Smoke on Cars
Auto Market Weekly Summary: November 7
Monday November 7, 2022
- Fed raises interest rates to the highest level since 2007.
- New-vehicle sales hit their highest pace since January.
- Vehicle prices stay high; incentives edge slightly higher but still low.
The October employment report saw a modest slowing in job creation, along with a slight increase in the unemployment rate and a modest slowing in wage growth. Still, the labor market remains strong and is a key reason why the Fed believes it is too soon to pause on rate increases.
The Fed increased the Federal Funds Rate by another jumbo 75 basis points (BP) last week, bringing the rate to 3.75-4.00%, the highest level since 2007. Most importantly, the Fed communicated a willingness to slow further increases to assess the impact on inflation and the economy, but they were careful to say that more increases are likely and that the ultimate rate level will likely be higher than previously communicated in September.
The light new vehicle sales seasonally adjusted annual rate (SAAR) increased in October to 14.9 million, the highest sales pace since January. Sales into fleet were up more than retail from a year ago. New-vehicle prices increased along with incentives.
Job Growth Slows but Remains Too Strong to Reduce Inflation
Job growth slowed again in September but was stronger than expectations and remains at a pace that is too strong for the Fed’s desire to reduce inflation. [Read the related Smoke on Cars post for more details.]
September saw 261,000 jobs created, and the last two monthly numbers were revised for a net increase of 29,000 more jobs than originally estimated, even though job creation in August was revised down to 292,000.
Most of the gains were in the service sector, with Education and Health Services, Professional and Business Services, and Leisure and Hospitality delivering 153,000 jobs collectively. Auto dealers added 1,100 jobs, leaving employment down 78,000 or 5.9% below the February 2020 level. Total payrolls now exceed February 2020 payrolls by 804,000.
Jobless Rate Rises to August Level but Remains Low
The headline unemployment rate increased to 3.7% in October, which was the same as August.
The labor force participation rate declined to 62.2% from 62.3% in September. Participation is down 1.2 percentage points from February 2020 and represents 3.2 million fewer people in the labor force compared to February 2020.
The underemployment rate, which is the broadest measure of unemployment, increased to 6.8% from 6.7% in September. That level is still lower than what it was before the pandemic began. Monthly average hourly earnings growth increased to 0.4% from 0.3% over the prior two months, and the year-over-year earnings growth slowed to 4.7%.
Initial jobless claims measures were mixed in October, but non-seasonally adjusted numbers increased, and continuing claims drifted higher. All measures remain low by historical standards, and the broadest measure of continuing claims remains well below what it was before the pandemic.
The Fed Raises Rates with Fourth Straight Jumbo Increase
The Federal Reserve increased the Federal Funds rate by 75 BP. This was the fourth straight jumbo increase, bringing the Federal Funds Rate to 3.75-4.00%, the highest level since 2007.
The Fed also changed its language about future rate direction by indicating they would be more data-driven, meaning they will likely lessen the size of future increases as they wait on data to indicate how inflation and the economy are responding.
However, Chairman Jerome Powell was careful to say that more increases are likely and that the ultimate rate level will likely be higher than previously communicated in September. This collectively implies a likely 50-BP increase in December and then potentially another 1 percentage point increase in 2023, which would bring the terminal Fed Funds Rate to 5-5.25%, which would be a level not seen since 2007 and before that 2000.
Consumer rates are destined to be at 20-plus year highs by year-end, and for the auto market that has substantial long-term implications for product mix and affordability challenges.
October New-Vehicle Sales Pace Highest Since January
October total new-light-vehicle sales were up 9.6% year over year. By volume, September new-vehicle sales were up 2.9% from September. The October SAAR was 14.9 million, which was the highest SAAR since January and a 12.7% increase from last year’s 13.2 million and up 9.8% from September’s 13.6 million.
Combined sales into large rental, commercial, and government fleets were up nearly 49% in October from a year ago. Sales into rental were up 58% from last year, while sales into commercial fleets were also up 58%, and sales into government fleets were down 0.3%.
Including an estimate for fleet deliveries into dealer and manufacturer channels, the remaining retail sales were estimated to be up 5.9%, leading to an estimated retail SAAR of 12.8 million, up 0.9 million from last month’s pace, or 7.4%, and up 1.2 million, or 10.3%, from last year. The total fleet market share was 14.1% in October, a 1.9% gain from last month and a 2.9% gain from last year.
Average Transaction Prices Exceed MSRP for 16th Consecutive Month
The average transaction price (ATP) of a new vehicle in October exceeded the average MSRP for the 16th month in a row, according to Kelley Blue Book data. Now at $48,281, the average price increased slightly, up 3.8% from a year ago. The average incentive spend from manufacturers increased 3.1% to $1,038 in October, so incentives as a percentage of average transaction price was unchanged at 2.1% and remained at a 20-year low.
Jonathan Smoke is the chief economist at Cox Automotive.