U.S. auto dealers enter Spring with new optimism, despite slowing sales
The government shutdown, concerns about tax refunds and auto tariffs, and record cold weather across much of the country all influenced U.S. auto dealer sentiment in the latest Cox Automotive survey.
Views of the future for all auto dealers – franchises and independents – improved significantly over last quarter.
The 2018 tax reform may be playing a role in regional variation in dealers’ views of the market.
ATLANTA, March 11, 2019 /PRNewswire/ — According to data from the Q1 2019 Cox Automotive Dealer Sentiment Index (CADSI) released today, U.S. auto dealer sentiment rebounded this quarter from the low level recorded in the last quarter of 2018, but the overall current market index remained in negative territory. The current market index rose to 48, up from 44 in the fourth quarter.
Expectations for the next quarter also rebounded, more than reversing the startling decline seen in Q4. That decline moved this critical leading indicator into negative territory for the first time when it reached 49, an all-time low. The increase in expectations this quarter was statistically significant from last quarter, but the expectations index remains significantly lower than last year’s series high.
“We’ve seen a turnaround in dealer sentiment and the outlook for the future this quarter compared to the fourth quarter,” said Cox Automotive Chief Economist Jonathan Smoke. “However, gone is the euphoria we saw this time last year as views of new- and used-vehicle sales are lower.”
At the time of the survey, auto dealers had a number of issues weighing on their business. The longest government shutdown in history had recently ended. Concerns over lower, slower tax refunds and renewed calls for auto tariffs were top of mind. Plus, weather played a role with a polar vortex spreading record cold temperatures across several states. Market conditions, consumer confidence and interest rates are the key measurable differences relative to this time last year when peak optimism was based largely on expectations of strong demand fueled by tax reform.
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“There is no question that it’s going to be an interesting year,” said Smoke. “As dealers look ahead, they have a less-than-positive view of growth in the future. We see the threat of tariffs potentially creating a pull-ahead affect in the near term, and then if tariffs are implemented, sales are expected to drop off dramatically. So, again this year, we are going to deal with an interesting roller coaster ride.”
Cox Automotive Dealer Sentiment Index
Derived from a quarterly survey that Cox Automotive issues to a representative sample of franchised auto dealers – new-car dealers – and independent auto dealers from around the country, the CADSI measures dealer perceptions of current retail auto sales and sales expectations for the next three months as “strong,” “average” or “weak.” The survey also asks dealers to rate new-car sales and used-car sales separately along with a variety of key drivers including consumer traffic. Responses are used to calculate an index by which any number over 50 indicates that more dealers view conditions as strong rather than weak. When an index is below 50, overall sentiment is negative.
You can download the full results of the Q1 2019 Cox Automotive Dealer Sentiment Index here: https://www.coxautoinc.com/market-insights/cox-automotive-dealer-sentiment-index-first-quarter-2019/
Cautiously Optimistic Start to 2019
CADSI data has consistently shown that sentiment skews more positive for franchises compared to independents. However, that gap narrowed this quarter as franchises became less positive and independents became less negative. While the aggregate view of the current market was a weak 48, franchises only barely managed to stay positive at 50 while independents were at 47. The independent view of the current market was significantly higher than last quarter.
When it comes to views of the future, dealer types are now more closely aligned. Franchises scored 62 while independents scored 63. Both saw statistically significant improvements from last quarter, but both are down from the record-high optimism recorded last year.
Behind their improving views of both the current market and the next three months, independents saw substantial improvement in customer traffic (30 to 33) and used vehicle inventory (46 to 52) with a substantial decline in price pressure (66 to 62).
Franchise dealers still rate the current market as strong, but just barely, as the current market index declined from 51 to 50. Franchises remain optimistic about next quarter, and that level of optimism is up substantially from 54 to 62. Franchises saw a statistically significant increase in used vehicle inventory (54 to 62), but they also saw a substantial deterioration in profits (49 to 43).
Factors Holding Back Business
The top five factors holding back the business across all dealers remained the same in Q1 2019 as Q4 2018, but relative positions changed. Market conditions remained in the top spot as the most cited negative factor with 45 percent of dealers citing market conditions as holding back their business. Competition moved into second place, pushing credit availability for consumers into third place. Expenses moved up into the fourth place as limited inventory slid down to fifth place.
The biggest changes from the fourth to first quarters were the decline in limited inventory being cited as a negative factor, the increase in consumer confidence being cited, and increases in both regulations and 2018 tax law changes being cited.
Regional Differences Emerge
Among franchises, dealers in the South report the strongest current market, and the South and Midwest have the highest expectations for the next 90 days. The lowest optimism is in the West where traffic, profits and used vehicle sales are considered weakest among dealers in the regions. Likewise, the pressure to lower prices is strongest in the West.
The tax reform implemented in 2018 may be playing a role in this regional variation in sentiment and may relate to some of the improvement in independents’ view of the current market and expectations for the next three months. Dealers outside of high tax states (defined as California, New York, New Jersey, Connecticut, and D.C.) saw a statistically significant increase in overall sentiment this quarter (48 vs. 45). Overall sentiment is also notably higher for ‘Buy Here Pay Here’ independent dealers compared to Q4 2018 (59 versus 51). Dealers outside of high tax states had an even larger increase in expectations for the next three months (64 versus 49), and they were substantially more optimistic than dealers in high tax states.
Cox Automotive Dealer Sentiment Index Methodology
Data for the Cox Automotive Dealer Sentiment Index is gathered via online surveys. The Q1 results were based on 1,164 dealer respondents (617 franchise / 547 independent) across the country from Jan. 28 to Feb. 8, 2019. Dealer responses were weighted by dealership type and volume of sales to be representative of the national dealer population.