Additional Coverage:
- People are delaying buying new cars, creating a deflationary ‘spiral’ that’s bad news for the auto industry (businessinsider.com)
Vehicles are filling the lot at Howdy Honda in Austin, Texas, captured on March 18, 2024, highlighting a critical moment for the car industry. The scene symbolizes a growing concern among economists and industry analysts about a possible downturn due to consumers postponing their vehicle purchases.
Delayed buying decisions are feared to trigger a “deflationary spiral” in the automotive sector, as a surplus of inventory begins to push down the prices of cars. This situation arises alongside a noticeable recession in the market for durable goods, such as vehicles, suggesting a broader economic impact.
Despite an ease in the car buying process recently, potential buyers remain cautious, largely deterred by high interest rates and fluctuating prices. Many are holding off on purchasing a new car with the hope of securing a better deal later on, posing a significant challenge to the automotive industry.
According to Cox Automotive, the average cost of a car dropped to $48,389 in May from a peak at the end of 2022, signaling a normalization in automotive production. Nonetheless, with interest rates still hovering between 6.7% and 11.9%, according to Experian, the hesitation among buyers persists.
Jonathan Smoke, an economist at Cox Automotive, warns that the industry may be on the brink of a “deflationary spiral.” This trend could lead to a vicious cycle of reduced demand and increasing supply, forcing prices down further and encouraging buyers to delay their purchases even more.
Smoke also points out the recession affecting durable goods, of which cars are a part, attributing the downturn to a combination of factors including deflation. He notes that the boom period triggered by pandemic savings and spending is over, and the economy has been in a restrictive phase for the past nine months.
Despite a general increase in vehicle sales, the rate of growth is slowing, with high inventory levels starting to affect pricing. Cox reports a 1% decrease in vehicle prices in May, with a noticeable shift in consumer demand towards more affordable models.
This shift sets the stage for an uncertain summer for the automotive industry. Smoke suggests that widespread consumer beliefs in potential future savings could pose further challenges to the sector, as more individuals opt to wait before making their purchases.
(Original article referenced from Business Insider)