If you’re a finance nerd or armchair economist it’s been an exciting morning as one of the big monthly measures of inflation is out, and it was both flat and better than expected. A big driver of the downturn? Automotive sales. Hey, we talk about automotive sales here at The Morning Dump.
This is good news. Let’s celebrate good news. Part of my guess that the market would reach 16 million sales in the United States in 2024 was based on a rate cut from the Fed before the end of the year and it seems like that might be coming. It’s not a lock, of course, but cheaper cars are definitely helping.
Will automakers allow this to happen forever? Maybe. Maybe not. Ford’s CFO is warning against automakers flooding the market with inventory as in the past. On the other side of Detroit, GM’s CFO is saying it’ll build fewer EVs while handing bucks back to investors.
On the other side of the pond, Chinese cars are going to get more expensive as the EU announced tariffs. How are Germany, China, and France going to respond?
CPI Was Flat In May As Cars Go Way Down
How much is the stubbornness of inflation tied to the automotive industry? While car sales and car ownership are only part of the overall economic picture, the costs associated with both went up dramatically during the pandemic.
When it comes to car sales, at least, the needle is pointing in the other direction. The Bureau of Labor Statistics released its monthly Consumer Price Index report, and the headline CPI number (all stuff) is 0.0%, which is great and also better than the 0.1% economists were expecting. Core CPI, which excludes food and energy, was only up 0.2%, compared to 0.3% that was expected.
This isn’t a surprise. Just yesterday Cox Automotive posted the May pricing data — and, specifically, the level of new car incentives — and called car prices an “inflation buster.”
Higher incentives helped make new vehicles more affordable in May. The average new-vehicle incentive package – discounts and rebates included – last month was 6.7% of the average transaction price, according to Kelley Blue Book estimates, an increase from April and the highest level since May 2021. Incentives in May were approximately $3,200, notably higher than one year ago when discounts were measured at 4.0% of ATP.
And, sure, prices are still higher than they were before the pandemic, but the needle is moving in the right direction if you’re a consumer. Specifically, according to the CPI new vehicle prices were down 0.5% month-over-month, bringing the 12-month unadjusted down 0.8%. Used cars and trucks did bounce by 0.6% but are still down 9.3% on a 12-month basis.
On the other side of it, “transportation services” is a category that includes both vehicle leasing and things like auto repair and insurance. Auto repair and insurance prices, unfortunately, are going up, and so the “transportation services” number is up 10.5% on a 12-month basis. Here, to, is good news, as for the first time in a long time the month-over-month number dropped, by a total of 0.5%.
Will this mean rate cuts are coming? For various complex reasons not worth getting into right now, CPI is not the Federal Reserve Bank’s favorite measure of inflation. That would be PCE, or Personal Consumption Expenditures, which is a price index made up of similar stuff but weighted differently (you can read a whole thing about it here).
The Fed has indicated it wants to see inflation, as measured by PCE, to come down for a while before it’ll lower rates, thus making cars even more affordable. The market this morning seems to indicate “yes” rates are coming and probably in September, but it’s hard to know for sure.
Ford CFO: We’re Worried About ‘Pink Polka Dots’
Part of the reason why the cost of new cars is going down is that there are a lot more cars. Supply/demand, et cetera. The big Deutsche Bank 2024 Global Auto Industry Conference was yesterday and both the Chief Financial Officer of GM and Ford said interesting things.
Let’s start with Ford CFO John Lawler, via Automotive News:
“I think we’re at a point as an industry where we need to be very thoughtful about how we proceed from here and watch our production relative to supply very closely,” Lawler said at the Deutsche Bank 2024 Global Auto Industry Conference on June 11.
[…]
“It worries me that the stocks are building,” Lawler said. “One of the pitfalls you can run into, if you’re pushing product out there that isn’t necessarily what the consumer wants, it’s really tough to move. Within Ford we call those ones with pink polka dots; not specced right. It hasn’t been a contagion on us yet, we’re still seeing strength, primarily because much of our product is new.”
I love that Pink Polka Dots bit. While I would drive a car with pink polka dots, that’s not everyone. This also may explain the existence of so many Dodge Hornets.
