In a down economy, industry experts recommend dealerships offer a range of finance and vehicle options to address budgetary concerns.
Patrick Manzi, chief economist for the National Automobile Dealers Assn. (NADA), told Wards Auto that the current U.S. financial landscape has the potential to curtail retail sales. He points to the September Seasonally Adjusted Annual Rate (SAAR), which improved only slightly compared to August, as evidence. Still, he said it was a 9.6% improvement compared to September 2021.
"You want to have some options to meet the needs of the customers who can't make the jump to a new vehicle right now," Manzi told Wards. "Everyone in the country is dealing with higher inflation. And if you have to buy a new vehicle, one way that you can help deal with rising prices is to buy a more affordable one. I think smart dealers will stock up on those, making sure they have plenty of options for that price-constrained customer."
According to J.D. Power, the average new light-vehicle transaction price hit $45,625 in September, marking a 6.3% year-over-year increase. Meanwhile, the average monthly payment for a new vehicle rose to $708 in September, up $52 year-over-year.
Manzi noted that increasing borrowing costs and higher prices have reduced consumers’ buying power. As that happens, households will pull back on spending and that will lead to slower growth. Still, Manzi said, “we don't currently believe the U.S. economy is in a recession” but added “the likelihood of entering one in the next six to nine months has increased."
Critical inflationary measures suggest he may be right. The U.S. Department of Commerce Personal Consumption Expenditures Price Index reports consumer prices rose 6.2% year-over-year in August, easing slightly from a 6.4% year-over-year increase in July. And the U.S. Bureau of Labor Statistics Consumer Price Index rose 8.3% in August from the same period in 2021.
Interest rates are soaring. In fact, the average interest rate on a new- vehicle finance contract reached 5.71% in September 2022, up 170 basis points (1.7%) year-over-year, according to J.D. Power. Interest rates for new and used vehicles will climb higher as the Federal Reserve continues to increase the Fed Funds Rate.
The Federal Reserve has increased the Fed Funds Rate five times this year. Now auto loan rates sit at a targeted range of 3% to 3.25%. By the end of the year, NADA expects the Fed Funds rate will exceed 4%.
Auto delinquency rates also are soaring, according to the TransUnion, "A Critical Eye on Auto Performance" report. Auto dealers can help this situation by offering financing tools that better help consumers determine what they can afford, noted Satyan Merchant, senior vice president of Auto for TransUnion’s financial services vertical.
Inventories are improving in the auto market. Even so, NADA has reduced its 2022 light-vehicle sales forecast from 14.2 million units to 13.8 million.
Manzi told Wards Auto he expects fleet sales will sustain the profitability of franchise dealers.
"The current environment will likely push many consumers out of the new-vehicle market," he explained. "Despite some demand destruction, we still expect that any excess retail demand will be happily taken up by large fleet buyers who have struggled to replace their aging inventories during the past two-and-a-half years. And even with a forecasted lower total sales volume compared to 2021, we still expect that 2022 will be another very solid year for America's franchised dealerships."
Originally posted on Auto Dealer Today