Charlie Chesbrough on Memorial Day Sales Results, Q2 Predictions, and Other Industry Trends – Cox Automotive

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While it’s important to monitor year-over-year trends in the retail auto industry, it is arguably more important to focus on where the industry is headed. Here to give us an overview of this year’s numbers so far and what we can expect for Q2 and beyond is Charlie Chesbrough, Senior Economist and Senior Director of Industry Insights at Cox Automotive. Charlie also discusses with CBT some trends we might be able to expect from the remainder of 2019 based on what we have seen so far, and what underlying trends might be looking to spell trouble for the future of the automotive industry. Find out more by watching the full interview above. 

industryVIDEO TRANSCRIPT: 

Jim:
Charlie Chesbrough, welcome to CBT News.

Charlie:
Thank you.

Jim:
Sure. So let’s dive right in here. From your perspective, what’s the first half of the year looking like so far?

Charlie:
Well so far it’s actually been pretty good news. I think we’ve had a very strong market so far, it’s down a little bit, but everyone’s expecting the market to be down a little bit this year. So I don’t think there’s been a lot of surprises. I think we can take heart that there’s been some pretty good demand out there given these high vehicle prices, but there are some interesting trends underneath that are a little bit more disconcerting that I think, spells some trouble for this market going forward through the course of this yeah right now over the next couple years.

Jim:
Okay, what might those be?

Charlie:
Well one of the things we’re seeing is that there’s been quite a decline in retail sales activity. But what’s really holding up the market is an increase in fleet sales activity. And so this is a trend that we saw last year, where the retail side of the industry was down while the fleet side was up, and we’re seeing that again this year. And what’s interesting is when we look into those retail numbers, it’s really retail purchasing that’s seeing the largest decline. Retail leasing is down as well, but it’s the purchasing side that’s down quite a bit more this year, and I think that that’s one of these indicators we’re seeing, that the supportability issue, that the price of these vehicles and the number of folks out there that can afford these high monthly payments, is really starting to get constrained. And I think consumers out there are looking for the best monthly payment they can get on a new vehicle, and that’s going to be pushing more and more folks into the leasing side of the industry.

Jim:
Sure. Obviously dealers love leasing because it brings that customer back to their store for another vehicle in 36 or 48 months typically. And that part of it looks pretty good. But as you said, it brings down the purchasing numbers right?

Charlie:
Well that’s right. So the fleet side’s really what’s been purchasing this market so far this year. And I think that’s a trend that we may be seeing from 2018 into 2019, and we may see fleet as just becoming a much more important channel for the new vehicle market than we’ve had previously. And I think one of the main contributing factors to that, is not only the expensive side of leasing and just not too many … excuse me, retail, not too many consumers beings able to afford these new vehicles.

Charlie:
But we had a substantial change in the tax law that was passed in December of 2017. They made substantial changes in business use vehicles, the amount of depreciation or the allowances you can make in terms of deducting the usage of your vehicle on your taxes. And that’s made business use vehicles much more tax advantageous than they have been before.

Jim:
What kind of impact have these rising interest rates had?

Charlie:
Well clearly it’s having an impact on those monthly payments. And we have seen a bit of a pause in what the fed’s monetary policy has been. We’ve had four interest rate increases in 2018. The consensus a few months back was we were going to see two, three, four more this year. But that really changes rather quickly and now very few analysts are expecting anywhere near those number of monetary policy increases in 2019. Maybe more in lines of zero to one interest rate increases.

Charlie:
So it may be that the wave of interest rate increases has now passed, or at least is temporarily taken a pause. But clearly it’s had ramifications in the market. We’ve seen auto loan rates have certainly gone up, it’s going at this affordability, and so when you have these higher interest rates, couples with these high vehicle prices, it’s creating a very difficult environment for consumers to be able to afford these vehicles.

Charlie:
But as I said, I think these interest rate increases are going to start to moderate a little bit this year. So they may not be as much of a head wind in 2019 as they have been, that we’ve seen over the last couple years, as they’ve risen from essentially zero to where they are today.

Charlie:
But I would add, there is one other head wind that we’re dealing with in the new vehicle side of the industry, and that’s these off lease vehicles. That’s a real threat, and we at Cox Automotive think that 2019 is going to be the peak year for these off lease vehicles. We’re expecting well over 4 million potential off lease vehicles coming back this years. That’s good for dealers, dealers out there are going to get a lot of, there’s going to be more inventory, there’s certainly a lot of demand for these vehicles. But it is going to provide a lot of competition to that same new plate that’s sitting on the lot.

Jim:
Yeah many of the dealers that we interview here on CBT news tell us that while their new car numbers are down, their used car numbers are high, much higher than they’ve been in the past.

Charlie:
And that’s something we talk about quite a bit when we meet with many of the OEMs and dealers around the country, is that from our perspective in the industry, we tend to think of it as new or used. You’re either a new vehicle, or a used vehicle, never the two should meet. But from a consumer’s perspective, I need to get new transportation, or at least new to me transportation. And when we think of the market that way, that I’m wiling to take out a loan, I’m willing to spend 400 dollars a month plus monthly payment, well there’s a much bigger market for that. It’s the 17 million on the new side, along with probably in the neighborhood of around 17 million, model year, zero to four vehicles, are also available out there.

