If you’ve noticed things getting a bit hectic lately, you’re not alone. Two years into the pandemic, 2022 has brought its own set of challenges, setbacks and surprises. Maybe you’ve been impacted by one of these challenges, or perhaps you’re one of the fortunate few who haven’t. Here at CarEdge we’ve been asking ourselves “what happens in 2022 and beyond” to help us plan for our business. Today I thought we would share our thoughts with you.
We’re entering a recession and will stay there for 12+ months
How will a looming recession affect consumers, automakers and the auto service industry?
Economists are only half-joking when they quip that we could be close to ‘talking ourselves into a recession.’ With an annual inflation rate over 8%, volatile stock markets, record-high gas prices, and rising interest rates, there are many factors that are dampening consumer sentiment in the United States.
An economic slowdown will impact nearly everyone, and each household will feel it differently. Although a recession by definition has not happened yet, there are indications that economic growth is slowing. Economists are taking note, and more than a few are sharing predictions. But when it comes to your money and lived experiences, how much do words matter? It’s a question worth pondering.
Recessions happen every four years on average
Diane Swonk is one of the most respected macroeconomists today, and this is what she had to say in a recent interview with PBS NewsHour. “I think the probability of recession is very high in the second half of the year and as we move into 2023. In fact, we’re forecasting what’s called a growth recession, which is when growth is not enough to hold unemployment down, and it continues to rise in 2023 to derail the inflation we have and get it back to being insignificant to most consumers.”
What happens to auto sales in a recession?
If a recession is knocking on our door, it’s wise to prepare as best we can. For most consumers, that means saving money and spending less. Discretionary spending, essentially spending by choice rather than by need, always plummets in a recession. For some (but not all) households, discretionary spending includes that shiny new car you’ve had your eye on. In a recession, auto sales decline significantly.
Just how bad could it get? New vehicle sales in the U.S. fell nearly 40 percent during the ‘Great Recession’ of 2008. 2020’s pandemic-driven recession was the shortest in history, lasting just two months. Even then, auto sales were down 15 percent compared to 2019.
Economic slowdowns affect the auto service and repair industry too, but the magnitude of impacts will depend on just how bad it gets. In most scenarios, the demand for auto service will stay fairly steady (as everyone needs occasional car maintenance). When the Great Recession put several million Americans out of work, the impact was significant and long-lasting, and enough to reduce the demand for auto maintenance for a few years.
The truth is, no one knows what the economy has in store over the next few years. Regardless, it would be wise to prepare for the worst while hoping for the best, even if that means putting off the purchase of your next vehicle. Our prediction is that a recession will be with us for 12+ months and that we’re already in the beginning stages of it.
Consumers will drive less
Consumers will continue to drive less as a result of changes in our ways of working post-pandemic. The “new normal” for consumers will be significantly fewer miles per year than in pre-pandemic years. In fact, we’ve already seen this trend showing up in national surveys of driving habits.
In late 2021, a survey from Hankook Tire found that just 36 percent of Americans drive every day. The statistic decreased by 12% over the course of 2021, and if the first five months of 2022 are any indication, a new host of factors (notably record gas prices) are likely to keep drivers off the road.
A recent article in Forbes highlighted the staying power of remote work. A third of workers feel more productive at home, and 36% of remote workers say they’d quit if they were forced back to the office. The nature of work in America has changed forever. Remote work may have a lasting impact on America’s driving habits, but it’s not enough to stop the post-pandemic traffic jam.
According to the U.S. Department of Transportation, travel on U.S. roads rose 11.2% in December 2021 compared with December 2020. The spike has resulted in a nearly full recovery in road traffic compared to 2019, with just 1% fewer miles being driven.
What about gas prices? Clearly, driving costs a lot more than it did last year. The national average is $4.59 per gallon nationwide. That is 50 percent higher than gas was at this time last year, according to AAA. Shockingly, hundreds of dollars in added fuel expenses each month isn’t keeping drivers at home.