GM CFO: We Aren’t Just Going To Make EVs to Make EVs
GM has slowly been revising down its electric car plans, from 300,000 new electric cars this year, to 250,000, and, as of yesterday, that number seems to be 200,000 Ultium-based Cadillacs, Chevys, Brightdrops, and GMCs.
What’s up? Again from Automotive News:
“We don’t want to end up in a position where we give out a production target and then we just blindly produce and end up with hundreds of thousands of vehicles in inventory because the market’s just not there yet,” Jacobson said. “We think that this is a really good blend of being able to drive the scale benefits that we need but still not get crazy with inventory levels, such that we have to start engaging in deep discounting to where customers who have already bought one start to see their residual values suffer.”
Again, you don’t want to end up with too many Hornets.
At the same time, GM is going to deliver on its promised dividends according to The Detroit News:
General Motors Co. announced Tuesday its board approved a $6 billion stock repurchase authorization in an effort to continue increasing shareholder value.
“The investments GM made in its brands and product portfolio over the last several years, and the company’s operating discipline, are delivering consistently strong revenue growth, margins and free cash flow,” said Paul Jacobson, GM executive vice president and chief financial officer, in a statement. “We are very focused on the profitability of our ICE business, we’re growing and improving the profitability of our EV business and deploying our capital efficiently. This allows us to continue returning cash to shareholders.”
This isn’t a surprise, and I was critical last year of this move, pointing out that I think GM has a lot more investment to do. But it’s a strategy. Maybe the best move, in this market, is to increase the share price and wait out the EV transition by selling a lot of profitable trucks. I’m not sure it is and it highlights a big difference between China and the United States right now, as pointed out by Bloomberg‘s Joe Weisenthal this morning:
Meanwhile, GM just authorized $6 billion more in stock buybacks, though there’s more to GM’s recent run. It’s doing well in bread-and-butter truck and SUV sales. GM also believes that next year, its EV business will be profitable on an operating business basis (before interest and taxes). Still, part of the story here is that EV-related investments are going to slow here, so the company can distribute more cash to shareholders (in the form of buybacks and dividends).
In US policy circles, there’s obviously a lot of anxiety about the rise of Chinese auto OEMs (hence all the tariffs). But it’s not clear whether the US legacy players can really *compete* technologically (or on cost) so long as shareholder-friendly capital allocation decisions are prioritized over a higher pace of sustained internal investment. Perhaps it’s fine. We’ll see.
I think the “perhaps” is doing a lot of work in this paragraph. I’m still skeptical.
EU Agrees To New Tariffs On Chinese EVs Based On How Much Companies Participated In EU’s Investigation
After a lot of throat-clearing about new European tariffs on Chinese cars from both Asia and Europe, it seems like the EU’s provisional duties against Chinese companies will be based on how much the EU thinks the various brands cooperated.
In addition to the 10% tariff that already exists, Chinese automakers will get a wide range of tariffs. BYD will get a 17.4% additional tariff, Geely will get 20%, and SAIC will get a big ol’ 38.1%. Notably absent are BMW and Tesla, which apparently cooperated.
Why wouldn’t these companies cooperate? One reason might be that they’re actually benefiting from unfair subsidies, as is being suggested by the European Union.
Last month I mentioned that the French and German auto industries have slightly different views on this based on this relative to their exposure to the European and Chinese markets, with the French caring more about Europe and the Germans caring more about China.
Reuters has a nice roundup of the responses and you can see how everyone feels. First, from France’s car lobby:
“… the EU market is the most open in the world. However, in the context of the historic transformation it is facing, the sector has never been more in need of a level playing field: competition, yes, but fair competition.
So, pretty happy about it.
From Germany:
“This measure further increases the risk of a global trade conflict … The potential damage that could result from the measures now announced may be greater than the potential benefits for the European – and in particular the German – automotive industry.”
Unhappy, at least performatively so.
And China:
“The EU’s provisional tariffs come basically within our expectations, which won’t have much of an impact on the majority of Chinese firms.”
China is kinda meh on this, either because it’s about to strike back or because its cars are so much cheaper to build that a 20% hit doesn’t really matter to them.
What I’m Listening To This Morning While Writing TMD
This isn’t my most listened-to album, but you’d be hard-pressed to do better than anything off of “Tres Hombres” by ZZ Top.
The Big Question
What’s the best example of a pink polka dot car/trim/package on the market right now that isn’t a Dodge Hornet in any configuration?
