It's shaping up to be an uncertain year for the automotive industry. Over the last two years, severe inventory constraints led to record high vehicle prices, and now the industry is bracing for a possible economic downturn or recession. The industry bright spot is the electric vehicle (EV) market, which is poised to hit a key milestone this year. We turned to Jonathan Smoke, economist with Cox Automotive for his predictions for the year ahead.

The Verdict: No Bullish

The outlook for the auto industry is “not bullish,” said Smoke in episode 20 of the Market Pulse podcast.

"It's an unfortunate timing for the industry that many of the supply problems are starting to resolve just as the prospect of a recession all starts to manifest itself," he explained. “Production is not back to normal, but it has started to recover and has been improving quickly over the last several months.”

Smoke noted that we started 2023 with about 800,000 more vehicles in new vehicle inventory than we had a year ag. Most of that improvement occurred in the final four months of last year. But that still leaves us with less than half the inventory we had at the beginning of 2019. 

Listen to the complete podcast interview now for more in-depth analysis.

 

Global Production and Supply Chain Issues Vary by Region

There are lingering production issues in some parts of the world, especially in Asia and Europe.

“By contrast, North American production is close to normal,” Smoke said. “And as a result, we basically see domestic brands in the best shape from a supply perspective, while Asian and some European brands are further behind. The lingering supply chain issues lead us to assume that we won't bounce back to pre-covid production and sales levels in 2023.”

Recession and Auto Affordability are Key Challenges 

The most obvious challenge the auto industry faces is a possible recession. Smoke said that would hinder both production and supply.

“There's a positive correlation with vehicle demand and job creation. So, job loss doesn't help vehicle demand if we were to experience it, and a recession would delay the recovery of the new vehicle market yet another year.”

Furthermore, Smoke said affordability will be an issue for years to come. There is not enough affordable and young supply in the used vehicle market.

“When you combine that with interest rates now being at levels we haven't seen in 20 years, we have a problem creating payments that are affordable to median and lower income households and to consumers with less than prime credit,” he said.

Electric Vehicle Market Shines Bright

Smoke is forecasting growth in the electric vehicle market. There is a slew of positive developments generating excitement, including EV makers lowering prices, new tax credits and 27 new electric model launches. Additionally, the EV industry is expected to hit a milmarketestone this year by selling more than a million pure battery electric vehicle in the U.S.

This is all driven by demand, said Smoke. He believes we’re not close to saturating the potential demand from willing buyers.

“Most of those model launches are coming from traditional brands,” he said. “This means the average dealership is going to have something to offer consumers, and this isn't just a Tesla thing and a California thing. This is happening across the country.”

With more electric vehicles in the market, that means more used EVs down the road. And that will have a big impact on how we value used cars.

“Historically, the used vehicle market judges the value of a used vehicle primarily on mileage. And in the future, mileage isn't going to mean much for a battery electric,” he said. “Instead, understanding where that car has been driven, how often it's been charged, how it's been charged. Those are the kind of things that are going to tell you the health of the battery.