Economist Sees Small Gains in Auto Sales in 2024, Bigger Gains Coming

Cox Automotive economist says the most improvement in auto loan rates and purchases will occur in early 2025.

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Cox Automotive said it continues to see little improvement in car sales this year, but expects bigger gains in 2025 as buyer income improves and loan rates fall.

Chief Economist Jonathan Smoke said Wednesday that the Fed seems to be on the path to a soft landing for the economy in the wake of its bigger-than-expected 50 basis-point rate cut Sept. 18, which in July he worried might come too late.

But the benefits for auto lending, which accounts for 30% of credit unions’ portfolios, will probably start in the spring.

Cox Automotive’s forecasts released Wednesday included:

During Cox Automotive’s quarterly forecast call, Smoke said auto loan rates have less to do with the federal funds rate than with yields on longer term bonds and lenders’ discretion on yield spreads. Those spreads have risen as auto delinquencies have risen.

“Lenders are risk averse with shaky loan performance, so we have historically wide yield spreads keeping rates that consumers see near recent highs,” he said.

Jonathan Smoke

But the lower federal funds rate will have an immediate impact on credit card rates, reducing interest paid by consumers.

Smoke said he expects some of that freed cash will help consumers catch up on existing loan payments, lower delinquencies or give consumers a dose of extra confidence to take out a loan for their next car.

Smoke said some reduction in auto loan rates is likely to start in November or December for new cars, but most of the improvement, especially for used cars, will start early next year “just before the spring selling season.”

Cox Automotive won’t release numbers on 2025 forecasts until late December, but Smoke said he expects improvement if conditions meet the forecast’s expectations. That includes the unemployment rate falling from August’s 4.2% level to 4.1% by December, and wages rising at a modest pace.

A weakening labor market and a slowing of wage growth contributed to the Federal Open Market Committee cutting the federal funds rate to 4.8%. At least half of members expected they would cut rates by about 50 bps more in one or both of its two meetings left this year. Their median expectation was that rates will fall to 3.4% by the end of 2025.

While the economy grew at 3% in the second quarter, Smoke said he expects GDP growth to fall to about 2% for the third quarter and most of next year.

“That’s slower but not bad,” he said. “We have not seen a collapse and the latest data points do suggest that the off repeated soft landing is indeed the most likely scenario.”

In the new car market, Senior Economist Charlie Chesbrough said tight inventories had constrained sales and raised prices in the wake of the pandemic, but now inventories are nearly back to pre-pandemic levels.

The average transaction price for a new car is $47,870 in September, down 1.7% from a year earlier as incentives become more generous and consumers shift to smaller cars. But prices might have grown only to about $44,000 if not for pandemic-err spikes from supply chain disruptions.

Charlie Chesbrough

“Prices are moving to the buyer’s favor,” Chesbrough said. “Consumers may have some expectation that vehicle prices have further to go before a true deal is to be had.”

In the used cars market, Jeremy Robb, senior director of economic and industry insights, said inventories are becoming tighter, in part because of the same pandemic-era supply disruptions, which resulted in fewer cars being built in 2020 and 2021.

One result is that 63% of used cars on the lot are under seven years (model years 2018 to 2024), compared with 67% in 2021.

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