Dealers Won’t See Swift Sales Boost Despite Interest Rate Cut

The Federal Reserve’s recent decision to lower interest rates elicits a range of responses from retail automotive professionals whose sales and profits have declined largely due to consumer apprehension over high financing costs.

Jonathan Smoke, chief economist at Cox Automotive, emphasizes that a rate reduction will not promptly translate to lower auto loan rates. He notes auto loans are likely to be among the last to experience any decrease after credit-card rates are cut, and neither is expected to occur swiftly.

“The decline in interest rates will certainly exert a positive influence on car sales, but the extent of that impact may not be substantial. Most car purchasers rely on financing, so a reduction in rates will be beneficial,” Tyler Corder, chief financial officer of the Findlay Automotive Group, tells WardsAuto.
“Typically, buyers are primarily concerned with their monthly payments, which dictate their purchasing power; thus, a reduction in rates will have an effect,” he says.

Can dealers endure this lag in sales? The answer is uncertain. Recent analysis from J.D. Power and GlobalData indicates a downward trend in both retail and non-retail sales, with projections suggesting that transactions in September will total 1,164,900, a 1.8% decline compared with September 2023, when adjusted for selling days.

“Sales volumes in September are expected to fall short of last year’s figures due to a calendar anomaly that placed the Labor Day holiday weekend within the August sales period,” says Thomas King, president of J.D. Power’s data and analytics division. “This phenomenon bolstered August sales but will result in a decline in September’s figures relative to last year. When aggregating the results from August and September, retail sales actually show a year-over-year increase of 2.6%.”

Despite this modest uptick in combined sales, coupled with the recent interest rate cut, many dealers and automotive retail insiders express skepticism about immediate benefits. Prior to this rate adjustment – the first in more than four years – the Federal Reserve had increased rates by 5.25 percentage points from March 2022 to July 2023.

Moreover, data indicates that the average profit per unit for retailers,including vehicle gross and finance and insurance income, is projected to decline to $2,294, representing a staggering 29% drop from September 2023, according to J.D. Power. Furthermore, only 13.6% of new vehicles were sold above manufacturer’s suggested retail prices, a decrease of 26.1% compared to the same period last year.

Cox Automotive's latest Dealer Sentiment Index has reached an all-time high in Q3, indicating that dealers are grappling with rising operational costs that are adversely affecting profitability.

Will the landscape shift for the better? Many in the auto retail sector remain hopeful, albeit likening the potential recovery to the challenging task of turning around a colossal ship like the Queen Mary.

“There are simply too many macroeconomic factors at play to anticipate that the interest rate cut will yield an immediate surge in sales,” iSeeCars executive analyst Karl Brauer tells WardsAuto. “A multitude of other changes must occur, both within dealerships and beyond, before we can expect profitability to improve.”