Economic headwinds have auto dealers pessimistic going into the last quarter of 2023.
The most recent Cox Automotive Dealer Sentiment Index (CADSI) report revealed a significant decrease in U.S. auto dealer sentiment in Q4 2023, driven in part by high interest rates and a weakening economy on the automotive market.
The latest survey showed dealer sentiment dropping to historic lows after being mostly unchanged the previous six months. The Q4 market index is now at 40, down five points from the previous quarter and the lowest level since 2020. Cox researchers noted the Q4 report is the sixth consecutive quarter with overall dealer sentiment below the 50. And independent dealers’ sentiment, continually below the 50 threshold since Q3 2022, is now at 38.
“Challenging Market”
The quarterly reports surpassed the previous all-time low of 41, an indication dealers believe the market will be weaker in the months ahead. The market outlook index in Q4 for franchised dealers dropped 12 points from the previous quarter to an all-time low of 46.
For independent dealers, the CADIS was down a point to 40. Both scores, and the overall score, are significantly lower than pre-pandemic and historical standards, according to Cox officials.
“The latest survey indicate(s) a challenging market with weak prospects,” said Cox Automotive Chief Economist Jonathan Smoke in a statement released in the report. “Many auto dealers are seeing their profits decline from record highs in 2021 and 2022, and they are feeling the pinch from high interest rates. Their expenses have gone up significantly, and the downward pressure on pricing has cut into their margins.”
“Clearly, the market dynamics are much more challenging for automobile dealers and especially franchised dealers than the market of just one year ago.”
Traffic, Profits Down
The gloomy moody of dealers stems from overall traffic and profits indexes both declining from the previous quarter. The Q4 2023 CADSI is based on a survey of 1,036 U.S. auto dealer respondents conducted from Oct. 24 to Nov. 6. The CADSI measures dealer perceptions of current retail auto sales and sales expectations for the next three months as “strong,” “average,” or “weak.”
The overall profits index, at 37, is now at a new low point, excluding Q2 2020, when much of the U.S. economy was shut down. The overall profits index hit an all-time high of 60 in Q3 2021 and has been sliding ever since.
For franchised dealers, the profits index declined seven points to 51 from last quarter and 32 for independent dealers—Cox notes this is the ninth consecutive quarter of a below-50 index reading for the latter cohort.
More EV Bad News
Additionally, the report continues the bad news drumbeat for electric vehicle (EV) sales from the dealer’s perspective. In the last year, EV sales are seen as worse for both franchised and independent dealers at 48. This quarter’s EV sales index score for franchised dealers was down to 50 from 54 last quarter and nine points below the Q4 2022 peak.
Dealers’ views about EV sales declined five points from Q3 to 42. Standing out the most is the decrease for franchise dealers—dropping by nine points compared to the previous quarter and 17 points from last year. Since EV market expectation were added in Q2 2021, the index score for both franchised and independent dealers were at their lowest points.
“The excitement that existed a year ago around EVs has definitely faded,” stated Cox’s Smoke. “Although EV sales are growing, supply is growing faster. The EV transition is requiring more effort from dealers than before, so it makes sense that enthusiasm has declined.”
Worsening Sales Environments
The negative feeling about EV’s mirrors new car sales expectations. After four quarters of improvement, new-vehicle sales environment declined eight points to 51. The index score is one point below a year ago and is lower than every pre-pandemic measurement.
The used-vehicle sales environment worsened in Q4—dropping overall to 39, down from 44 in Q3 and below the 42 recorded a year ago.
Independent dealers continue to view the used-vehicle sales environment as particularly poor, decreasing five points to a 35 in Q4. Franchised dealers are more positive about the used-vehicle market, but the score dropped as well–seven points to 51, reaching the lowest level since Q2 2020.
It’s the Economy
But factors outside of their control are most concerning to dealers as interest rates (65%) and the economy (61%) are the top two issues cited by both franchised and independent dealers when asked about what is holding back business.
The issue of interest rates is relatively new—as recently as Q4 2021 interest rates was not even listed as a top-ten factor. Besides interest rates and the economy, concerns about credit availability for consumers was significantly higher overall.
Meanwhile, limited inventory has now fallen to the fifth most often mentioned factor, compared to be the leading factor for most of 2022, at 33%.
