New Vehicle Sales Are Showing Gains in July as Prices Improve

Automobiles are shown for sale at a car dealership in Carlsbad, Calif., on May 2, 2016. (Mike Blake/Reuters)

New vehicle sales slightly accelerated this month, as automakers are expected to report big gains over last year in the next few days, according to a new report.

A combination of higher interest rates, tighter credit, and improved supply, have led to a balance between supply and demand in the market, while lower vehicle prices are likely to lead to an overall decline in inflation.

Car sales have done well so far this year, despite several interest rate hikes by the Federal Reserve.

The rise in sales was primarily led by the auto market’s recovery, after two years of supply chain logjams that caused a surge in overall prices amid high demand, according to the Cox Automotive Forecast for July 2023.

“The return of supply—which is nearly 80% higher than one year ago—has been the key driver of sales this year,” wrote Charlie Chesbrough, senior economist at Cox Automotive.

“However, it isn’t consumers buying all these cars and trucks; rather, it is being fueled at least in part by rental and commercial fleets,” he wrote.

Purchases for large commercial, government, and rental fleets, not including sales for dealer and manufacturer fleets, increased nearly 45 percent in June from last year to 217,572 units, according to the report.

Auto Prices Improve Due to Supply Chain Improvements

In the first half of 2023, the total number of new American vehicle sales rose over 12 percent with retail sales surging approximately 9 percent and total fleet sales jumping by more than 34 percent.

“When COVID disrupted supply chains and vehicle production, OEMs focused on keeping retail channels as stocked as possible, leaving fleet demand unfulfilled,” said Mr. Chesbrough.

“However, now that production is returning to normal, fleet sales have rebounded, and these sales are significantly lifting industry volume,” he wrote.

The seasonally adjusted sales rate for July is expected to reach 15.9 million by the end of the month up 2.6 million from the same month last year, reported Cox Automotive.

This is an improvement over June’s increase of 15.7 million and the 15.1 million in May.

Sales volume in July is expected to show a 15.3 percent gain over 2022 to 1.32 million units due to the end of most major supply shortages.

However, auto sales volume is expected to decline from last month due to there being one less selling day in July compared to June.

Meanwhile, any economic headwinds from high prices and tighter credit will likely slow the current recovery in new vehicle sales.

Used-vehicle loan rates tumbled in July while new-vehicle loan rates have surged to 9.2 percent a 2.8 percentage point increase from a year ago.

The auto loan rate is more closely tied to bond yields and yield spreads, rather than interest rates.

Car Production to Exceed Sales as Shortage Ends

A recent report from UBS estimates that global car production will exceed sales by 6 percent this year, leaving an oversupply of 5 million vehicles Yahoo Finance reported.

The flood of new cars is expected to lead to price cuts in the second half of the year as dealers attempt to reduce the oversupply of vehicles.

Electric vehicle manufacturers like Ford Motor Company and Tesla have already begun slashing prices in a price war, due to a glut in the market.

“Given the bullish production schedules, we see high risk of overproduction and growing pricing pressure as a result,” UBS said in a note to clients.

“The price war has already started unfolding in the EV space, and we expect it to spread into the combustion engine segment [during the second half of 2023].”

Although sales have shown strength thus far in 2023 a slowdown in the second half of this year is expected.