Economy, interest rates sour dealer views on market, survey finds

Concerns about the economy and rising interest rates have lowered franchised dealers' expectations for the upcoming retail environment despite improved new-vehicle inventory, according to the latest quarterly index survey from Cox Automotive.

Results from the fourth-quarter Cox Automotive Dealer Sentiment Index show franchised dealers polled have record-low expectations for their area's vehicle market in three months. The score of 48 is down 21 points from a year ago and 11 points from third-quarter 2022 results. It is the first score below 50 since Cox began the survey in the second quarter of 2017.

Independent dealerships' expectations for the future also reached a new low, with a score of 39. The industry aggregate score is a record-low 41.

Scores greater than 50 indicate dealers view conditions as positive or improving.

Cox surveyed 604 franchised dealers and 430 independent dealers from Oct. 25 to Nov. 7 to calculate the latest quarterly index. In addition to asking dealers their outlook on the three months ahead, Cox asked about the past 90 days and identified factors affecting dealers' optimism or pessimism. Cox weighed responses by dealership type and sales volume to calculate a diffusion index.

"High loan rates and a generally slowing economy are clearly weighing heavily on U.S. auto dealers right now," Cox Automotive Chief Economist Jonathan Smoke said in a statement. "Dealers are normally optimistic, so the drop in the 3-month outlook to a new low in our survey history is particularly noteworthy. As the year began, dealers were telling us about one obvious problem: inventory. Now, as 2022 comes to a close, it's all about the economy and interest rates."

Franchised dealerships' views of the current market tumbled from a score of 62 in the third quarter to 52 for the fourth quarter. Independents also registered quarter-over-quarter declines in current market sentiment, and the industry as a whole rated conditions a 43, the second consecutive quarter with a negative view.

Smoke told Automotive News dealerships never expected the future market to be worse than the current market in any Cox survey from 2017 to the COVID-19 pandemic. Since then, it has happened several times. He said he feels it highlights dealership uncertainty.

"The uncertainty is principally around things that are completely out of their control, with no relief in sight," he said. This is particularly the case for factors like the economy or interest rates, he added.

Interest rates and the economy are at the top of the list of factors that franchised dealers told Cox are hindering their business, knocking the issue of inventory down to third place.

Fifty-eight percent of those dealers said interest rates are a problem — up from 40 percent in the third quarter and from just 2 percent in the fourth quarter of 2021. Eighteen percent of dealers said consumer credit availability is an issue, up from 10 percent in the third quarter of this year.

"Higher interest rates are killing the vehicle market, which is exactly what the Fed wants," a Chevrolet dealer told Cox.

The Federal Reserve has increased the target range for its benchmark interest rate — from 0 to 0.25 percent at the start of the year to 3.75 to 4 percent today, and it might increase the rate again next week. Those changes can produce a ripple effect on auto interest rates.

Fifty-seven percent of franchised dealers said the economy is a concern, up from 47 percent in the third quarter.

"Customers don't know how bad the economy will get in the coming months and years, which makes them think twice about buying a vehicle right now," a Mazda dealer told Cox.

Inventory held back 51 percent of dealers, down from 63 percent in the third quarter of the year.

"[New-vehicle inventory] is finally beginning to increase," a Honda dealer told Cox. "It is still low, but we are starting to see models we had not seen for some months and I find this encouraging."

New-vehicle inventory has even jumped back into favorable territory based on responses to another Cox question. Dealers rated it a 53, up from 31 in the third quarter. This slightly positive rating is better than any seen since the second quarter of 2020 — the first full quarter of the U.S. being disrupted by COVID-19.

"Fully stocked in most models, first time in months, incoming inventory has been good," a Jeep dealer told Cox. "No shortage for our specific dealership."

Customer traffic to franchised dealers fell from 51 in the third quarter to 43 in the fourth quarter — a score suggesting the level of traffic dealers consistently saw before the COVID-19 pandemic.

Franchised dealers also face significantly more pressure to lower prices than they did last quarter. Dealers rated this pressure a 35 in the third-quarter survey, with this factor soaring to 50 in the latest Cox report.

"Higher interest rates, horrible lease programs, and we are seeing more customers with negative equity in their trades," a Nissan dealer told Cox. "Some are vehicles purchased in the last 24 months, some are older. But the drop in wholesale values is having a big impact on these buyers."

Dealers view the new-vehicle sales environment about the same as they did in the third quarter. But they indicate that the used-vehicle market, while still favorable, has soured from a score of 62 in the third quarter to 54 in the fourth quarter.

Yet profits remain strong for franchised dealers. Retailers rate their profitability over the past three months at 67 — down 11 points from their third-quarter score but still well above pre-pandemic levels.

"That's still a very high number for franchises," Smoke said. But the trajectory of this data indicates "we may not stay in the sixties very long," he said.

The time of "abnormally" good profits has ended for independents, who were already down to pre-pandemic levels in terms of profitability, Smoke said. "Maybe we're headed into a direction that tells us there's only a few more quarters potentially left for franchises too," he said.