Dodge just can’t catch a break today, huh
Dodge just can’t catch a break today, huh
Good choice musically. I’ve been wondering if I should maybe consider going back to grabbing CDs on longer drives rather than go off my curated playlists. I don’t listen to albums anymore like I used to in the cassette and CD in car entertainment era. Mind you I also made lots of mix tapes.
Good choice musically. I’ve been wondering if I should maybe consider going back to grabbing CDs on longer drives rather than go off my curated playlists. I don’t listen to albums anymore like I used to in the cassette and CD in car entertainment era. Mind you I also made lots of mix tapes.
I mostly just wonder how many people that tend to buy a new car every ~3 years are sitting out because they’re disgusted by the tactics the dealers have been using to inflate the prices, charging markups etc.
I used to be in that boat, buying a new car every few years. That situation makes it really easy to sit it out if you don’t need a car. I have to imagine this is a fairly big number but maybe in the grand scheme of things it’s a rounding error.
The thought of having to deal with a dealer to buy a new car makes me want to hang onto what I have for as long as possible thanks to their COVID shenanigans.
I mostly just wonder how many people that tend to buy a new car every ~3 years are sitting out because they’re disgusted by the tactics the dealers have been using to inflate the prices, charging markups etc.
I used to be in that boat, buying a new car every few years. That situation makes it really easy to sit it out if you don’t need a car. I have to imagine this is a fairly big number but maybe in the grand scheme of things it’s a rounding error.
The thought of having to deal with a dealer to buy a new car makes me want to hang onto what I have for as long as possible thanks to their COVID shenanigans.
The ZZ-top 6 pack box set was in a used CD store what a deal that is. Tres Hombres and the rest of the first 6 albums, such great blues rock. Yes Eliminator is great for the 80s sound and videos but early ZZ Top is best ZZ Top.
The ZZ-top 6 pack box set was in a used CD store what a deal that is. Tres Hombres and the rest of the first 6 albums, such great blues rock. Yes Eliminator is great for the 80s sound and videos but early ZZ Top is best ZZ Top.
No Hornet eh? Ok then I’m a say anything that starts at about $30k but you can option for near $50k 😀
No Hornet eh? Ok then I’m a say anything that starts at about $30k but you can option for near $50k 😀
There’s a pink polka dot tutu with lime green fringe out there called the Volkswagen Jetta.
Take a moment to peruse the $4000+ discounts they are slapping on these old crates.
Funny enough, they probably do alright at that price since this geriatric design was selling for $15k back in 2019.
There’s a pink polka dot tutu with lime green fringe out there called the Volkswagen Jetta.
Take a moment to peruse the $4000+ discounts they are slapping on these old crates.
Funny enough, they probably do alright at that price since this geriatric design was selling for $15k back in 2019.
I’d say the Jeep Renegade is another pink polka dot car. Price vs what you get got way out of whack.
I’d say the Jeep Renegade is another pink polka dot car. Price vs what you get got way out of whack.
Fun fact: inflation drives prices up (or down), not the other way around. Inflation is caused, in the long run, by an increase in money supply. Trying to estimate inflation based on “a basket of goods” is a fool’s errand, and has been for as little over 100 years, though the US BLS has a fancy way of estimating inflation back to 1635.
As seen with vehicles, their prices are mostly based on inventory, and what manufacturers think they will sell for, not just inflation, which winds its way in via costs of building the vehicles.
Trying to control inflation, or, mainly, the appearance of inflation, is for politicians trying to keep their jobs. Meanwhile, other folks want to pump up the appearance of inflation to dive people out of office.
Yes, I have an Economics degree, but I use it only to disparage economic discussions.
I mean, you’re not wrong and we have talked about quantitative tightening as the sort of quiet driver of real prices in the market (not to mention sellers’ inflation, et cetera). That’s why I’ve tried to ground the discussion in CPI/PCE and how it’ll impact the Fed which, in a real way, is going to impact car affordability and investment.
Not to get Zizekian, but what is real and imagined in terms of economics is less important to me than predictable outcomes. Or, to paraphrase the old joke: An old economist and young economist are walking down the street, and the younger economist says: ‘Look, there’s a hundred-dollar bill,’ and the old one says, ‘Bullshit, if it was there somebody would have picked it up already.’