The US auto industry just posted its worst sales in more than a decade — but that’s not necessarily a bad sign for the sector.
What’s happening: 2022 was the worst year in more than a decade for the auto industry, largely because manufacturers couldn’t keep up with consumer demand.
Supply chain issues and a shortage of crucial semiconductor chips, coupled with high interest rates and low inventory sent car sales tumbling. Only 13.7 million vehicles were sold in 2022, a drop of 8% from 2021 and the lowest total since 2011, according to research firm Wards Intelligence.
To put that into historical perspective, auto sales topped 17 million each year between 2015 and 2019, before Covid.
Stellantis, the parent company of Chrysler, Dodge and Jeep, saw US sales fall by 13% in 2022. Honda saw a 33% drop and Nissan reported a 25% drop. Toyota, the largest automaker in the world, said US sales dropped by about 10%.
On face value, this seems like very bad news. But the auto industry saw sky-high profits even as sales plummeted. Domestic manufacturers of cars and car parts saw a profit of $32 billion through the third quarter of 2022 (the latest data available) — their largest profit since 2016. Car dealerships also reported record-breaking profits through Q3, according to auto-retail advisers Haig Partners.
That’s because pandemic-era pent-up consumer demand remained strong as supply shifted, allowing automakers to increase their prices and their profit margins. Cars and trucks were sold nearly as soon as they hit dealership lots, and the average price paid for a vehicle in December soared to a near-record high of $46,382, according to J.D. Power.
Data from the Labor Department’s November Consumer Price Index shows American consumers are paying about 20% more for cars than they were in 2019.
The trend could continue into next year — research website Edmunds expects new-car sales to hit 14.8 million in 2023, a marginal increase from last year but well below pre-pandemic levels.
The auto industry has entered a new era: Less choice, higher prices and larger profit margins. So far it seems to be working for them.
Analysts see 2023 as a strong year for the industry. Earnings per share for auto companies listed in the S&P 500 are forecast to grow by 55% through the year, according to FactSet data.
“The auto sector is rebounding, and car prices are flattening out as normalizing supply factors lift production, inventories, and sales from depressed levels,” wrote Francis Scotland, director of global macro research at Brandywine Global Investment Management.
In a note this week, Bank of America analysts gave buy ratings to Ford, GM, Ferrari, Lucid Motors and Rivian based on their latest earnings estimates.
Wall Street worries
But the latest University of Michigan survey showed that consumers are cautious on purchasing a vehicle in the current environment, with high prices cited as the primary factor.
Rising interest rates, inflation and a potential recession could push prices out of reach for Americans and limit demand for vehicles, the survey said.
And financing a vehicle is growing more expensive than ever for consumers. One major consequence of the increase in rates is that auto loan rates are now at the highest level since 2010, which could put pressure on demand and prices.