Car Dealers and the Economy: How Dealers Can Navigate Economic Shifts
Apr 27, 2023
The past few years have seen rough economic shifts across industries. Car dealers and the economy are inextricably linked, and this fact was sharply illustrated by supply chain disruptions, raging inflation, and low consumer confidence in an economic recovery. The pandemic dealt the hospitality industry the toughest blow, but as you’ve likely experienced, dealerships around the country and the overall automotive industry saw challenges, too.
In 2021, auto industry challenges were exacerbated by consumers under shelter-in-place orders. People were forced to dig into their savings and retirement accounts for everyday expenses, leaving no disposable income for large purchases, like cars and trucks.
Now, it’s 2023.
As reported by U.S. News, ongoing economic updates illustrate a vacillating unpredictability regarding economic stability following the collapse of two United States banks, Silicon Valley Bank and Signature Bank in mid-March. Treasury Secretary Janet Yellen maintains there is no imminent banking collapse on the horizon. Yet, according to a report from Cox Automotive gauging consumer sentiment from 1990 to 2023 (research prepared by the University of Michigan), consumer sentiment has never been this low. In fact, it’s even lower now than during the crash of 2008. What does that mean for your dealership?
How do the up-and-down nature of consumer sentiment and the back-and-forth of geopolitics impact how inflation affects dealerships?
This post takes a closer look at the connection between car dealers and the economy, the factors that link them, and how the right dealership tools can help your dealership navigate economic shifts.
How consumer sentiment and geopolitics impact car dealers and the economy
Consumer sentiment is in an incredibly reactionary relationship with the economy. Whenever the economy takes a downturn, so does consumer sentiment. If inflation soars, consumer sentiment tanks. And when interest rates dip, consumers typically rush to make larger purchases they’ve been putting off. Dealerships can capitalize on these dips with tools like Kelley Blue Book® Instant Cash Offer.
Consumer sentiment and the economy are intertwined in an action / reaction dance in which the dynamics we’ve been seeing are normally drawn out and develop over time, making each crescendo and decrescendo — the highs and lows or “peaks and valleys” — not only more apparent but the outcomes much easier to predict.
However, since late 2020, the peaks and valleys of consumer sentiment and the overall economy have become compressed, making it more difficult to predict — and therefore, assess the meaning of — the next meteoric rise or abrupt drop-off of either on any given day.
Let’s more closely examine some of the U.S. News economy updates mentioned above to discern the relationship between car dealers and the economy:
Inflation fell in February
While prices for some items remained steady or fell slightly, big-ticket items like cars and homes and necessities such as energy and food saw rising prices.
Why it matters:Consumer sentiment was briefly buoyed by the revelation, but consumer confidence still didn’t meet expectations. According to Cox Automotive, new vehicle sales were up 9% from 2022 but down by a million vehicles from January’s impressive 15.9 units sold.
Two U.S. banks collapsed
On the heels of the two United States banks collapsing, anxiety was high regarding the potential collapse of the European bank Credit Suisse. Stock markets fell in response to the 167-year-old Swiss bank’s ongoing turmoil.
Why it matters: This is yet another bank adding to the fears of a global banking collapse, which causes consumers to keep a tighter hold on their wallets and plan their spending. This is the time to position yourself as the community’s go-to dealership to buy, sell, or trade in a vehicle or to get routine maintenance or services performed.
Unemployment down, construction up, Yellen testifies
Unemployment fell, new construction builds increased, and Yellen testified before Congress. More people are working, so consumers are making money and businesses are gaining traction. A hypothetically problematic situation appears handled when Yellen’s testimony states there’s nothing wrong with the U.S. banking system.
Why it matters:More people employed and new build activity in the construction sector means consumers and business owners alike are experiencing somewhat improved economic confidence. Yellen’s testimony sounds the all-clear, which alleviates surface-level anxiety, but this doesn’t necessarily apply to car dealerships or translate to vehicle sales. As Cox Automotive reported, new car inventory was 70% higher in March 2023 than in March 2022.
Not quite out of the woods yet
Examining these economic factors, you can see the one step forward, two steps back dance playing out in real time. February data released in mid-March pointed to an imminent recession and a drop in consumer sentiment, and Secretary Yellen’s explanation that banks are stable seems incongruous with the Fed’s interest rate hike near the end of March.
So, what economic factors are playing a role? Let’s explore how inflation affects dealerships and contributes to the relationship between car dealers and the economy.
Economic factors affecting dealerships: Car dealers and the economy
The greater forces at play between car dealers and the economy include:
Amount of disposable income
Economic factors such as interest rates, amount of disposable income, and inflation are especially potent in the automotive industry. Individually, each factor plays its own role and has its own effects on such things as how many cars a dealership can sell, which translates into how many cars are sold in each country. The number of cars you and other dealerships can sell during an economic shift impacts the entire automotive industry, as well as other linked industry players, such as chip manufacturers and metal, rubber, and plastic parts manufacturers.
Low interest rates mean financing is easier, more people can qualify, and more people consider looking for a new vehicle, which translates to higher sales figures. High interest rates, however, mean even small, inexpensive cars are often an impractical purchase. According to the Cox Automotive report, Millennials and Gen Z’ers had the lowest average credit scores at the end of 2022 compared with all other generations, meaning rate hikes strike at the demographic most in need of a break.
Amount of disposable income
While some states have raised minimum wages, wage growth has been negative overall in the past 12 months. The most positive wage growth occurred near the end of 2022, and the growth experienced was outpaced by inflation, making vehicle purchases out of the question for many Americans, as disposable income has all but disappeared because it’s covering other expenses.
As inflation inches higher, the value of the dollar creeps lower. When wage growth doesn’t outpace inflation, average expenses become hard to manage. Inflation rates like those experienced in 2022 and early 2023 push used car prices into new car price territory and new car prices out of reach of the average family.
Q1 2023 saw overall dealer sentiment significantly lower than the previous two years and provides evidence of why dealer profit sentiment is also on the decline. While used vehicle sales were slightly up compared to 2022, inventory is down 21%, according to Cox Automotive’s findings.
When examining how inflation affects dealerships, car sales and gross domestic product (GDP) rates are tightly linked. If dealership sales figures are high, GDP trends higher, and when GDP is trending high, it typically means greater buying power for that country’s residents. When buying power is high, that generally translates into higher dealership sales figures.
It’s not surprising that the auto industry is competitive. When exchange rates are low, competitors outside the U.S. can market their cars to U.S. citizens, and U.S. dealerships can market elsewhere. It offers consumers around the globe the opportunity to make big-ticket purchases for less money, which boosts sales figures everywhere.
Countries with low unemployment have citizens with greater buying power, creating vehicle demand, but the opposite is true in nations with high unemployment rates.
Car dealers and the economy: Navigating economic shifts with Kelley Blue Book
Times are tough right now, and things are uncertain. That’s why it’s the right time to lean on Kelley Blue Book’s Instant Cash Offer division. In 2021, 43% of used car inventory came through Instant Cash Offer on dealer websites. Our current data says 53% of used car inventory has been sourced through the Instant Cash Offer tool. Using tools like Instant Cash Offer and Price Advisor on your dealership website can help you acquire and stabilize inventory expansion efforts, giving you and your customers peace of mind — your dealership can boost inventory using your service lanes or via your website, and your customers can enjoy a great deal on a trade-in or when selling their car outright to your dealership.
For more industry insights and dealership strategies, read our blog.