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Economic Update

 

Economy Stronger Than the Headlines, but Rates Remain a Risk

Last week brought several important economic signals, highlighted by Fed Chairman Kevin Warsh’s Jackson Hole speech.

The biggest takeaway: the underlying economy appears stronger than headline GDP suggests, but that strength could keep interest rates higher for longer.

Fed & Interest Rates

Warsh reinforced the Fed’s commitment to its 2% inflation target and pushed back against the idea that financial conditions are particularly restrictive.

Markets reacted quickly, increasing expectations for additional rate hikes.

• Headline Q2 GDP growth: 1.5% annualized
• Private domestic final purchases: 4.2%, suggesting stronger underlying demand
• 10 year Treasury yield: near 4.7%
• Markets are now pricing significantly greater odds of additional Fed tightening

Dealer takeaway: Do not build your fall strategy around meaningful interest rate relief. Higher for longer remains the more prudent assumption.

Consumer Spending & Inflation

Consumer finances improved modestly in July, but households remain under pressure.

• Personal income increased 0.4% month over month
• Consumer spending increased just 0.2%
• Real spending was flat after adjusting for inflation
• Savings rate improved to 3%
• PCE inflation remained 3.7% year over year
• Core PCE remained 3.3%

Consumers are earning more, but spending growth is slowing and inflation continues to absorb a meaningful portion of those gains.

Automotive Cost Pressure

Transportation related inflation remains particularly important for dealers.

• Gasoline prices were up 25.6% year over year
• Transportation services inflation increased 7.1%
• Vehicle maintenance and repair costs increased nearly 7%
• Auto parts and accessories increased 6.6%
• New vehicle prices increased 0.6%
• Used vehicle prices declined roughly 2%

This reinforces something we continue to emphasize: vehicle affordability is no longer just about the selling price or monthly payment. Total cost of ownership matters.

Consumer Confidence Weakens

Consumers feel better about conditions today than they do about what is coming.

The Consumer Confidence Index declined to 89.4, while the Expectations Index dropped to 68.2, a seven month low.

Consumers also expect inflation of 5.8% over the next 12 months.

Interestingly, auto purchase intentions remain relatively strong compared with last year.

Bottom line: Consumers are cautious, but they have not stopped buying vehicles.

 

 

The Auto Market Is More Resilient Than the Headlines

Despite tariffs, elevated interest rates, fuel costs and affordability pressure, automotive demand continues to hold up.

New vehicle sales remained relatively steady through mid August, while used vehicle activity strengthened as wholesale conversion improved.

The consumer still needs transportation. What is changing is what they can afford and what they are willing to buy.

Used Vehicle Demand Remains Strong

Demand continues moving toward older, more affordable used vehicles.

We are seeing increasing competition for vehicles in the $15,000 to $18,000 price range, along with growing consumer acceptance of vehicles that are 8, 9 and even 10 years old.

That creates an important inventory opportunity.

Dealer takeaway: The winning inventory profile is changing. Dealers need to understand not only which vehicles sell, but which year, make, model, trim, mileage and price combinations their customers can actually afford.

Credit Remains a Bright Spot

There is an important distinction between interest rates and credit availability.

Rates remain elevated, but lenders have become more willing to extend credit to qualified borrowers.

New vehicle APRs increased across nearly every credit tier in August, while used vehicle rates remained relatively flat from July.

That continues to support used vehicle demand despite broader affordability pressure.

What Dealers Should Watch

The macroeconomic environment matters, but dealerships operate locally.

Do not let national headlines become your operating strategy.

Watch:

• Retail traffic
• Sales pace
• Inventory turn
• Wholesale conversion
• Price point demand
• Aging and depreciation
• Local supply and demand
• Credit availability

The national market matters. Your market, your customers and your inventory matter more.

 

 

Bottom Line

The economy is sending mixed signals.

Underlying economic activity remains stronger than many headlines suggest, but inflation is still elevated and interest rate relief may be further away than consumers and dealers hoped.

At the same time, the automotive market remains remarkably resilient.

Consumers are still buying. Credit remains available. Used vehicle activity is strengthening. But affordability is increasingly dictating what consumers buy and where demand is moving.

For dealers, this is a market that rewards precision and speed.

Know what is selling. Know what your customers can afford. Know where demand is moving. And adjust your inventory strategy before the market forces you to.