Experts seem split on the notion that the U.S. is in a recession, and the effects of record-high inflation on car buyers could be wide-ranging. Historically, it may be reasonable to expect car prices to drop in a recession. However, there may be other factors that could significantly affect your ability to get a deal on the car you want.
What Is A Recession?
According to the National Bureau of Economic Research, a recession is a time between the peak of economic activity and its lowest point. A separate, often-cited definition of a recession is that one is likely underway when the Gross Domestic Product (GDP) is negative for at least two consecutive financial quarters.
So are we currently in a recession? That may depend on who you ask. In a recent statement by Federal Reserve Chairman Jerome Powell, unemployment rates are still near 50-year lows. However, with the national inflation rate at around 7% as of this writing, we're still well above the Fed's official target of 2% inflation.
To fight inflation, the Fed has raised interest rates multiple times to cool down the economy. These actions have faced criticism for causing higher mortgage rates, higher auto loan rates, and effectively reducing the average consumer's everyday purchasing power. Some assert that the rate hikes may trigger a recession.
Do Car Prices Go Down In A Recession?
Car prices typically go down when supply exceeds demand. However, unlike in past recessions, some automakers are making permanent changes to how they do business. For example, Ford unveiled a plan earlier this year to stock up to 80% fewer car configurations at dealers and encourage buyers to place orders instead.
Similarly, Honda may normalize low inventory levels to boost its profitability by reducing overhead costs. As a result, predicting whether or not car prices will go down in 2023 may prove difficult. For now, a chip shortage is still wreaking havoc on car production, resulting in big variations in car prices across the U.S.
But that's not all. Amid record-high transaction prices, we're also seeing some brands completely eliminate some of their most affordable vehicles. For example, Hyundai recently discontinued the Accent, one of the cheapest cars to buy. Honda also discontinued the Civic LX, the ever-popular sedan's entry-level trim.
Earlier in the pandemic, production stoppages at new car factories helped cause a surge in demand for used cars. According to J.P. Morgan, prices show signs of starting to drop and may have peaked earlier in 2022. However, it may be too soon to tell if and when things will ever get back to normal for car buyers.
There may already be a reason to rein in some of this possible early optimism. That's because, down the line, the lack of new car sales and leased vehicles around 2020 may result in a shortage of used cars around 2023 or 2024. This reduction in supply could result in high used car prices in many parts of the country.
For now, it may be best to accept that your results may vary if you're looking to get a deal. For example, not every dealer charges markups over MSRP. Still, other dealerships may compensate for a lack of sales with pricey add-ons or higher interest rates. We recommend shopping around to get the best price possible.
Sources: NBER, J.P. Morgan
As a seasoned economic analyst with a deep understanding of the factors influencing the automotive industry, let's delve into the concepts presented in the article and provide insights that demonstrate a comprehensive grasp of the subject matter.
Economic Indicators and Recession:
National Bureau of Economic Research (NBER):
The NBER is a key institution for identifying economic cycles, particularly recessions. In the context of the article, it's important to note that their definition of a recession involves a period between the peak and trough of economic activity. This definition goes beyond just GDP and considers various economic indicators.
Gross Domestic Product (GDP):
The article mentions GDP as a marker for recession, stating that a recession is likely when GDP is negative for at least two consecutive financial quarters. GDP is a fundamental economic indicator representing the total value of goods and services produced within a country. A negative GDP growth rate is indicative of economic contraction.
Inflation and Federal Reserve Actions:
Inflation Rate:
The inflation rate, as cited in the article at around 7%, is a crucial economic metric. Inflation measures the general increase in prices for goods and services, eroding purchasing power. The Federal Reserve often sets an inflation target, and deviations from this target can prompt policy responses.
Federal Reserve Chairman Jerome Powell's Statement:
Powell's statement about unemployment rates being near 50-year lows is an essential point. Low unemployment rates suggest a robust labor market, but the article contrasts this with the high inflation rate, prompting concerns about the effectiveness of the Federal Reserve's policies.
Interest Rates:
The Federal Reserve's strategy to combat inflation involves raising interest rates. This affects various sectors, as mentioned in the article, such as higher mortgage rates and auto loan rates. The article suggests that these rate hikes might have repercussions, potentially triggering a recession.
Automotive Industry Dynamics:
Car Prices and Supply-Demand Dynamics:
Traditionally, car prices decrease in a recession when supply surpasses demand. However, the article notes a shift in how some automakers operate. Ford's strategy to reduce configurations and Honda's move to maintain low inventory levels suggest a departure from conventional practices.
Chip Shortage:
The ongoing chip shortage is highlighted as a current challenge affecting car production. This scarcity contributes to significant variations in car prices across the U.S. This shortage disrupts the normal supply-demand equilibrium, impacting pricing dynamics.
Changes in Vehicle Offerings:
The discontinuation of affordable vehicle models by automakers like Hyundai and Honda showcases shifts in market strategies. This can influence the availability of budget-friendly options for consumers, potentially affecting overall pricing dynamics.
Used Car Market Dynamics:
The article mentions the surge in demand for used cars during the pandemic due to production stoppages. J.P. Morgan's observation that prices may have peaked in 2022 introduces the temporal aspect of market trends. Additionally, the projection of a potential shortage of used cars in 2023 or 2024 underscores the long-term impact of past disruptions.
Conclusion and Consumer Advice:
The article concludes by advising consumers to be cautious, acknowledging that market conditions vary among dealerships. This recommendation aligns with the recognition that the complex interplay of economic indicators, industry dynamics, and unforeseen events makes predicting future car prices challenging.
In essence, the automotive market is influenced by a myriad of factors, including economic indicators, industry strategies, and external disruptions. Analyzing these elements holistically allows for a more nuanced understanding of the complexities at play, supporting informed decision-making in the volatile landscape of car buying.
