Car sales are down but the outlook isn’t so bad
Car sales remain weak, at levels typically seen only during a recession. Rising interest rates are spooking auto industry investors, but volume will likely increase in coming years given supply and upcoming price declines.
Remember the surge in auto and light truck sales after the 2020 shutdowns. Consumers who kept their jobs spent less but earned more, thanks to government stimulus checks and wage increases . They went to get their rides. But by the time the auto industry realized it needed to ramp up production, computer chips were in short supply. There had been talk of chip shortages in 2019, and then pandemic-induced demand for laptops and video conferencing equipment exhausted all chip capacity. (This is explained in a previous Forbes article.)
Prices for new and used cars have risen rapidly in recent years. Now, consumers are seeing high prices at car dealerships and higher financing costs. Interest rates recorded by the Federal Reserve because car loans have not increased too much, fewer zero rate offers are offered. CarFax reported early October, “There are fewer 0 APR offers available this month than ever before. Cash bonuses have been reduced or, in some cases, eliminated. Consider this: In November 2020, we listed more than 125 models with zero percent financing This month, there are only about 20. Costs for these programs have jumped as interest rates have risen Business borrowing costs on short-term loans rose from 0.07% at the end of 2021 to 2.80% last month, a much larger increase than consumer rates from banks and finance companies.
The good news is that the availability of cars and light trucks is improving. August inventory on dealer lots was the highest in a year, says Robert Hughes good summary of recent data. The supply of chips is improving, thanks to both increased capacity and lower demand for laptops.
More good news is that consumers will buy as dealer inventories rise and prices fall. Remember that for years consumers have enjoyed deep discounts off list prices. Then last year they had to pay a sticker and often more for top selling models. Automakers and dealerships are free to cut prices to maintain volumes, and they will. Car prices did not experience inflation in the years immediately preceding the pandemic. Production efficiency compensated for slight increases in labor costs. But now car prices are 16% higher than pre-pandemic levels, meaning they can come down significantly without hurting automakers’ desire to produce cars and dealers’ interest in selling them. .
The recent low volume of new cars has also resulted in pent-up demand, likely which could be accentuated by improved technology in newer models.
Some consumers are unable to buy a new car, which is always the case. But those buying new rather than used are more likely to have kept their jobs during the pandemic. They’re likely driving less due to remote work, but some have moved away from nearby neighborhoods and are driving more for shopping and entertainment.
The Federal Reserve’s tighter monetary policy will slow the overall economy, and we generally view large consumer purchases as a way to raise interest rates to slow spending. This time around, however, consumers have substantial savings from their stimulus checks and pay raises, and some of that money will be spent on new cars.
For car manufacturers and dealers, unit volumes will increase but profit margins will contract. It is highly likely that net profits will fall, although some companies may benefit more from the quantity effect than the price effect.
The strength of future auto sales is dampening the Fed’s ability to slow the overall economy, but other sectors may contract more easily.
Consumers who don’t need financing will find this a great change, with more models to choose from and better prices. And even those who borrow most of the cost may be better off after implementing some incentive programs.