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August 2024 – The U.S. auto market is facing a growing headwind as economic conditions continue to deteriorate, according to the latest analysis from Cox Automotive. While vehicle spending saw a temporary boost in the second quarter, the underlying economic picture suggests a slower sales pace in the months ahead.
The U.S. economy grew at an annualized rate of just 1.5% in the second quarter, well below the 2.0% forecast. Consumer spending rebounded to 3.2%, but the uptick was largely fueled by one-time factors such as larger tax refunds, which are expected to fade in the second half of the year. Spending on motor vehicles and parts surged 10.5% in Q2, but that pace is unlikely to be sustained.
“The temporary lift from tax refunds is already wearing off,” said Cox Automotive chief economist Jonathan Smoke. “We’re seeing consumers stretch their budgets, and the savings rate has dropped to a four-year low.”
Personal income rose just 0.2% in June, while spending increased 0.3%. Year-over-year, expenses climbed 6.3% versus income growth of only 3.9%, pushing the personal savings rate down to 2.7% – the lowest since 2020. Households are increasingly relying on credit to make ends meet, with auto loan delinquencies ticking up in recent months.
Inflation eased slightly in June, with the Personal Consumption Expenditures (PCE) index at 3.7% year-over-year and core PCE at 3.3%. Both remain well above the Federal Reserve’s 2% target. Following the Fed’s July meeting, long-term interest rates rose, and Cox Automotive warns that higher funding costs are already translating into more expensive auto loans. The average rate on a new-car loan has climbed above 7% for the first time in over a decade, according to data from Edmunds.
Consumer confidence slipped in July, with the Conference Board’s index falling to its lowest level since early 2023. Fewer consumers now plan to buy a new or used vehicle in the next six months, according to Cox’s survey. The decline is most pronounced among lower-income households, who are feeling the sting of elevated prices and high interest rates.
On the supply side, inventory levels have stabilized, but dealers are seeing a shift in buyer preferences. Smaller, more fuel-efficient models are gaining attention as gas prices remain volatile. However, the average transaction price for a new vehicle still hovers above $48,000, putting many models out of reach for budget-conscious buyers.
Cox Automotive’s outlook for the remainder of 2024 remains cautious. The firm now expects total U.S. new vehicle sales to fall short of earlier projections, potentially landing around 15.5 million units – down from the 16 million forecast at the start of the year. Used car prices, which had been declining, have stabilized at a higher level than pre-pandemic, further squeezing affordability.
“The auto market is resilient, but it’s not immune to the broader economic pressures,” said Smoke. “We’re advising clients to prepare for a slower third quarter and to adjust inventory and marketing strategies accordingly.”
The Federal Reserve’s next policy meeting in September will be closely watched. Any further rate hikes could accelerate the drag on auto sales, while a pause might offer some relief. For now, the combination of high prices, rising rates, and weakening consumer sentiment paints a challenging picture for the months ahead.
