DETROIT -

“Not so bad” meaning “equally good and bad on either side of the coin,” is how Cox Automotive chief economist Jonathan Smoke sized up the economic outlook for 2020.

Unemployment is at a 50-year low, consumer sentiment continues to be “relatively high” and consumers are seeing strong wage and income growth, he said.

But there are caveats.

Smoke is concerned that economic growth is “slowing”, and he expects a record number of subprime auto delinquencies in the first quarter of the year — “even more than we saw during the great recession.”

Cox Automotive senior economist Charlie Chesbrough said there is a “slowdown” in the new-vehicle market, too. And while stressing that he’s not predicting a recession, Chesbrough believes if there is a recession, light trucks, as a segment, will be shunned as consumers seek financial refuge in less expensive new compact cars and sedans and used SUVs, crossovers and pickups.

Cox Automotive also forecasts that the industry will sell 16.6 million new vehicles this year, “a healthy number” but in a market that will be more challenged, Chesbrough said. The forecast is down from the 17 million-plus new-vehicle sales the industry has seen over the last few years.

Those were some of the predictions and observations shared by Cox Automotive analysts during the company’s annual media presentation held Jan. 13 in Detroit.

Slowing finance growth

“It’s really the next 90 days that will determine what the economy is going to look like,” Smoke  said, referring to a time frame that is roughly the first quarter.

But in the meantime, he attributes the slowdown in auto finance growth, at least in part, to lenders’ reluctance to make loans to subprime borrowers and said that’s where borrowing costs diverge from interest rates.

Consumers with super prime credit are getting better loan rates as a result of the Fed cutting rates in 2019, but conversely, subprime borrowers at the end of December were paying an average rate of 18.9% on new-vehicle loans, Smoke said.

That is 2 percentage points higher than the prior year and is substantial when combined with record high vehicle prices, he said.

It also helps to explain why new-vehicle affordability is one of the industry’s big challenges, he added.

“We have a record amount of loans outstanding at over $1.3 trillion, so that sets up a base that says ‘how much can you grow’?” Smoke said. “When you throw in on top of that a declining new-retail sales market, and a growing share of vehicles being financed are increasingly being more used, the finance dollars slow down.”

Tough economy, tough luck for SUVs

If the economy gets “tough,” cars may get a new lease on life at the expense of SUVs, crossovers and pick-ups, because consumers will have to look for ways to cut expenses, Chesbrough said.

“I would suggest to you that if and when we do have a recession, these product segments are probably going to be under significant threat, because we’ve seen such massive price increases over the last few years,” Chesbrough said.

From 2012 to 2019, the average MSRP for the full-size SUV, midsize pick-up and full-size pickup segments increased close to 25% or more, a Cox Automotive bar chart shows. In the same time period, compact cars, for example, increased an average of about 5%.

“These aren’t necessarily the vehicles that consumers are most interested in,” Chesbrough said of cars.

“But one thing we know is when times get tough, consumers are going to have to start looking for ways to save money. They’re going to start looking at value and ways to cut their monthly expenses, and it may be that these car segments may have a little bit of life left in them if and when we see this economy slowdown.”

'Gently used' a threat, too

At the same time, used vehicles also offer another option for price weary consumers.

In 2019,  when 4.1 million off-lease vehicles returned to the market, the industry sold over 11.6 million used vehicles that were current to four model years old, Chesbrough said. The same number of off-lease vehicles are expected to hit the market in 2020, too.

He said these off-lease vehicles are high-content, relatively low mileage and are selling at prices that are 30% to 50% lower than their new-vehicle counterparts, making them “a real threat to the new-vehicle side,” Chesbrough said.

“As we look at this industry, with these rising prices and (some manufacturers) pulling out of many the of car segments, the industry has created this environment. So where do these value shoppers go? The gently used market is fulfilling that void that the industry has created.”

Untapped subscription model variations

Also at the briefing was Vince Zappa president of the Clutch Technologies mobility software company that powers approximately 200 dealership rooftops and 18 OEM brands in the United States, Canada, United Kingdom and Germany. Clutch is a Cox Automotive brand.

Zappa said there are many untapped variations of the subscription model that present more mobility options for consumers and create profit opportunities for dealers, OEMs and fleet operators.

Fox example, Clutch believes the OEMs will explore how to use individual vehicle subscriptions to help manage the volume of off-lease vehicles coming back into the market, he said.

Another model, called rental-on-demand, is a by-product of thinking about subscription programs as a fleet, Zappa said. So when these alternative models supplying a fleet for access to consumers, whenever those vehicles might be idled, for whatever reason, dealers, OEMs or fleet companies, would rent out to consumers idled vehicles on an ad hoc basis, he said.

It involves OEMs, dealers and fleet companies that supply subscription vehicles to consumers to also rent out those vehicles, when they are not in subscription use, on an ad hoc basis to consumers.

To grow these and current mobility programs, Zappa said Clutch wants to build “mobility hubs” for fleet operates and dealers in particular, by getting the entire eco-system — OEMs, finance companies, insurance companies, infrastructure providers — to get on board.

Dealers, Zappa said, “have a right to win” because of their local community connections, their infrastructures “and they have a lot at stake in the game as we think about changing these relationships.”