Dealers' optimism faded a bit from last year

Dealers' optimistic view of the market waned last quarter amid softening new-vehicle sales and a mounting threat of tariffs on import vehicles and parts. They remained optimistic about inventory levels, but as lease return volume comes down, their confidence will likely start to dim, according to a quarterly survey by Cox Automotive.

Franchised dealer respondents to the latest Cox Automotive Dealer Sentiment Index survey feel the market is still strong, but optimism was more subdued in the second quarter compared with the prior year.

The survey, which gauges dealers' perceptions of the past 90 days and expectations for the next three months, identifies key factors affecting retailers' optimism or pessimism.The latest survey, conducted April 29 to May 14, garnered responses from 1,031 dealers — 583 franchised and 448 independent. Responses are weighted by dealership type and sales volume to represent the national dealer population. The survey tracks how dealers view their market on a scale from weak to strong. A score higher than 50 indicates optimism, while a score below 50 indicates a negative outlook.

For franchised dealers, current market conditions scored a 54 in the second quarter, up from 50 in the first quarter but down from 56 a year earlier.

Affordability concerns were prevalent in dealer responses, with many citing stagnant income growth in tandem with rising new-vehicle prices."If interest rates and tariffs aren't nipped in the bud, could mean a decline in sales," said a Ford dealer in the Northeast.

Midwestern dealers cited a decrease in business from their farming customers as a main contributor to weakening profits, while dealers nationwide voiced concerns about a possible economic downturn.

"If the economy starts to skid, it will cause a full-on backslide here," said a Subaru dealer in the South.

Despite their concerns, dealers were optimistic about profits over the past three months for the first time since the second quarter of 2018, with a score of 51, rising significantly from 43 in the first of quarter 2019 and flat from the year earlier.

Independent dealers were less optimistic overall, scoring the current market at 48, up from 47 in the previous quarter and down from 50 in the second quarter of 2018.

Franchised dealer sentiment surrounding tariffs was consistent with previous quarters, according to Jonathan Smoke, Cox chief economist, largely because of key events that occurred after the survey closed.

Cox Automotive began reporting survey results in the third quarter of 2017. Questions about tariffs have been a component of the survey for four consecutive quarters.

Just days after the second-quarter survey responses were collected, President Donald Trump's administration announced it would delay imposing tariffs on imported vehicles and parts from the European Union, Japan and other nations for 180 days to continue negotiations for trade accords.

Less than two weeks later, Trump posted on social media that he intends to implement a 5 percent tariff on all goods from Mexico. Such an import tax, which he said would be effective June 10, would affect billions of dollars worth of vehicles slated for U.S. dealerships, as well as the Mexican-made auto parts and materials upon which retailers rely.

Smoke said the auto retail industry's current climate closely mirrors the events of last summer, when looming tariffs boosted vehicle sales in the short-term as shoppers wary of limited supply and rising vehicle prices purchased their vehicle earlier than planned.

This year's concerns over tariffs are more complex, and as the Trump administration progresses toward trade deadlines without resolutions, the fear of implementation becomes more tangible.

"Instead of having less uncertainty, we're now seeing uncertainty as somewhat lingering over the market for the indefinite future, until we start to see progress with at least some of these deals," Smoke said.

Meanwhile, franchised dealers were satisfied with new- and used-vehicle inventory levels in the second quarter, though inventory metrics could shift rapidly as the year goes on, according to Smoke.

New-vehicle inventory is expanding faster than dealers can move the vehicles off their lots, according to the survey. The new-vehicle sales environment scored a 54 from dealers, down from 59 last year, but inventories scored a 64, rising from 61 a year earlier.

Dealers appeared to be happy with the mix of vehicles on their lots. For the first time, Cox asked dealers how they would describe new-vehicle inventory mix, which received the highest score for any metric by franchised dealers at 75.

"I expected new-vehicle inventory to be more of a problem, and becoming more of a problem," Smoke said. "Part of the challenge is likely there's really big contrast" geographically.

Dealers in certain areas of the country are more likely to struggle with the production shift of domestic automakers away from smaller vehicles, Smoke said. Some dealers cited the dearth of affordable sedans in their survey responses.

Meanwhile, franchised dealers scored the used-vehicle sales environment at 72, flat with a year earlier, though used-vehicle inventory fell to 53, down from 62 in the first quarter and 58 the previous year.

And acquiring used-vehicle inventory could become more challenging as the stream of lease returns is expected to dry later this year, increasing competition among franchised dealers and independents for the remaining inventory, Smoke said.

"We are approaching the peak in the off-lease volume in particular, which has been the major source of growth for the used-vehicle market to the benefit of the franchised dealers. They have the ability to ground [the vehicles] at the end of the lease term that fit right into [certified pre-owned] programs," Smoke said. "It's not that that supply is going to go away, it's just not going to continue to grow."