Sponsored by Agile Auto

 

 

Economic: The Consumer Is Becoming the Story

The U.S. economy continues to expand, but the underlying picture is becoming more complicated. Inflation is cooling, employment growth is weakening, consumers are showing signs of strain, and long term borrowing costs remain elevated.

Inflation is improving, but the Fed is not declaring victory. July CPI increased just 0.1% month over month, bringing headline inflation down to 3.4% year over year. Core CPI declined to 2.5%, its lowest level since February. Producer inflation remains more problematic, however, with final demand prices still 4.7% above last year.

The Fed remains cautious. The federal funds target remains at 3.50% to 3.75%. With inflation still above target, the conversation has shifted away from assuming the next move will be a rate cut. Markets currently see roughly a 70% probability of no change at the September meeting.

Consumers are losing purchasing power. Real wage growth has now been negative for four consecutive months. July retail sales fell 0.6%, the first monthly decline since last October, while weekly consumer spending trends have weakened for four straight weeks.

Employment is becoming a larger risk. July payroll employment declined by 23,000 following downward revisions to previous months. The unemployment rate fell to 4.1%, but part of that improvement came from a shrinking labor force rather than stronger employment.

Long term rates remain a headwind. The 10-year Treasury yield has moved toward 4.7%, increasing borrowing costs throughout the economy. Housing remains under pressure, and higher funding costs are beginning to flow through to auto lending.

At the same time, business investment remains remarkably strong, particularly around AI, data centers, semiconductors and equipment. Second quarter GDP grew at approximately a 1.5% annualized rate while business fixed investment increased roughly 8.4%.

Bottom line: The economy is not necessarily signaling recession, but its composition is changing. AI and business investment are providing meaningful support while the consumer, employment and interest rate environment are becoming increasingly important risks.

 

Automotive: Credit Is Improving. Affordability Is Not.

 

On one side, auto credit availability continues to improve. The Dealertrack Credit Availability Index reached its highest level since December 2015 in July. Approval rates increased 37 basis points to 74%, and credit availability improved across most channels.

Independent Used and All Used showed some of the strongest improvement, while Credit Unions and Captives led lender gains.

That is encouraging for dealers.

The other side of the equation is affordability.

Consumers may have greater access to credit, but the cost and structure of that credit remain challenging. Higher Treasury yields are putting renewed pressure on lender funding costs and new vehicle financing rates.

 

Several underlying risk indicators remain elevated:

• 31.1% of loans now exceed 72 months, matching an all-time high.

• Negative equity improved modestly from June but remains significantly above year ago levels.

• Subprime share declined for the fourth consecutive month.

• Down payments remain below year ago levels.

Vehicle prices are also beginning to move higher again. Used vehicle CPI increased 0.4% in July, while new vehicle prices increased 0.1%. Vehicle insurance provided some relief, declining 0.3% and posting its sixth decline in seven months.

The clearest warning signal came from retail sales.

 

The Automotive Paradox

Credit availability is improving at exactly the time consumer affordability is becoming more fragile.

More approvals do not automatically translate into more demand.

The critical variables are increasingly the payment, equity position, term, vehicle price and consumer confidence.

 

Dealer Takeaways

 

1. Payment Is Becoming More Important Than Price

Consumers increasingly shop based on what fits their monthly budget, not simply the advertised vehicle price.

Dealers need to understand the relationship between vehicle cost, trade equity, interest rate, term and payment before acquiring inventory.

A vehicle can be priced correctly relative to the market and still be wrong for the customers who actually shop that store.

2. Improving Credit Availability Creates Opportunity

A 74% approval rate and the strongest overall credit availability in more than a decade should help dealers convert customers who might previously have struggled to obtain financing.

But improved approvals should not be confused with improved consumer financial health.

Dealers should work their lender relationships aggressively while maintaining discipline around deal structure and customer affordability.

3. Long Term Loans Are a Warning Signal

With 31.1% of loans exceeding 72 months, the industry is increasingly using term to solve the affordability equation.

That may help today’s payment, but it can create tomorrow’s negative equity.

Dealers should expect trade cycles to become more complicated as customers return with vehicles whose loan balances remain high relative to market value.

4. Inventory Risk Is Increasing

When consumer demand slows, inventory mistakes become more expensive.

The question is no longer simply:

“Can I buy this vehicle at the right price?”

It is:

“Does my market have enough demand to retail this specific vehicle quickly, at the payment my customers can afford, while protecting gross?”

That requires tighter acquisition discipline and greater emphasis on VIN level demand, market supply, historical performance and future pricing risk.

5. Aging Discipline Matters More in a Slower Market

A vehicle that misses the market by $1,000 or sits 20 days too long can quickly erase the gross opportunity that originally justified the acquisition.

Dealers should be identifying aging risk earlier rather than waiting until a vehicle crosses a traditional 60 or 90 day threshold.

The objective is not to manage aged inventory better. It is to prevent inventory from aging in the first place.

6. Watch the Consumer More Than the Stock Market

Equity markets may be reaching record highs, but dealership customers are dealing with a different economic reality: negative real wage growth, high borrowing costs, elevated vehicle payments and increasing household budget pressure.

For automotive retail, consumer financial health is currently a more important demand indicator than the S&P 500.

 

 

The Bottom Line

 

The automotive market is entering a period where access to credit is improving while the consumer’s ability to absorb higher payments is weakening.

That creates both risk and opportunity.

Dealers who continue buying inventory based primarily on historical turn, instinct or broad market averages could find themselves increasingly exposed to aging and margin compression.

Dealers who understand what their customers can afford, what their market actually needs and which VINs have the highest probability of selling quickly can take advantage of improving credit availability while competitors struggle with affordability.

The next phase of the market will reward precision over volume, inventory discipline over speculation, and proactive decisions over reactive markdowns.