Bubble Warnings Loom Large Over US Auto Sales Boom

Business is booming on the lot, with the industry on pace to move some 16 million vehicles out onto the highway by the end of 2014. However, some Wall Street insiders are growing bearish with this bull market, blaming easy credit for the surge in demand.

Reuters reports the insiders believe the demand is artificial, and should begin to drop once the U.S. Federal Reserve raises interest rates next year. Morgan Stanley auto analyst Adam Jonas is among those insiders, and has gone as far as to proclaim the demand “peak auto”:

We have little doubt that we’re in bubble territory. We’ve blown through prior (sales) peaks in terms of value, the amount of money people are spending on automobiles. We’re in uncharted territory right now.

Jonas posits demand will actually hit its peak in 2017, when a record 18 million units are expected to leave the showroom floor, before dropping to just 14 million in 2019.

Easy credit is claimed to be fueling the current demand, which, in turn, is also fueling record transaction prices, the current average being more than $30,000 per vehicle. The U.S. Office of the Comptroller of the Currency goes as far as to claim in a June report that “signs of risk in auto lending are beginning to emerge” as automakers and their financing partners go after subprime consumers with ever-lengthening long-term loans.

However, most industry insiders believe pent-up customer demand is driving the ongoing sales boom, with incentives remaining stable compared to the run-up to the Great Recession six years ago. Inventories, too, are at “a healthy and manageable level,” with production capacity at near-peak, according to Ernst & Young lead analyst Anil Valsan. He expects sales to cool off and plateau in the coming years, rather than the bust Jones is forecasting.

That said, some vehicles are being moved with a much larger carrot than others, like the Cadillac ELR’s $20,000 discount and Chevrolet’s and Ford’s $10,000 discounts on their respective full-size pickup offerings. Jonas believes it’s only a matter of time before the market visits the ER for credit poisoning, warning the next decade in the auto industry will be “more brutal” than the current decade “in almost every way.”