Investors looking for signs of a deflationary environment taking root in a weakening U.S. economy need to look at the new efforts by car manufacturers to try to lure consumers. Vehicle manufacturers and dealers have been aggressively cutting prices to counteract weakening demand. The lackluster car sales are partially the result of the Fed’s higher interest rates, which have had their desired dampening effect on U.S. consumption, reducing consumer appetite for a new car.
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Aggressive Price Cuts Amid Weakening Demand
According to Motor Intelligence (MI), a market research and data analytics firm specializing in the automotive industry, the average incentive packages on new vehicles are higher by 53% over last June. Major manufacturers like General Motors (GM), Hyundai (HYMTF), and Volkswagen (VWAPY) have multiple incentives, including cash back, low interest rates, and price cuts to help stimulate sales and reduce inventories. JD Power reports a very low 16.9% of new cars sold above the manufacturer’s suggested retail price, a significant drop from 34.9% last year.
Impact of Higher Interest Rates on Consumer Spending
When the Fed began hiking interest rates in 2022, the intent was to slow inflation back down to a moderate 2%. The Federal Reserve’s prolonged higher rates finally have the intended affect on consumer demand within the U.S. economy. Despite high consumer spending, recent data indicates a pullback in purchases, especially of larger durable goods.
In fact, Matt Smith, an analyst at CarGurus, explained that sales pending on motor vehicles and parts have fallen 20% since April 2021, which was the highest level during the pandemic. From the same comparison period, total vehicle sales have dropped 15%. “If folks can put off a purchase, they’re doing that,” Smith said. “And even when they need a car, they’re looking for less expensive ones because they have to deal with higher interest rates.”
Inventory Levels and Shift to Smaller Vehicles
Inventory levels are low for small and mid-size vehicles as price-conscious buyers are downsizing. Manufacturers such as Ford (F), GM, and Stellantis (STLA) have discontinued many of their smaller models in recent years. Erin Keating, an analyst at Cox Automotive, observed, “We’re seeing compact SUVs and cars selling more frequently, which has more to do with affordability.” He explains, “People need wheels, and if they have to sacrifice somewhere, they’ll sacrifice on size.”
Key Takeaways
Inflation isn’t just tapering; in some industries, the cost of goods is falling. This is evident in the car business, where car manufacturers and dealers are aggressively cutting prices to counteract weakening demand that is swelling inventories. The change is partly because of high interest rates, which reduce consumer spending, especially on goods typically purchased on credit, like new vehicles.
However, as buyers downsize to better fit their wallets, inventories for small and mid-size vehicles have become low. But this still doesn’t help the high inventory dealers struggle to clear, which has increased by over 1 million units in the past year.
