Why Auto Industry Demand May Suddenly Tank
The auto industry has been experiencing a surge in demand for years due to limited supplies, experts believe that demand many finally taper off as the US enters into an economic downturn.
This article is more than 2 years old
Wall Street is eagerly awaiting news of third-quarter earnings for the automotive industry. Many analysts believe that the auto industry demand is ready to take a nosedive. But they are waiting for the earnings reports before settling on any predictions for the end of the year.
During the pandemic, demand for new cars skyrocketed well beyond the available supply. In most years, this may not have been the case. However, the pandemic coincided with plenty of supply chain and manufacturing problems.
The result was dealerships with shockingly empty car lots and record-long waits for shipments of new vehicles. And since the auto industry demand was so great, US dealers and manufacturers no longer had to offer deals or concessions to get people to buy. They capitalized even further when consumers began purchasing used vehicles instead of new ones.
These factors allowed dealers and manufacturers to rake in record profits for the last three years. But, according to CNBC, that may all change. And rapidly.
Wall Street analysts are concerned that the looming recession, record inflation, and rising interest rates will dampen auto industry demand. Joseph Spak is an analyst with RBC Capital Markets, and this week he told investors, “auto sentiment is very poor. We get it. Higher rates, still high prices, low consumer confidence, a potential recession and European energy risk does not make autos a friendly place.”
Spak is not alone in his belief. Analysts at UBS warned investors that profits could drop by half next year. He predicts weakening auto industry demand, leading to an oversupply of vehicles.
One UBS advisor, Patrick Hummel, told investors last week that the auto industry “is deteriorating fast so that demand destruction seems inevitable at a time when supply is improving.” This news does not bode well for car manufacturers or dealers, who are bracing for the impact. The investment firm has so little faith in the industry they even downgraded two major companies.
They moved Ford from “neutral” to “sell.” And GM got moved from “buy” to “neutral.” But they are not alone in their troubles. CarMax, an online used car dealer, posted an enormous earnings miss after the close of its second quarter on August 31.
Many believe that the third-quarter earnings will be the last positive news for the industry for some time. And that is all due to waning auto industry demand. However, the market will not know until the earnings reports start rolling in.
GM will kick off the third-quarter earnings reporting. It plans to issue its report on Tuesday before the market opens. Ford will follow Wednesday after the bell.
Tesla, Group1 Automotive, AutoNation, Sonic Automotive, and Asbury Automotive Group will report their third-quarter performance later this month. Lithia Automotive reported its revenue and earnings per share on Wednesday. They posted the most successful performance in company history but fell well short of Wall Street expectations.
The trajectory that auto industry demand will take in the fourth quarter and 2023 is unknown. But, low demand, high gas prices, and skyrocketing inflation may damage the auto industry over the next year. Those keeping a close eye on the sector do not expect good news.
