Economic Bumps Dent Shoppers' Buying Power

As the economy lurches toward what some predict will be a recession, industry experts say dealers who offer a range of finance and vehicle options are poised to weather budgetary downturns.

Patrick Manzi, chief economist for the National Automobile Dealers Assn. (NADA), notes the U.S. financial landscape is not grim but still has the potential to curtail retail sales. That's evidenced by the September Seasonally Adjusted Annual Rate (SAAR), which improved only slightly compared to August. Still, he says it was a 9.6% improvement compared with September 2021.

"You want to be able to have some options to meet the needs of the customers who can't make the jump to a new vehicle right now," Manzi tells Wards. "Everyone in the country is dealing with higher inflation. And if you have to buy a new vehicle, one of the ways that you can help deal with some of the rising prices is to buy a more affordable one. So I think smart dealers will be stocking up on those, making sure they have plenty of options for that price-constrained customer."

J.D. Power reports the average new light-vehicle transaction price in September was $45,625. That is a 6.3% year-over-year increase. The average monthly payment for a new vehicle in September rose to $708, up $52 year-over-year. That is the third straight month of average payments above $700. J.D. Power notes average incentive spending per unit rose slightly to $984.

"Increasing borrowing costs and higher prices have dented consumers’ buying power and will weigh on consumer demand through households pulling back on spending, which will lead to slowing growth," adds Manzi. "While we don't currently believe the U.S. economy is in a recession, the likelihood of entering one in the next six to nine months has increased."

Critical measures of inflation remain elevated. According to the U.S. Department of Commerce Personal Consumption Expenditures Price Index, consumer prices rose 6.2% year-over-year in August, easing slightly from a 6.4% year-over-year increase in July. Another measure of inflation, the U.S. Bureau of Labor Statistics Consumer Price Index, rose 8.3% in August from the same period in 2021.

The average interest rate on a new- vehicle finance contract reached 5.71% in September 2022, up 170 basis points (1.7%) year-over-year, notes J.D. Power.  The average interest rate on new- and used-vehicle finance contracts has risen above pre-pandemic levels for the first time. Rates are expected to climb higher as the Federal Reserve continues to increase the Fed Funds Rate to cool the economy and tamp down inflation.

The Federal Reserve has increased the Fed Funds rate five times this year and rates currently sit at a targeted range of 3% to 3.25%. By the end of the year, NADA anticipates that the Fed Funds rate will exceed 4%.

A just-released report by TransUnion, "A Critical Eye on Auto Performance," notes the changing economy is spurring a rise in auto loan delinquency rates. Still, TransUnion data shows consumers value auto loans as much as mortgages and more than credit cards. 

Although the point-in-time delinquency rates are elevated, Satyan Merchant, senior vice president and automotive business leader-TransUnion, stresses "fairly stable vintage performance." So dealers should look at the big picture of auto finance and decide how best to accommodate shoppers during this rough economic time.

"Auto dealers should be aware that consumers are continuing to feel affordability challenges when shopping for a vehicle," Merchant tells Wards. "As consumers navigate through a choppy economic environment with limited vehicle inventory, offering financing tools such as prequalification to help determine what the buyer can afford will help create a better experience for that consumer."

Heading into Q4, the U.S. new-vehicle market is starting to see signs of improving inventories just as borrowing costs and monthly payments are rising to post-pandemic highs.  Although North American light-vehicle production and inventory levels have improved somewhat, NADA has reduced its 2022 light-vehicle sales forecast from 14.2 million units to 13.8 million.

While limited inventory remains a key pain point for dealers and shoppers, new-vehicle inventory at the end of the Q3 was up 44.3% compared with the start of the year, when inventory levels were just below 1 million units on the ground and in transit, according to NADA. The numbers vary among manufacturers and some still struggle with production.

Yet despite inflation and production snags, Manzi says he expects sales to fleets will sustain the profitability of franchise dealers.

"The current environment will likely push many consumers out of the new-vehicle market," Manzi says. "Despite some demand destruction, we still expect that any excess retail demand will be happily taken up by large fleet buyers who have struggled to replace their aging inventories during the past two-and-a-half years. And even with a forecasted lower total sales volume compared to 2021, we still expect that 2022 will be another very solid year for America's franchised dealerships."