Jonathan Smoke, Chief Economist at Cox Automotive, provides an update on the 8 Key Trends that, earlier in the year, he predicted would have the greatest impact on how the automotive industry performs in 2018. Now that we are close to wrapping up the year, we are revisiting those trends to see how things have shaped up and are also looking at an additional 9th key trend that has gained significance heading into 2019.
- Economic Momentum: As forecasted, economic growth has continued accelerating. Nearly 3% growth at the end of 2018 will support healthy demand for autos in the near term, but next year’s projected growth of approximately 2% means that demand will somewhat weaken.
- Total Vehicle Sales: As expected, new vehicle sales are declining but the used vehicle market has grown. The used vehicle market is now at its peak and is likely to stay at this existing level in 2019. New vehicle sales will likely reach 16.9 million by the end of the year.
- New Vehicle Market: In September, the days’ supply of cars reached a near four-year low, but the days’ supply of trucks, CUVs and SUVs reached a multiyear high. Through the end of the year, we are likely to see an increase in incentives and discounts as OEMs seek to sell more CUVs, SUVs and pickups.
- The Shift Evolves: CUVs continue to rise in popularity, outselling all car segments combined, and this trend is likely to continue. New CUVs are starting to see more competition from used CUVs that are coming off lease, a segment that constitutes a third of all off-lease vehicles coming into the used market. Dealers will have more CUVs than any other type of vehicle on both new and used lots, which means more incentives and discounting in the new CUV market.
- Interest Rates: There has been more movement in interest rates and best available auto loan rates in the last 18 months than in the last six years combined. An approximate 1.3% increase in interest rates have caused auto loan payments to rise by approximately 3%, shrinking the pool of consumers who can afford to buy new vehicles and pushing them toward the used vehicle market. The Federal Reserve plans to raise rates one more time in 2018 and likely at least three more times in 2019, resulting in another 1% increase by the end of next year.
- Tightening Credit: Eight straight quarters of tightening auto loans standards ended during the last quarter, with banks somewhat loosening standards for prime and super-prime borrowers. However, banks further tightened standards for subprime borrowers who are consequently being pushed out of the new vehicle market and into the used vehicle market, a trend that particularly impacts millennials.
- Used Vehicle Prices: After 11 weeks of unusual price appreciation, used prices somewhat normalized during September and October but remain about 4% higher than normal. This translates to higher residual values on leased vehicles, which means that OEMs can offer lower lease payments to consumers. This abnormally high pricing is largely driven by tariffs, is generally good for the market, and is likely to continue.
- Dealer Sentiment: Dealers believe the market is strong and see limited new and used inventory as the primary factor that’s holding back their ability to sell more vehicles and grow their business. Dealers are also concerned that tightening credit availability and higher interest rates will negatively impact demand.
- Tariffs: The U.S. new vehicle market is dependent on a complex global supply chain. 47% of the vehicles sold in the U.S. are assembled in other countries, with nearly half of those being assembled in Mexico and Canada and the remaining half being assembled in South Korea, Europe and Japan. What transpires with trade agreements will have a significant impact on continuing vehicle price increases.
8 Key Market Trends – 2018 Fall Update
Now that we are close to wrapping up the year, we are revisiting those trends to see how things have shaped up.Download