NATION Analysts predict falling car demand

Demand for cars is expected to fall if interest rates rise.
ASSOCIATED PRESS
The possibility of rising interest rates is turning Wall Street sour on prospective demand for new cars and trucks and on growth opportunities for shares of the two biggest domestic automakers.
Deutsche Bank analyst Rod Lache lowered his rating on Ford Motor Co. shares Monday to "sell" from "hold," citing concerns over interest rates.
With similar concerns, Goldman Sachs analyst Gary Lapidus downgraded his rating Friday on General Motor Corp. shares to "in-line" from "outperform." He reiterated an "underperform" rating on Ford.
On the news, Ford and GM shares fell Monday. In trading on the New York Stock Exchange, Ford shares were off 59 cents, or 4.1 percent, to close at $13.95 while GM shares were down 98 cents or 2 percent, to close at $48.70.
Wall Street's less bullish sentiment toward the automotive segment comes only days after the Federal Reserve hinted an increase in interest rates may be coming, something Lapidus said "will be punishing for auto demand."
Effects on car industry
"The Fed is threatening to take away the punch bowl, and while it may not tighten for a while, even the anticipation of rate hikes is likely to weigh heavily on carmakers," Lapidus said in a report. "Easy monetary policy has been the linchpin of robust U.S. auto sales over the last few years."
Higher interest rates likely will curb consumer spending, particularly on big-ticket items such as cars and trucks, analysts say.
Paul Taylor, chief economist for the National Automobile Dealers Association, said at the organization's 87th annual convention in Las Vegas this weekend that he expects rates to rise somewhat before the end of 2004, then 1 percent in 2005 and another 1 percent in 2006.
That would offset some of the strength in spending automakers have experienced in recent years, Taylor said. Still, he expects sales of new cars and trucks to rise about 1 percent this year.
Sales report due
The first glimpse of 2004 sales information comes today, when major automakers report January sales.
Analysts have said business generally was brisk to start the month but slowed in the latter weeks, in part because of extremely cold weather in some parts of the country.
In a research note, Lache said a benefit of lower interest rates is that people whose car loans are more than the vehicle is worth can roll that "negative equity" into new loans without seeing a rise in monthly payments.
"This phenomenon is unlikely to be sustainable in a rising rate environment," he said.