fundamentals for local and state government resources to recover. The impact from a housing market recovery on overall economic activity is expected to be very strong. The improvements in housing and employment should further boost automotive sales in 2014. NADA’s forecast is for automotive sales to reachyet another post-2009 high of 16.4 million units. While housing and the improvements in construction are critical to reaching this 16.4 million level, other fundamentals also will have an impact. As mentioned earlier in this article, the decline in net outstanding debt has been critical in putting households on a firmer economic footing. This will steadily free up more income for discretionary expenses including the purchase of a new car or truck. The used market will also see a boost in demand as vehicles that are now approaching an average fleet age over 11 years are traded in. Lastly, demand will likely remain high due to continued low interest rates. The Federal Reserve, through the Federal OpenMarket Committee (FOMC), is expected to keep interest rates low throughout 2014. This policy has two critical pieces: the first is simply the Federal Funds Rate, which we expect to remain unchanged through at least the middle of 2015. The secondhas been the use of bondbuying by theFed to keep interest rates low. This policy is entering a new phase which will see some upward pressure put on rates. The rise in rates will be relatively small. We expect, at the very most, a modest increase of 0.5% in the ten-year bond by the end of 2014. This should not impact vehicle affordability for consumers in 2014. From a dealer’s perspective, rising rates are never welcome. The automobile retailing industry has benefitted greatly from the low interest rate environment the Fed created after the global financial