Car Sales and Interest Rate Regression: Scenario Analysis

Introduction and Overview

A finance manager employed by an automobile dealership believes that the number of cars sold in his local market can be predicted by the interest rate charged for a loan. The finance manager performed a regression analysis of the number of cars sold and corresponding interest rates, and identified a direct correlation: fewer cars are sold as interest rates increase. This case study assesses whether there are other salient factors besides interest rates that should be taken into account in this regression analysis, and whether the interest rate charged for a loan is the most important factor. A discussion of how the finance manager would respond to the dealership's vice president of marketing's request for a sales forecast at the prevailing rate of 7% is followed by an analysis of whether the prediction of car sales at 7% interest reflects the current state of the economy and its potential implications for the dealership.

Are there factors other than the interest rate charged for a loan that the finance manager should consider in predicting future car sales? At present, there are a number of trends that will inevitably affect new car sales levels for the foreseeable future, including the following:

Other Factors Affecting Car Sales Predictions

Is the interest rate charged for a loan the most important factor to consider in predicting future car sales? While the regression analysis clearly demonstrates that higher interest rates correlate with fewer sales, the trends outlined above — including leasing growth, credit scoring adoption, and tiered lending — suggest that interest rate alone does not fully capture the complexity of consumer purchasing decisions. Nevertheless, it remains a central and measurable variable in any forecasting model.

The dealership's vice president of marketing has requested a sales forecast at the prevailing interest rate of 7%. At this rate, the finance manager's regression analysis indicates that between 300 and 400 cars will be sold (the time frame for car sales is unspecified in the regression model).

As finance manager, the appropriate recommendation to the vice president is that, while other factors are involved in the decision to purchase a new vehicle, the regression model provides clear evidence that higher interest rates result in fewer sales, with the 7% interest rate falling near the top end of the rates examined. This makes the forecast of 300–400 units a reasonable planning estimate given current conditions.

Interest Rate as a Forecasting Variable

Is the prediction of car sales at 7% a reflection of a current downturn in the economy? It would be difficult to make this argument, since the American economy had recently rebounded to its pre-Great Recession of 2008 levels and interest rates had been falling at the time of this analysis (Parkinson & Blackwell, 2015).

How might this impact the dealership's business? Higher interest rates will have a corresponding negative impact on car sales. Research confirms that there has been a historic relationship between the health of the economy, unemployment rates, and car sales (Strauss & Engel, 2008). Consequently, the dealership should monitor macroeconomic indicators alongside interest rate movements when planning inventory, staffing, and marketing strategy.