Mark Strand, deputy chief economist at Cox Automotive Inc., elaborated, “2026 may look a lot like 2025, but with lower credit delinquencies and improving credit scores. I’m predicting moderate growth fueled by stimulative provisions from the One Big Beautiful Bill (OBBB) and AI buildout. Targeted tax relief and larger tax refunds should take some pressure off lower and middle-income households and reduce credit strain. Some re-shoring of investment would boost employment. But if inflation remains elevated and an obstacle for lower and middle-income consumers looking to make a vehicle purchase, then the top-earning households may not have enough spending to overcome the drag and lift the economy.” “Along with the federal fiscal situation, I’m watching the bond market.” Strand continued. “There’s a voracious global demand for capital — for AI, robotics, European rearmament and fiscal deficits — that’s keeping long-term rates elevated. Despite the Federal Reserve (Fed) rate cuts, longer-term mortgage and auto loan rates haven’t fallen as much as the Fed would like, and we still haven’t seen all the tariff pass-through. If inflation accelerates, that could force the Fed to pause or reverse rate cuts and create headwinds for vehicle affordability.” IT’S A BIFURCATED, TWO-SPEED ECONOMY “We have near record-low consumer sentiment at a time when GDP is growing, and equities are at an all-time high. That tells us the benefits are not being distributed evenly. It’s a bifurcated consumer market, and there is real stress on lower and middle-income households,” says Strand. Skordeles added, “It’s often labeled as a K-shaped economy, but that doesn’t accurately describe the dynamic we’re seeing. K-shape suggests that spending is going down for a segment of consumers — that’s not what we are seeing.” Skordeles continued, “I’ve been describing the economy as ‘two-speed.’ At the top end, spending is robust; these consumers are buying, especially autos. For median earners and below, spending is still happening, but shoppers are being more selective. Value is paramount, and they’re more deliberate about their purchases.” Strand added, “Consumers aren’t happy about what they’re getting for their money, whether that’s at the grocery store or the auto dealer. Want-to-be home buyers feel prices are out of reach. Current homeowners are pressured by rising insurance, utilities and upkeep costs. All those factors are driving consumer sentiment south.” EXPECT A SMALLER, MORE PROFITABLE AUTOMOTIVE MARKET “Wages are once again growing faster than inflation,” Skordeles said, “which supports real incomes and should help consumers as we move through 2026.” Still, the total cost of vehicle ownership — vehicle prices and loan payments, along with insurance and maintenance costs — has outrun wages over the cycle. The result is a smaller new market than we saw before the pandemic. Strand expanded, “The auto market is driven by $100K+ households. Everything has changed for consumers earning below that, including subprime buyers. Compared to 2019, we’ve lost roughly 10% of the buying pool due to credit issues, access and affordability. We see elevated delinquencies and repossessions concentrated in subprime, though not at 2008-2009 crisis levels. Many are reprioritizing and may choose to stay in an older vehicle versus buying a newer one, which contributes to the gap.” For the dealer, the smaller new car market hasn’t diminished returns. “Overall profitability is almost two times what it was pre-pandemic,” Strand explained. “Dealers are finding revenue from parts, from the service lane and from selling F&I. As consumers have adjusted to the idea that they get less for their money and are staying in older vehicles with higher mileage, they’re buying the tire plan, extended warranties and some insurance add-ons. The dealer wins on all of those.” DISCIPLINED, TECH-SAVVY DEALERS CAN EXPECT ANOTHER STRONG YEAR Jason W. Smith, head of Truist Dealer Commercial Services, states, “In the capital-intensive auto retail sector, lower short-term interest rates should reduce floor plan interest expenses, enhance cash flow and earnings, and ultimately benefit organizations financing commercial real estate projects and franchise acquisitions through debt.” “Broadly speaking, dealers who learned from the pandemic are better off,” says Smith. “Dealers that have systematically applied operational improvement lessons and embedded efficiency into their organizational DNA are outperforming peers.” During the pandemic, buyers demanded enhancements to the digital buying experience, and auto retailers offered them. Skordeles said, “Digital buying forced familiarity with technology, tools, apps and CRM systems that allowed dealers to hold less inventory and generate more cash flow. Dealer operations have become far more sophisticated and are being operated with greater discipline.” Strand added, “The latest inventory optimization and management software lets dealers take a more scientific approach. Retailers can easily track what they’re holding onto and better manage acquisitions, pricing and margins.” OEMS’ APPROACH TO THE MARKET Strand believes that new car production levels will remain flat in the short term. “Without greater vehicle affordability, it’s hard to see production returning to levels we saw CATA UP TO SPEED 24
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