Jim:
That’s right. So talk to us about the recent holiday, Memorial Day sales. How did that bode for dealers?

Charlie:
Well I don’t have any hard numbers on that yet, but just anecdotally talking to folks, we hear a lot of positive things. That it’s been a good sales weekend. But the expectation is that we’re gonna see a market that’s running a little bit hotter than we did in April. And I think that’s one of the interesting things that we’re seeing so far in the market in 2019, is that volatility is a new participant in the automotive market these days.

Charlie:
Much like the stock market, we’ve seen peaks and troughs, peaks and troughs, a number of times over the last four, five months. In the vehicle market we too have been seeing a very hot market, we finished the fourth quarter of 2018 running at a 17.5 million new vehicle clip. But then by February that fell to about 16.4 million. And then in March it jumped back up to 17.4 million, then in April it fell back down again to 16.4 million.

Charlie:
Now many of us analysts will point to weather related issues and certainly heavy fleet activity which can always move 20, 30 thousand vehicles around. And so that can always mess with the monthly SAR. What we’ll find out this month is, if we get back on track, that we’re expecting a market of about 16.9 million for the month of May. Our year end forecast is 16.8. So it’s essentially, continuing this down shift from the robust pace we had in the fourth quarter of last year.

Jim:
It’s funny, when we talk to dealers, they’re like, 16.8, 16.7, 17.2. They’re hitting high fives at those numbers, right? They’re going, “Wow.”

Charlie:
Oh yeah.

Jim:
We might be fluctuating a couple of hundred thousand units one way or the other, but man, this is the good stuff right?

Charlie:
And again, at these high price points, vehicle prices are running 1000 dollars higher than they were at this time last year. So if we can still be doing these kinds of volumes, profitability for the industry should still remain quite healthy, even at slightly lower volumes.

Jim:
Right. Where the manufacturers take this will be very interesting to watch. Because there will be certainly a wall that they’ll hit, that consumers will just say, “I’m out, I can’t go 60 grand on a pickup truck or an SUV. It’s nuts.”

Charlie:
I think pickup buyers are already in for sticker shock when they go to the dealer and they see what these new pickups … they’re beautiful vehicles, but you’re paying for that beauty.

Jim:
I was on a Ford showroom here in Atlanta yesterday, and the Ford, beautiful truck, FM50 in the showroom, said 71.9, although you can buy it right now for 64.3. And I said to myself, “My god, can you imagine the shock that people are getting when they come in.” Walking in and seeing an F150, albeit completely loaded, beautiful vehicle, but the whole fact that we’re just looking at these cars now, trucks and SUVs, priced at that kind of a number is just mind-boggling. To think where this is going, you know?

Charlie:
And you think about, who’s the contractor that wants to throw a cinder block in the back, this truck bed at those prices? Loading lumber of that.

Jim:
That just became the family good car. Now we need the beater.

Charlie:
We’re going to see kid gloves on these trucks. But the industry’s in the situation now where things are really good today, but when we look on the horizon, even on the near term horizon there’s so much uncertainty, that I think many of the industry executives are probably just biting their fingernails trying to keep an eye on what is going on with the monetary policy, and certainly the president’s trade policies. Even just the trade policies, we know with the steel and aluminum tariffs, that’s added some price to the vehicles. The president’s got these China tariffs, which are certainly going to have implications for vehicle prices through car parts.

Charlie:
And if we go ahead with these 25% European and Japanese tariffs, that’s certainly going to be just another obstacle for the industry as we go forward.

Jim:
That’s right. It was interesting, we spoke to one Audi dealer that said that he had some customers that came in and purchased a vehicle from him. And they mentioned to him in the showroom, when they met, that they were in to buy the car now before tariffs go into effect. Have you seen some of that, where it’s kind of accelerated the market a little bit, from the fear of consumers having to pay tariffs?

Jim:
So instead of putting it off a year or six months, let’s decide now, honey, we got to get in, and get the car, and get this before tariffs hit?

Charlie:
We do think that there is, not all consumers of course. But we do think some dealers and some consumers have been paying attention as to what the president’s been proposing. We’ve seen some movement in the used vehicle side at auction, when the president first announced the steel and aluminum tariffs and was threatening additional tariffs a couple summers back, that we saw movement and prices at the auction, where we felt like dealers were actually coming to auction trying to acquire inventory before these tariffs went into effect.

Charlie:
And even though they would only affect new vehicles, it would also impact used vehicle valuation. So they were hoping to get ahead of that. I think there’s a lot of that. But I will say we’ve had so much news, I guess is the polite way to put it from the president and what he’s going to do with the automotive industry, it’s hard to know what’s real, what’s noise, I don’t know that it’s having the same impact that it might’ve had before. But I do think that there may be some manufacturers that have been stocking the shelves a little bit if you will, just to get inventory, maybe even running a little bit higher inventory than they would otherwise just in case the president goes forward with these tariffs. Just in case the UAW does strike, that there may be some need to keep some inventory available in case we hit a hiccup.

Jim:
Absolutely. Well, Charlie Chesbrough, I want to thank you so much for joining us on CBT news, we very much appreciate it. Your information here today has been very enlightening for our subscribers and viewers, so thanks again, we’d love to have you back after the month ends, and see how things shake out.

Charlie:
Great, thank you very much.

Jim:
Thank you.

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