As the Debt Ceiling Debate Rages, the Auto Market Braces for Stormy Weather

This year has been a whirlwind of economic headlines. First, it’s been the Fed and the ongoing will-they-or-won’t-they debate on interest rates. Last week came some clarity, an expected pause, but that clarity arrived as the debt-ceiling debate shifted into high gear. Now the worry is the U.S. government defaulting on its debt and spinning the economy into a recession.

For our industry, thankfully, the Federal government does not play a large role in auto lending, so an actual default or government shutdown won’t stop lenders from lending or sellers from selling. The primary risk is consumer confidence. The last time Congress and the president took us to the brink was in 2011, and consumer confidence fell dramatically and took several months to start to recover. New-vehicle sales slowed – as is often the case when confidence drops – but did not drop dramatically.

As we move closer to the deadline this summer without a solution, the stock market will likely show some large declines, which will also negatively impact confidence. Stock market declines tend to hurt luxury vehicle sales, and any slowdown will put a damper on recent signs of health in new-vehicle sales, driven largely by improving inventory and remaining pent-up demand.

The biggest concern, of course, is an actual default. That would likely be the tipping point for recession as negative ripple effects work through the U.S. and global financial markets. A recession would reduce vehicle demand, lead to further credit tightening, and likely push manufacturers to pull back on production. The market would therefore see notably lower retail sales in the following months.

We have until the end of May to watch the initial drama unfold. June is likely when government money would run dry, and a default will come if no solution is found in Washington. I would not bet on stronger consumer sentiment and spending between now and then, as any deal likely won’t come until the last minute.

Experience suggests that the most likely scenario to unfold is a last-minute deal precipitated by big declines in financial markets. The deal will likely extend the debt ceiling until the fiscal year ends in September. The reason for that would be both parties getting what they say they want the most—the White House gets a clean debt ceiling raise (albeit for a short time), and Republicans can then tie future debates to the budget and force spending cuts, or at least force discussions about spending cuts.

Pushing discussions to September will keep the economy in a whirlwind – not a good scenario for vehicle sales – and make for an even uglier late summer/early fall debate. The timing could not be worse for the auto market, as the timeline is exactly when UAW negotiations will be heating up. Our team is forecasting tough negotiations this year, with new UAW leadership already pushing for significant changes.

I’m trained as an economist, not a weatherman, but I will say: The coming months look to be very cloudy, with a strong chance of severe storms.

Jonathan Smoke

Chief Economist

Jonathan Smoke leads Cox Automotive’s economic and industry insights team, which tracks key metrics and trends impacting both the wholesale and retail markets for vehicles informed by the proprietary data from the company’s businesses and platforms. For 28 years, Smoke has focused on translating data and trends into relevant actionable insights for the industries that represent the biggest purchases that consumers make in their lifetimes: real estate and automotive. Smoke joined Cox Automotive in 2017.