The automotive industry has successfully navigated through the persistent aftereffects of the pandemic and the associated disruptions in the supply chain which adversely impacted the sector for more than two years. The rebound in production is evident, with North America producing 15.6 million vehicles last year — a notable increase of 9.6% compared to 2022 and just 3.9% shy of the figures from 2019. Sales of light vehicles in the U.S. also saw a rise, increasing by 12.7% last year due to improved model availability, which helped meet the burgeoning demand among retail and fleet customers. However, the start of 2024 has shown a dampening in the automotive market as high financing costs deter potential buyers, leading to a rise in auto loan delinquencies. Although there has been a slight improvement in affordability due to a robust labor market and decreased vehicle prices, the gap created by high interest rates remains significant.
For 2024, it’s anticipated that light vehicle sales will grow by 3.7% to reach 16.1 million units. Growth, however, is projected to slow down compared to 2023 as the initial post-pandemic recovery fades, and high interest rates continue to restrict sales throughout most of the year.
Stabilization in North American Auto Production
Last year marked a significant stride towards normalization for international supply chains, as demand for goods moderated amid high global interest rates and pandemic-related restrictions no longer hampered the transportation & logistics sector. Despite some ongoing geopolitical risks, current supply chain conditions align closely with pre-pandemic levels. This normalization helped North American automotive production to increase by 9.6% year-on-year in 2023, though production was still 3.9% lower than in 2019. This underperformance was partly due to disruptions stemming from the UAW strike against major North American automakers towards the year’s end.
The new UAW collective agreement is set to increase labor costs for all automakers. This includes direct effects on the Detroit-3 (GM, Ford, and Stellantis) and indirect effects on other manufacturers who will need to remain competitive in hiring. Notably, GM and Ford have stated that the new contracts will add approximately $9 billion to their costs over the next four years. After accounting for deflation in most raw materials like steel, rubber, plastics, and glass, the initial wage increases from the UAW contract will likely lead to higher costs in 2024.
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Consumer Trends and Gas Prices Above Pre-Pandemic Levels
The national average price for gasoline has hovered between $3 and $4 per gallon since late 2022, dropping momentarily below $3 in December 2021. Recently, this has adjusted up to $3.40 at the end of the first quarter. Although these prices are above the pre-pandemic levels, the average American is using about 5% less gasoline than in 2019. This reduced consumption is in part due to fewer miles driven, likely influenced by the shift towards hybrid/remote working arrangements.
Elevated Financing Rates and Challenges in Auto Loan Affordability
Interest rates have remained high, affecting the auto sector harshly. The average financing rate on new auto loans surged above 8% in the latter half of last year, pushing average monthly payments to approximately $750 at the beginning of 2024. Despite this decrease from the high of nearly $800, it remains substantially higher than the 2019 figures. Higher costs across various spending categories and the resumption of student loan payments have pressured auto loan delinquencies to increase, reaching levels not seen since 2010.
Sales Prospects Amid Economic Resilience
Despite the financing challenges, light vehicle sales have continued to increase due to the rebound in production and supply. This robust demand, particularly from fleet customers, compensates for the less aggressive growth in retail segment sales. While nominal income growth for households has sluggishly followed the growth in average transaction prices and payments, substantial wealth gains, strong corporate profit growth, and robust real wage increases are helping maintain consumer spending.
Given the current conditions, a 3.7% increase in sales to 16.1 million units is anticipated for 2024, with the potential for even higher growth if recent analyses suggesting increased immigration are accurate.
Conclusion:
The U.S. automotive industry is showing signs of stabilization post-pandemic and the recent UAW strike, with rising production levels and strengthening sales. While affordability remains a challenge due to high financing costs, the overall economic environment continues to support consumer demand, pointing towards a positive outlook for sales in 2024.
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Words by: Craig Clowes
Credits
economics.td.com
