New Car Sales Beat Expectations in April, Outlook Ahead Worsens
Economists inside and out of the credit union industry warn the Fed's actions will take their toll in coming months.
New cars sold in March at a much faster pace than analysts at Cox Automotive had expected just last week, but their chief economist said the Fed’s rate hike can brake auto sales and makes a recession more likely.
U.S. Bureau of Economic Analysis data released Wednesday showed new cars and light trucks were sold at a seasonally adjusted annual rate (SAAR) of 15.9 million in April, up 11.4% from a year earlier and up 7.2% from March.
On April 25, Cox Automotive had estimated new cars would sell at a 15.1 million SAAR in April, up 2% from 14.8 million in March and up 14% from April 2022 — “a large gain over last year’s supply-constrained level of 14.3 million.”
On Wednesday morning, Cox Automotive revised its statement to say sales beat its estimate because they were “fed by higher inventory levels and a healthy dose of fleet deliveries.” Honda, Hyundai, Kia and Subaru had large gains.
“With inventory at the highest level in nearly two years and transaction prices trending downward through the first quarter, new-vehicle sales in the U.S. continue to surprise on the upside,” the news release said.
NAFCU Economist Noah Yosif said the surge in sales “indicates pent-up demand within the industry despite rising interest rates and deteriorating economic conditions.”
In a commentary published after the 2 p.m. Wednesday announcement by the Fed of its 25 basis point rate hike, Cox Automotive Chief Economist Jonathan Smoke said the Fed’s action is likely to worsen the market for new and used auto sales in the coming months.
As the Fed raised rates from zero to 5% in 14 months, Smoke said interest rate-sensitive sectors like housing and the used-car market slowed down, and three banks failed in the last two months.
“The Fed seems to be willing to accept a recession and what is likely to be at least four million jobs that will be lost as a result to bring inflation down to a 2% target,” he said.
CUNA Chief Economist Mike Schenk echoed that comment, and said the Fed decided to raise rates for 10th time since March 2022 even as most gauges showed inflation receding for the past nine months.
While inflation is still above the Fed’s 2% target, Schenk said the gap would have likely closed without the latest cut. Inflation was already likely to fall through the weakening job market, credit tightening in the wake of recent bank failures and the typically long lag between Fed rate hikes and their consequences.
“Consumers are likely to more obviously feel the pinch of these changes in the coming months,” Schenk said.
Smoke said troubles loom, despite the fact that some recent numbers look good. For example, new car sales so far this year have been stronger than expected, and appear to be gaining momentum.
“However, do not interpret the performance so far as an indication that the new-vehicle market is immune from higher rates and a slowing economy,” he said.
While the supply of new cars is up 70% from a year ago, Smoke said borrowing costs have risen as well. New car rates in April were 8.8%, down slightly from a peak of nearly 9% in March, but up 3 percentage points from April 2022. Some of that pain is offset by increasing incentives from manufacturers.
Smoke said the greatest pain is in the used car market, where loan rates were 13.5% in April, down from a peak of 14% in March, but up 3.5 points from a year earlier.
Yosif, the NAFCU economist, said affordability remains the predominant obstacle for consumers with lower incomes or weaker credit.
“Against the backdrop of tightening credit standards and fewer lenders, credit unions have played an outsized role in supporting this segment of the market and the overall balance of supply and demand,” Yosif said.
Experian has shown credit unions gaining larger shares of both new and used car loans last year.
First-quarter results for the nation’s 10 largest credit unions showed that trend might be continuing. The Top 10, which accounted for about 12% of credit union auto loans in December, held $273.9 billion in new and used car loans on March 31, up 18.5% from a year earlier and up 2.1% from Dec. 31. The Top 10’s gains were slightly stronger for new car loans than used car loans.
Smoke said evidence is increasing that rising rates are contributing to declining sales in the used market, where rates are more reflective of financial market conditions.
“The Fed acknowledged that credit conditions have tightened over the last few months. Still, their unanimous decision indicates they remain more worried about inflation than the financial system’s fragility or the U.S. economy more broadly,” he said.
Smoke said the nation “more likely than not” will dip into recession over the next 18 months.
“The Fed’s actions add to that risk as higher rates expose more challenges to the banking system and inevitably lead to more credit tightening for businesses and consumers alike,” he said. “This summer may be brutal for its impact on consumer confidence and credit conditions, and that does not bode well for retail vehicle demand.”