What could put the brake on U.S. auto sales

Yahoo Finance

U.S. auto sales figures for July are being released Friday, and ahead of them, automotive industry consultants J.D. Power and LMC Automotive predicted they would be the strongest for the month since 2006, rising 9% from last year.

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In general auto sales have been a strong point of the economic recovery, driven by a number of factors including pent-up demand and low interest rates.

"You had a few years during the recession where car sales really fell off a cliff, so there were a lot of older cars on the road that had to be replaced," says FT Alphaville's U.S. Editor Cardiff Garcia in the video above. "And even now the average age of cars on the road is pretty old, so I think this has at least a little more room to run for now."

But with loosening credit standards for car loans leading to some concern about a subprime bubble forming, and with trends like younger people not buying cars at all, there's a question of how long this strength can continue.

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Garcia says there is no way to know but there should be some concern about long-term sustainability worth monitoring closely.

He points out that there's an interesting comparison to be made between housing and cars. We saw credit tighten in the housing market in the aftermath of the financial crisis but not in autos where credit has flowed much more freely. It's among several reasons that car sales rebounded more quickly than did single-family homes, according to Garcia.

At the same time, "there's a tradeoff between economic growth in the short term and later on [the risk of] some kind of a bigger fallout," he notes. But it is not as threatening as housing, says Garcia, because it's a much smaller part of a person's assets.

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So a slowdown, he notes, "might have negative impact on growth, but I don't think it's going to lead to a huge financial crisis...it might be a problem for a lot of people who took out loans and maybe shouldn't have, and possibly even for some of those lenders if they don't get paid back."

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