GOLDMAN: 'Auto Economics 101' Explains Why Rising Interest Rates Won't Smash The Demand For Cars

It’s no secret that Treasury rates are rising. And all of the rates that use the Treasury curve as a benchmark (e.g. mortgages, auto loans, credit cards) are also rising.

But does that mean the markets for homes, cars, and everything else will get crushed?

Not necessarily.

Even the most bearish economists have argued that rising mortgage rates won’t stop the housing market as long as a growing economy fuels demand.

The same argument can be made about the market for cars.

Goldman Sachs analyst Patrick Archambault explains:

We want to be clear that we are not suggesting that higher rates will significantly curtail volume. Exhibit 10 below shows a graphical depiction of what happens in a tightening cycle that is concurrent with an economic recovery. As the economy recovers and disposable income improves there is a macro driven outward shift of the demand curve (engendering more volume at a given price). If as a response to the healthier macro the Fed lets rates rise, then there is a partially offsetting increase in price (i.e., a higher monthly payment) which reduces “quantity demanded” pulling us back a bit along the new demand curve, but we still wind up with higher overall volumes. This is born out anecdotally in Exhibit 2 which shows that the SAAR increased during 2 out of the last 3 tightening cycles.

Like with housing, the key is an improving economy fueling demand.  Below is Archambault’s chart

auto economics

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