Economic Conditions Point to Another Promising Year for Auto Retailers Learn 6 Strategies To Stay Prosperous in a Dynamic Auto Retail Environment By Mike Skordeles, Head of U.S. Economics, Truist Advisory Services Inc., and Jonathan Smoke, Chief Economist, Cox Automotive Continued economic growth, moderating inflation and evolving global trade policies — all of which will shape automotive demand — set the tone for what promises to be a solid year for U.S. auto dealers. While conditions should drive sustained profitability in the new and used vehicle markets, dealers will need to navigate a tight labor market for staff, keep an eye on affordability challenges for new car buyers and find adequate used car supply. Continued Economic Growth Bolsters Dealer Confidence 2024 GDP growth is projected at 2.7%, surpassing most economists’ predictions by a full percentage point.1 Mike Skordeles adds, “Growth is forecasted to remain above 2% in 2025 — promising economic conditions for auto sales.” The effects of the post-election policy changes on the auto retailers are unlikely to materialize immediately. Jonathan Smoke says, “The biggest issues at play will likely revolve around debt ceiling decisions and the impending expiration of the Tax Cuts and Jobs Act. These issues may take much of the year to resolve.” Barring any unexpected events (acceleration of global conflicts, natural disasters, etc.), consumer demand, wage growth and a strong labor market should provide the ongoing fuel needed for a growing economy. Consumers Continue as the Bedrock of the Economy “There’s a promising economic story taking shape across the board for U.S. households,” says Skordeles. “While inflation lingers as a drag on consumer sentiment, it has moderated as rents flatten out, food price levels stabilize and gas prices fall. While labor participation rates are suppressed, low unemployment has kept cash flowing for households.” Smoke adds, “Credit card balances and rates are at all-time highs, but credit card debt should begin coming down by spring when tax refunds begin, and credit card bills are lower.” The downward trajectory of interest rates should provide a lift for consumers, particularly for financed purchases. Smoke notes that the prospect of auto loan rate reductions — especially in the used car market with its larger yield spreads — could offset the recent increases in auto insurance costs. A Robust Market for New Vehicles “The fundamentals that drive dealer demand look good. I’m optimistic about 2025,” says Smoke. “There’s pent-up demand that will be moving back into the market because rates will be lower, and consumers will be able to get monthly payments that we haven’t seen for a couple of years.” Consumers should be ready to buy. Skordeles says, “A long-term trend shows that customers are more attuned to the monthly outlay than the absolute price of a car — lower financing costs can help shrink monthly payments. Also, expect to see patient buyers who’ve been educated over the past few years to be willing to wait days — up to a week — to get the specific car they want.” New Vehicles The new vehicle market increasingly looks like the providence of wealthier consumers. These buyers have the resources to weather price increases and qualify for financing. Buoyed by a rise in the stock market asset value and home appreciation along with a strong labor market, wealthier customers are expected to maintain their new car purchasing activity. From a volume standpoint, Smoke says, “The market shift towards larger, more expensive SUVs and trucks reduced the buying pool by about 10% from 2019 levels. In 2024, the market recovered 2.5% of that loss Continued on page 16 14 Illinois Automobile Dealer News
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