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Car makers and dealers are reducing prices in response to weakening demand, as high interest rates impact US consumers’ interest in purchasing new vehicles.
Incentive packages on new vehicles increased by 53% year over year in June, with manufacturers like Hyundai, General Motors, and Volkswagen offering cash incentives, low interest rates, and discounts to stimulate demand and clear out inventory. Only 16.9% of new cars were sold above the manufacturer’s suggested retail price, a significant decrease from the previous year, according to JD Power.
“Due to increased supply and decreased demand, manufacturers are offering more attractive deals to move cars off the lot,” said Bank of America economist Stephen Juneau.
The latest US consumer price index report indicated a decrease in the cost of new and used vehicles in June, along with a 2% drop in retail sales. Vehicle prices have contributed to a significant portion of the decline in core goods prices over the past year, as reported by JPMorgan.
The combination of falling prices and high incentives suggests that the US economy and consumer demand are feeling the effects of the Federal Reserve’s rate hikes over the past two years in its effort to combat inflation.
While consumer spending remains high, recent data shows a slowdown in purchases, particularly in larger durable goods such as motor vehicles. Financing rates for new vehicles reached 8.65% in May, the highest level since 2001.
Manufacturers are facing challenges in clearing out high inventory levels that have accumulated since the easing of Covid-related shortages. Brands like Jeep and Lincoln have inventory levels nearly double the industry average days’ supply, according to Cox Automotive.
“The main factor keeping sales at recessionary levels is the high interest rates,” said Capital Economics’ chief US economist Paul Ashworth.
Inventory levels are especially tight for small and mid-size vehicles as cost-conscious buyers opt for smaller options. Manufacturers like Ford, GM, and Stellantis have discontinued many compact models in recent years.
“Compact SUVs and cars are selling more due to affordability reasons,” said Cox Automotive analyst Erin Keating. “Consumers are prioritizing affordability when it comes to vehicle purchases.”