Memorial Day weekend is expected to bring 37.9 million Americans to the road, according to Arrivalist. That’s more than the last pre-pandemic Memorial Day weekend. Will Americans continue to disregard the cost of fuel? Time will tell. Our prediction is that Americans will not return to their pre-pandemic driving habits.
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The car shortage will continue
Last year, 11 million cars were lost from production due to the worsening semiconductor chip shortage. Unfortunately, it doesn’t look like it’s getting any better. So far in 2022, 1.8 million cars have been removed from automaker production schedules. Over half a million of those cars were scheduled to be built in North America.
Automakers will continue to struggle to produce enough new vehicles to meet consumer demand. The ripple effects from lost production in 2021 and 2022 will permeate throughout 2023, 2024 and 2025. We should expect a shortage of quality used cars and prohibitively high prices for in-market car buyers. Used vehicles will continue to appreciate (or at a minimum not depreciate as they did in pre-pandemic times). We’ve seen used car prices rebounding yet again over the past few weeks (see the latest numbers here).
The average age of a vehicle on the road will continue to increase as consumers hold onto their existing cars longer. The average light-duty vehicle on American roads is now over 12 years old. Twenty years ago, the average auto was 9.6 years old. Drivers are responding to the car shortage by simply holding on to their cars longer. That’s not a bad idea with the way things are going. We expect this trend to continue.
Increased consumer demand for fuel efficiency (EV, PHEV and Hybrids)
Electric vehicle market share surpassed 5% for the first time in the first three months of 2022. And that was BEFORE gas prices shot up. But it’s not all about EVs, either. Hybrids, plug-in hybrids and full battery electric vehicles (collectively known as electrified vehicles) were up 41% year-over-year in 2021, despite average prices being thousands more than combustion engine counterparts.
Even as consumers drive less, we should expect to see continued and increased demand for EV and hybrid powertrain vehicles. More consumers will become EV and Hybrid “curious” and consider those powertrains for their next vehicle.
See the latest EV market share numbers here
The average transaction price for a fully-electric vehicle is roughly $11,000 more than ICE vehicles. Incentives (such as the federal EV tax credit) help some buyers overcome the cost, but it’s still a luxury that most driver’s can’t afford. Will EVs get any cheaper? Not anytime soon, especially since battery production costs have thrown a wrench into automaker’s plans to lower prices.
Rising interest rates make borrowing more expensive
In an effort to mitigate inflation, we should expect interest rates to rise further. As the cost to borrow money increases, consumers (and businesses) will be more cash-conscious than before. The Federal Reserve just raised interest rates for the first time in three years, and they said it surely won’t be the last hike.
New car buyers probably won’t see much of a change at first. Captive lending makes it possible to hold off major rate increases for as long as possible to entice buyers into the dealer showrooms. However if the mortgage industry is any foreshadow of what’s to come, car buyers should expect auto interest rates to increase expeditiously over the coming months.
It’s important to remember that a higher interest rate will cost buyers of expensive vehicles most (on a dollar-for-dollar basis). A 6% interest rate will result in about $6,000 in total interest paid for a $40,000 loan over 60 months, but just $2,400 for a $15,000 loan over the same term.
How much do rising interest rates increase car payments? Let’s consider this example. Right now, the average amount borrowed with an auto loan is roughly $40,000 (wow!). With a 72-month loan, a 3.5% interest rate would result in $4,400 in interest paid over the life of the loan. With a 6% interest rate, that same loan would cost $7,700 in interest. It’s not pocket change.
Of our 5 predictions for 2022 and beyond we are most concerned about the impacts of a global recession and the continued car shortage. It’s impossibly difficult to predict all of the effects we’ll see from these phenomena, however we’re cautiously optimistic that we’ll be able to “weather the storm” and be on firmer footing because of it. By 2025 we think we are on the other side of “this”.
What can you do about these 5 known factors in the remainder of 2022? Stay alert, informed and prepared. Whether that means saving a few extra dollars or making that older vehicle last a little longer, every little bit will help ease the anxiety brought on by the uncertain times we live in.