updated 2/13/2006 9:59:57 AM ET 2006-02-13T14:59:57

U.S. auto sales will fall slightly in 2006 because of the impact of rising interest rates, the chief economist for the National Automobile Dealers Association said Saturday.

"Price matters in this market. This is an increasingly price-sensitive consumer," economist Paul Taylor said on the opening day of the NADA's annual four-day convention.

Taylor predicted new vehicle sales will total 16.8 million in 2006, down from 16.947 million last year. That's because it will cost consumers more to finance their vehicles, he said.

On Jan. 31, the Federal Reserve raised the key federal funds interest rate to 4.5 percent, its highest level in five years. Many economists predict the Fed will raise the rate further next month.

Taylor said the number of months' salary it takes to finance a vehicle had been falling since the mid-1990s but is on the rise because of interest-rate hikes. The average number of months was 26.2 by the third quarter of 2005, up from around 20 in 2002 and approaching the recession-era level of 30.2 months in 1990.

The average transaction price for a new vehicle in 2006 will be $28,000 (euro23,392), Taylor said, while the average price for a used vehicle will be $14,840 (euro12,398).

"These are big-ticket items for consumers. They're going to be sensitive to interest rates," Taylor said.

But the news isn't all bleak for auto dealers. Consumer confidence is on the rise along with household wealth, which should give luxury vehicle sales a boost, Taylor said. The number of licensed drivers also is expected to increase by a robust 1.5 percent in 2006 as the largest generation since the Baby Boomers continues to reach driving age.

Taylor also said used-car sales are expected to show some strength this year. Used vehicle sales have risen steadily since the 1980s but dropped sharply in 2002 as incentives and low interest rates made new vehicles more attractive.

But Taylor said used vehicle sales are on the rise again. Dealers sold 12.1 million used vehicles in 2005, compared with 11.9 million the year before. People in the hurricane-ravaged Gulf region are still replacing vehicles and many will choose used cars, he said.

Dealers who expand their used vehicle offerings and provide good parts and service departments should be able to weather the downturn in sales, Taylor said. He said more customers also may choose to lease their vehicles.

"Dealers are still optimistic about the future, even though in some cases their manufacturers are going through tough times," Taylor said, referring to U.S. market share losses at General Motors Corp. and Ford Motor Co.

Michael Rothermel, the general manager of a Ford, Lincoln and Mercury dealership and a used-vehicle dealership in Belle Glade, Florida, said the outlook for dealers is positive as long as they spend money on advertising and provide good service.

"The strong survive in this business," Rothermel said. "There's plenty of money out there. As long as no one panics, we'll be fine."

Crossovers, which are car-based sport utility vehicles, will likely see continued growth this year at the expense of larger SUVs, Taylor said. Crossover sales were up 14 percent last year and could climb another 15 percent this year.

Taylor said SUVs and trucks could see some growth as new products hit the market, including GM's revamped lineup of SUVs.

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