Cox: Car dealers' sentiment dips in Q3 on concerns about economy, inflation

Economic concerns dimmed franchised dealers' view of the third-quarter market and their expectations for the future, Cox Automotive's top economist said Wednesday.

Franchised dealers polled this summer for Cox's third-quarter Dealer Sentiment Index rated their markets as still favorable but worse than 90 days earlier or at the same time in 2021. And dealer respondents anticipated a further decline in conditions during the final few months of the year.

"The economy is the source of worry and I think ... why the outlook is dimmer," Cox Automotive Chief Economist Jonathan Smoke told Automotive News. "Across the board, costs are rising, the new-vehicle market remains tight, and sales remarkably are holding up so far. It's more about the uncertainty about the future and the economy that I think is framing the lower outlook."

Smoke noted that while the scarce vehicle inventory situation showed improvement, it still had a long way to go.

The deterioration in franchised dealers' ratings for the third-quarter market bucked a common seasonal trend, according to Smoke. Excitement over the new model year tends to find franchisees viewing third-quarter conditions more favorably, but that wasn't the case this year, he said.

On Cox's index, a number greater than 50 indicates that dealers view conditions as positive.

The industry as a whole, franchised dealers and independents, scored the third-quarter market in negative territory, at 45 out of 100, which Smoke described as "an ominous signal."

Cox surveyed 574 franchised dealers and 466 independents from July 26 to Aug. 9 to calculate the latest quarterly index. In addition to asking dealers their outlook on the three months ahead, the company asks about the past 90 days and identifies factors affecting dealers' optimism or pessimism. Cox weighs responses by dealership type and sales volume to calculate a diffusion index.

Franchised dealers rated the current market a 62, down from 67 in the second quarter and 73 during the third quarter of 2021. The score of 45 by franchisees and independents together was down 5 points quarter over quarter and 14 points year over year.

Franchisees scored the future market — three months down the road — at 59, compared with 71 a year earlier when looking ahead to the fourth quarter of 2021. All respondents together scored the future market at 44 — the lowest number for that question since Cox started the survey in the second quarter of 2017.

Smoke called it significant that dealers projected the fourth quarter would be worse than the third quarter. Before the coronavirus pandemic, dealers polled had always expected the coming quarter to surpass the current market, he said, attributing that to dealers' natural optimism and confidence.

"It's pretty notable when we run into this situation," Smoke said.

The change in mindset from the pre-pandemic optimism, according to Smoke, reflected uncertainty among dealers "that tilts towards the negative," particularly for factors out of a dealer's control such as the economy and inventory challenges.

While inventory remained the top factor franchised dealers cited as holding back business during the third quarter, the No. 2 and No. 3 hindrances were the economy and interest rates. Significantly more dealers cited concerns about those factors than three months prior.

Forty-seven percent of franchised dealers said the economy held them back during the third quarter, compared with 38 percent during the second quarter.

"People are a bit more guarded with their money and with increased prices on vehicles are more hesitant to make such large purchases," a Dodge and Ram dealer in the Midwest told Cox.

A Dodge and Ram dealer in the South said problems with the economy stemmed in part from "people scared of recession holding back on buying."

Rising interest rates worried 40 percent of franchised dealers during the third quarter, compared with just 16 percent three months earlier.

Concerns about the economy and interest rates were two of three challenges that grew at statistically significant levels between the second and third quarters, according to Cox. The third significant increase involved consumer credit availability, which rose by 6 points to concern 10 percent of dealers in the third quarter.

Inventory challenges were cited by 63 percent of franchised dealers, down from 67 percent the prior quarter.

Dealers called new-vehicle inventory weak in the third quarter, scoring it at 31. However, this represented a 6-point increase from the prior quarter and more than double the score of 13 recorded in the third quarter of 2021.

"The number is starting to go up," Smoke said. He said it reflected improvement in supplies and mix for some dealers — but not all.

Domestic brands offered the best supply, while Asian brands were in the worst inventory state, Smoke said. European brands represented "a bit of a mixed bag," he said.

The most recent Cox data available found the industry had 235,000 more vehicles on the ground during the week ended Aug. 22 than a year earlier, up 24 percent. However, new-vehicle sales remained down 13 percent from a year earlier.

A GMC dealer in the South told Cox that "inventory is increasing and we are getting a good mix of cars — just no programs to sell them." But a fellow General Motors retailer was more negative.

"It's difficult to get and keep new inventory physically on our lot," a Chevrolet dealer in the Midwest told Cox. "Most customers are opting to order, but that comes with its own challenges. Across the board, there is not a manufacturer right now who is keeping up with demand."