Cox Automotive Index shows U.S. car dealers expect tax reform to boost profitability
OREANDA-NEWS. March 27, 2018. Members of the National Automobile Dealers Association heading to Las Vegas this week for NADA Show 2018 will be arriving with a sense of optimism for current market conditions and high expectation for the coming months.
According to the Q1 2018 Cox Automotive Dealer Sentiment Index (CADSI) released today, U.S. automobile dealers generally expect tax reform to boost their profitability and provide more disposable income for their customers. The majority of auto dealers expect President Trump's recent tax reform legislation to have a positive impact on their business's profitability over the next three months.
"Dealers have very high expectations for the next 90 days, with positive views of the recent tax reform likely contributing to their optimism," said Cox Automotive Chief Economist Jonathan Smoke. "While only 44 percent of dealers expect to pay a lower effective income tax rate as a result of the reform, they expect their customers to have more disposable income and the U.S. economy to be stronger as a result."
Derived from a quarterly survey Cox Automotive issues to a representative sample of franchise and independent auto dealers, the CADSI measures dealer perceptions of current retail auto sales and sales expectations for the next three months as "strong," "average" or "weak." The survey asks dealers to rate new- and used-car sales separately and weigh in on a variety of key drivers of their business.
The Current Market Index—how dealers feel about the market today—came in at 49, up 3 points from Q4 2017. Any number over 50 indicates that more dealers view conditions as strong rather than weak, so the score indicates slightly more dealers feel that the current market is weak.
The index for the next three months was 70, up 17 points from Q4 2017, indicating substantially more dealers expect market conditions to be strong in the next 90 days compared to those who think market conditions will be weak. Franchise dealers were most positive about the next three months, with an index score of 73, compared to independent dealers who scored 70.
Other significant changes from last quarter include a decline in pressure to lower prices, an increase in dealers' ability to get credit, and increases in both new- and used-vehicle inventory levels.
Perceptions of the new-car sales environment by franchise dealers remains one of the other most positive areas of dealer sentiment, as the new-vehicle sales index increased from 61 to 65 between Q4 2017 and Q1 2018.
Tax Reform Seen as a Positive by U.S. Car Dealers
In the Q1 2018 Cox Automotive Dealer Sentiment Index multiple questions pertaining to tax reform were posed. The results show that dealers are most positive, and most uniform, in expecting tax reform to lead to greater business profitability in the next three months.
The index score of 77 indicates that a majority of dealers expect the 2018 tax reform plan to have a positive impact on their business' profitability over the next 3 months, possibly contributing to the significant increase in market outlook for Q2 2018. Franchise dealers were the most positive about tax reform, as they scored 83 compared to independent dealers at 76.
Among those expecting a positive impact, a number of reasons were cited. Three-quarters (74 percent) of dealers believe their customers will have more disposable income and nearly two-thirds (63 percent) believe the U.S. economy will be strong. Half of the dealers responding to the survey believe their profitability will improve due to tax reform.
Views on Inventory Change
The new-vehicle inventory index increased to 68 in Q1 2018, compared to 62 in Q4 2017. This indicates the majority of dealers believe their new-vehicle inventory levels are growing. Having "too much retail inventory" increased slightly as a factor holding back their business among franchise dealers. In Q4 2017, 5 percent of respondents indicated they had too much inventory compared to 7 percent in Q1 2018.
The used-vehicle inventory index also increased substantially relative to the last quarter (59 versus 53). Dealers reporting "limited inventory" as a factor holding back their business remained flat with last quarter. In both quarters, 27 percent of dealers indicated limited inventory was an issue.
Having adequate inventory has been a greater challenge for independents, but that issue showed signs of improving in Q1 2018. A significantly higher proportion of independent dealers say their used inventory is growing, while fewer say it is stable. However, limited inventory remains a top 5 factor holding back business for independents.
"Independents are seeing improving inventory conditions," Smoke said. "At the same time they are reporting their access to credit is improving while they are feeling less pressure to lower prices. However, we continue to see independents facing more challenges relative to franchises."
Of the top factors holding back the business, "market conditions" remained the top cited for all dealers, but the percentage of dealers reporting it as a negative factor declined to 40 percent in Q1 2018 from 44 percent in Q4 2017. Other factors holding back the business include "credit availability for consumers," "competition" and "expenses."
The survey also showed a substantial increase in the percentage of dealers citing "interest rates" as a negative factor weighing on the business.
Cox Automotive Dealer Sentiment Index Methodology
Data for the Cox Automotive Dealer Sentiment Index is gathered via online surveys. The Q1 2018 results were based on 896 dealer respondents across the country from January 29 to February 12, 2018. Dealer responses were weighted by dealership type and volume of sales to be representative of the national dealer population.