Dealers shouldn’t become too encouraged by the small bits of good news on the retail auto front – including a tiny reprieve from onerous import tariffs and strong March and April retail sales.
Cox Automotive Chief Economist Jonathan Smoke and the company’s chief analyst Erin Keating tell attendees at an Automotive Press Assn. webinar that they predict slow demand and affordability issues will soon follow the unstable markets and recent tariffs. “Uncertainty persists,” Smoke says. “All we can say is, this is taking a bad situation and making it slightly less worse.”
The 25% import tariff is still in place, Keating reminds listeners, and automakers and suppliers will have to pay the tariff when goods enter the U.S., then apply for the offset for vehicles assembled in the U.S. with foreign parts.
It is also unclear how the offset, just announced by President Trump, applies to suppliers, she says. And while it may apply to companies that supply automakers, the tariff “may still significantly impact (the cost of) repair and maintenance parts.”
Not Like COVID
New-vehicle sales surged in March and April when consumers sought to take advantage of pre-tariff prices, but the pace of growth is already slowing, Smoke says. Slowing new-vehicle sales growth suggests the market may be at a peak, and customers are wary of vehicle purchases.
This is not 2021 all over again, Smoke warns. Then, during COVID, consumer demand was supported by federal stimulus dollars, low interest rates, loose credit and a very hot housing market. None of those conditions exist today.
Cox has lowered its full-year new-vehicle sales forecast from 16.3 million to 15.6 million.
Used Sales Will Likely Sink
On the used side, sales increases week over week have stopped, Smoke says. “I would argue that used has hit a ceiling,” he says.
And while sales volume has declined, so has days’ supply in both new and used, pushing retail listing prices up.
Listing prices for new vehicles have increased for four consecutive weeks while days’ supply is down to just over 60 days after being fairly consistent at 80 to 85 days, Smoke says.
“We could easily get back to 2022 levels' days’ supply in just a few weeks,” when it hovered between 55 and 65 days, he says.
As dealers sell down existing inventory, all the new supply will be exposed to tariffs, Smoke says.
Affordability and Market Limits
Affordability challenges have kept the new-vehicle retail market under 16 million for the past two years, Smoke says, but it was supported by solid income growth and prices coming down.
“Tariffs ruin that in two ways,” he says.
The tariffs should push both new- and used-vehicle prices up by 5%, Smoke says. And if the tariffs push the economy into a recession, positive income growth will be at risk.
“Scenario modeling suggests recession brings demand down closer to 14 million” sales, he says.
Segment Impacts Differ
While some manufacturers have said they will not raise the Manufacturer's Suggested Retail Price (MSRP) on vehicles, MSRP could be raised when the model year changeover happens, Keating says.
“We will have lower supply. (Manufacturers) will have a little bit more freedom to look at pricing. It will be a matter of what the (model) mix will be on the ground,” she says.
Even if MSRPs don’t increase, what consumers actually pay for the vehicles likely will, Smoke says. “The invoice is where we are going to see a lot of movement,” he says.
Rising prices likely won’t impact the luxury segment much because higher-income quintiles have more price elasticity, meaning their demand is less impacted by price increases, he says.
In median- and low-income quintiles, however, those segments are much more sensitive to price increases and purchase intent is already going down, Smoke says.
“A 1% increase in cost can take away 10% of the market” in those segments, Smoke says. That kind of decline in demand will force some manufacturers to decide whether they can continue to compete in those lower-priced vehicle segments, he says.
