Pub. 64 2023-2024 Issue 2

What economic conditions should auto dealers be preparing for in 2024? Truist Dealer Services spoke with Mike Skordeles and Jonathan Smoke to get their views on emerging economic trends and their impact on automotive retailing. Slower Economic Growth and a Rolling Recession For Skordeles, the big picture is all about interest rates and where they’re heading. While a recession is still the base case entering 2024, he now sees that a soft‑ish landing is possible. “From a GDP perspective, we may have a negative quarter or two, but without the corresponding job losses,” he says, “it’s not going to be a classic recession, nor should it be deep if it does happen.” Rather than across-the-board declines, Skordeles sees signs of a rolling recession with some sectors of the economy contracting while others expand. “Manufacturing, construction spending and construction hiring are coming back in a big way,” he points out. “Meanwhile, the banking and finance sector is retrenching and seeing layoffs — largely because the mortgage business isn’t coming back any time soon.” Smoke also expects slower growth in 2024. He anticipates the weak growth environment may result in modest GDP declines but not necessarily job losses. Like Skordeles, Smoke observes that regional variations indicate stronger economic performance in the Southeast and through the Sunbelt, with population declines and job reductions in California, New York and Chicago. In fact, he cautions that California could experience a full-blown recession due to high job losses in the state. Both economists recognize the strong influence that UAW strikes have had in the industrial Midwest, including Cleveland, Toledo, Detroit and parts of Kentucky. Ripple effects left many industry suppliers furloughing workers, but strike-related economic sluggishness should ease as production resumes. Smoke thinks growth in this region could ramp up more aggressively as incomes rise, noting, “A substantial increase in wages and income is flowing through the industry, and not just for UAW workers — we’ve already seen Toyota preemptively increase wages.” Strong Labor Markets and Investment‑Related Growth The UAW agreements reflect a labor market that continues to show exceptional strength and resilience. Labor markets remain tight across most industries with wages and incomes still growing, but the rate of growth is slowing down. According to Skordeles, “Business owners say they still have demand. It’s not as strong as it was last year, or even earlier in 2023, but with positions to fill, they’re not letting people go. In fact, they’re likely hiring for some positions.” At present, the entire country is benefiting from tremendous investment, some of which relates directly to policies and legislation pushed through by the current and previous administrations. “Tax changes incentivized companies to bring capital and manufacturing back to the U.S.,” explains Skordeles, referring to the Tax Cuts and Jobs Act of 2017. “When you layer on the CHIPS Act, the Inflation Reduction Act and the infrastructure bill, that’s a big push toward growth, especially in the Southeast and Texas.” Delinquencies Rise, But Loan Performance Remains Strong Auto loan credit performance can often serve not just as a leading indicator of auto demand but of the overall direction of the economy. “The credit part of the auto market has been an area of concern for a lot of people because we’ve been witnessing record levels of severe delinquencies on auto loans,” says Smoke. “But those delinquencies are not resulting in a corresponding level of expected defaults.” He cites multiple factors to explain why auto loan performance hasn’t exhibited more significant deterioration. Consumers are painfully aware of how difficult — and expensive — it has become to replace their current vehicles, so they are likely prioritizing auto loans over other forms of debt. Some are trading down to lower-priced vehicles when faced with a financial crunch; others are reaching out to lenders to find solutions before they fall into default. The critical point, in Smoke’s view, is that consumers have jobs. “Historically, we have seen high delinquencies and high defaults when people are losing their jobs but not when we have an unemployment rate below 4% and continued positive job creation,” he says. “The fact that people are employed resolves a lot of the stress.” New auto loan demand remains strong. The pool for new loans shows exceptional quality, with higher credit scores than ever before. Despite rate hikes and delinquency concerns, credit flow has been remarkably stable in 2023, providing a solid indication of lenders’ ongoing willingness to lend. A Constrained Automotive Market Overall, Smoke believes the automotive market is in a good place. “I think we’re on the cusp of what I’m describing as a constrained recovery,” he says. “We’re optimistic that we’ll see growth in every channel in 2024. Demand is repressed because of affordability due to interest rates at 23-year highs and tighter credit requirements by lenders. On the supply side, we’re not back to the level of production we had previously for new vehicles — I don’t think we’re getting there anytime soon.” Lower production levels and greatly reduced fleet sales in the last three years have impeded the used car market. The shortage of nearly-new 21 DEALERS’ CHOICE

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