WSJ US BusinessRising Interest Rates Test Demand for Cars

October 3, 20220
http://www.gmi-co.com/wp-content/uploads/2022/10/rising-interest-rates-test-demand-for-cars.jpg

More new cars and trucks are finally trickling into dealerships as supply-chain troubles ease and auto makers increase factory output. Now, rising interest rates and other economic pressures are starting to put a damper on the car-buying mood.

Several major auto makers reported U.S. sales declines in the third quarter as inventory levels remained pressured, despite some improvement in recent months. General Motors Co. GM 2.43% posted a 24% jump in third-quarter U.S. sales as its vehicle availability increased after it was disproportionately hit last year by supply-chain constraints resulting from Covid-related shutdowns in Asia.

The auto industry has grappled for nearly two years with choppy factory schedules and thin dealership stocks, stemming from semiconductor shortages and other supply problems. Those troubles are easing and vehicle availability is slowly improving, the car companies say.

A dealership lot for used-car retailer CarMax, which says high prices, inflation and rising interest rates are slowing demand.

Photo: Marta Lavandier/Associated Press

Auto executives continue to express confidence they will be able to fill a big backlog in consumer demand as production normalizes. But a worsening economic picture and higher interest rates are raising questions about whether consumers will still keep snapping up cars and trucks at the same pace once stock levels improve.

“There’s a lot of negative consumer sentiment in the marketplace. So we’re obviously concerned about that,” Hyundai Motor America Chief Executive Randy Parker said Monday, citing rising rates and stock-market declines. Hyundai’s third-quarter sales rose 3%.

Still, Mr. Parker said it was too early to say whether demand is weakening significantly and said he is cautiously optimistic that it will hold up. He said sales slowed last week partly because of Hurricane Ian’s impact on the Southeast, making it more difficult to gauge underlying consumer demand.

Auto makers pointed to continued low vehicle inventories as the reason for weaker third-quarter sales. Toyota Motor Corp. TM 4.07% said sales fell 7% in the July-to-September period. Stellantis NV’s dropped 6%, with the Jeep maker citing continued supply constraints, and Nissan Motor Co. reported a nearly 23% drop in U.S. sales for the third quarter.

Supply-chain woes, parts shortages and inflation are making it costlier for auto makers such as Ford to manufacture vehicles. Is this trend here to stay, and does this mean that cars are going to be more expensive? WSJ’s George Downs explains. Illustration: George Downs

Overall, industrywide sales in the U.S. for the third quarter were about 3.36 million, roughly flat over the prior-year period, according to Wards Intelligence. Ford Motor Co. F 2.41% is set to report U.S. sales results on Tuesday.

Electric-vehicle leader Tesla Inc. on Sunday said global vehicle deliveries in the third quarter rose about 42% to a record 343,830, but were hampered by vehicle-shipping capacity. The deliveries total fell short of Wall Street estimates.

EV startup Rivian Automotive Inc. also reported on Monday that it had produced 7,363 vehicles at its factory in Illinois and delivered 6,584 to customers during that same period. The figure remains in line with Rivian’s target of producing 25,000 vehicles this year, the company said. Rivian’s stock was up more than 6% in after-hours trading Monday.

Rising interest rates are making it harder for U.S. buyers to afford record-high pricing on new vehicles, a byproduct of the scant inventory at dealership lots. Gone are the days of 0% financing on new vehicles, which car companies and dealers have long used as a staple promotion to sell cars.

The average interest rate on a new-car loan in the U.S. hit 5.7% in the third quarter, the highest in three years, according to research site Edmunds.com.

Americans also are financing more of the purchase price than ever, reflecting record-high car prices. The average amount financed per vehicle in the third quarter was $41,347, compared with $38,315 a year earlier, according Edmunds.com. And 14% of auto-loan customers during that same period took on a monthly payment of $1,000 or more, up from 8% a year earlier, the firm found.

“It seems likely that much of the pent-up demand from limited supply is quickly disappearing as high interest rates eat away at vehicle buyers’ willingness and ability to purchase,” said Charlie Chesbrough, senior economist with research firm Cox Automotive.

The firm last week lowered its 2022 U.S. sales forecast to 13.7 million new vehicles, which would be down 9% from last year. In the five years leading up to the pandemic-plagued year of 2020, the industry sold more than 17 million vehicles annually.

So far, though, car companies and dealers say that most new vehicles that get shipped from the factory are quickly snapped up by buyers.

Car companies and dealers say that most new vehicles that get shipped from the factory are snapped up by buyers.

Photo: Brandon Bell/Getty Images

There were nearly 1.3 million vehicles on dealership lots or en route to stores in August, up 10% from July and 19% higher than a year earlier, according to research firm Wards Intelligence. That represented a 29-day supply, the highest in months but still roughly half historical norms.

“There is still really strong consumer demand, and huge replacement demand,” said Duncan Aldred, head of GM’s Buick and GMC brands, during an interview at the Detroit auto show last month. “I think that will probably overcome a lot of the economic headwinds.”

GM said Monday that semiconductor availability has improved and output has stabilized, allowing it to stock more cars and increase sales. The number of vehicles on dealership lots or en route to stores at the end of the third quarter rose 45% from a year earlier, GM said.

Auto executives have said the semiconductor shortage that has plagued output for nearly two years is gradually easing. Still, shortages continue, and the impact tends to be felt unevenly across regions and companies.

SHARE YOUR THOUGHTS

Are you planning to buy a car this year, or are higher interest rates making you rethink your plan? Join the conversation below.

There are signs that rising interest rates are starting to strain car buyers, which could pressure pricing.

This past week, CarMax Inc. KMX 2.61% shares sank after the used-car retailer flagged that high prices, paired with high broader inflation and rising interest rates, have slowed demand. The company’s profit fell 50% in its most recent quarter and its sales leveled off at 2% growth, both worse than analysts expected.

—Sean McLain contributed to this article.

Write to Mike Colias at mike.colias@wsj.com

Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

Leave a Reply

Your email address will not be published. Required fields are marked *

700 Louisiana Street , Houston TX. 77002
(+1) 832-390-2738
info@gmi-co.com

Follow us:

FREE CONSULTATION

Calls may be recorded for quality and training purposes.

Copyright © GMI 2020