After stronger-than-expected auto sales in the U.S. in 2023, we expect the momentum to brake modestly this year. We now expect flattish volumes in 2024 with sales failing to recover to pre-pandemic levels by year-end 2025. We forecast global production will remain tightly linked to demand as automakers stay disciplined on inventory build-up, given that a pronounced downturn in the labor market in North America and the eurozone could push the global economy into a recession. The U.S. economy continues to outperform Europe due to the strength of the labor market but cracks are increasing as consumer real income growth has slowed (see Economic Outlook U.S. Q1 2024: Cooling Off But Not Breaking, published Nov. 27, 2023, on RatingsDirect).

Gradually rising unemployment and the usual delayed impact of tightening monetary policy on consumers' purchasing power are key factors in our conservative outlook for U.S auto sales for 2024 and 2025 (see chart 1). This is consistent with our expectations for a more modest recovery of global volumes in 2024 and 2025 following a stronger-than-expected rebound in 2023. The recovery comes as demand aligns to subpar global economic growth fueled by higher-for-longer rates ahead after pent-up demand releases from easing supply constraints. For more details, see Industry Credit Outlook 2024: Autos, published Jan. 9, 2024, on RatingsDirect.

In 2023, U.S. auto sales increased 12.4% as supply chain constraints eased, vehicle inventories at dealerships improved relative to mid-2022 levels, and sales to fleets increased significantly. The industry had been operating at near-recession level auto sales for almost three years, and a recovery over the next two years toward 16 million vehicle sales will depend on further supply chain improvements, labor availability at manufacturing plants, and most importantly, pent-up consumer demand. Our forecasts incorporate narrowing cushions at households to absorb the back-to-back macroeconomic shocks of high vehicle prices, ongoing inflation, and higher interest rates for longer. We expect the weakness of retail buyers to emerge in 2024 once the share of rental car and commercial fleets slows down after returning to pre-COVID-19 pandemic levels this year (roughly 20% of light vehicle sales). The U.S. auto industry will also adjust to a slower growth environment for battery electric vehicles and plug-in hybrids (i.e., EVs) in 2024-2025 per S&P Global Ratings estimates (table 2).

Chart 1

Table 1

Lower Ratings Headroom In The U.S. Auto Sector

Base-case scenario

Though the U.S. will likely avoid a near-term recession and settle into a soft landing, recession risks remain. We expect below-trend GDP growth for this year and next, with unemployment drifting up to the mid-4% range by year end. There are already signs that consumers are stretched, with American households (especially in the lower-income bracket) tapping more into credit and rising auto delinquencies. Labor cost pressure and supply chain constraints could also linger. As a result, we expect modest credit deterioration in the auto sector, particularly at the lower end of the ratings scale as borrowing costs look set to remain elevated. We forecast three Fed cuts this year, which would bring the policy rate to 4.50%-4.75% and the yield on 10-year U.S. Treasury notes to remain close to 4% through 2024.

For the U.S. auto sector, credit metrics will gradually stabilize by late 2024 as most companies (especially those rated 'BB' or below) will look to preserve liquidity in line with pre-pandemic levels and limit large, debt-financed acquisitions. Given the United Auto Workers (UAW) strike, credit metrics deteriorated somewhat in the fourth quarter, but our ratings incorporate some short-term fluctuation in credit metrics. We expect limited margin and cash flow improvement in 2024 due to higher interest rates and pricing pressure amid potential demand volatility as supply gradually normalizes. As a result, we now have a higher and increasing negative rating bias (percentage of issuers with a negative outlook or on CreditWatch with negative implications) than January 2023 levels (see chart 2).

In our base-case scenario, we incorporate the following high-level assumptions:

• U.S. auto sales remain flat in 2024 at 15.4 million units, and slightly recover in 2025-2026, still below pre-pandemic levels of 16 million.
• Average new vehicle prices fall about 10% over the next 24 months and demand shifts to used from new.
• Used vehicle prices to fall another 5%-7% in 2024 (after falling around 7% in 2023) as increasingly difficult financing conditions weigh on demand along with improving supply.
• The industry will exercise discipline while rebuilding capacity toward inventory levels of 50-60 days, or roughly 30% below pre-pandemic levels. This will ensure reduced pressure on automakers to raise incentives and lower prices, hence protecting their margins somewhat, even if consumer demand weakens over the next 18 months.
• For the U.S. automakers, we expect General Motors Co. (GM) and Tesla Inc.'s EBITDA margins to be slightly weaker relative to 2023 (see chart 3) mainly due to lower revenue growth, higher labor costs, and more discounting. Ford Motor Co.'s margins will improve compared to 2023 but with a high reliance on cost reduction, which has been subpar relative to GM over the past five years.
• Supplier margins will likely keep improving gradually with increasing volumes and more moderate raw material and freight inflation and less supply chain induced volatility for customers. However, labor availability and wage inflation along with overall higher energy prices limit margin upside, particularly if original equipment manufacturers (OEMs) get tougher on cost pass-throughs.
• For auto retailers, we expect EBITDA margins to further decline in 2024, gross profit per unit to normalize with better new vehicle availability, and as new vehicle prices to drop. Furthermore, we expect finance & insurance (F&I) income per unit to come under pressure as affordability remains a problem for consumers, particularly given the high interest rates.

Chart 2

Chart 3

With Increased Pricing Pressure, Inventory Management Will Be Critical

New vehicle prices remain about 30% above pre-pandemic levels in the U.S. at the start of 2024 (average transaction prices of around $46,000 in December per J.D. Power). However, we expect about a 10% decline over the next 24 months as used vehicle prices fall (with a potentially higher supply) and consumers opt for lower trim versions and more entry-level segments.

We believe volatility in automakers' sales (see table 1) could persist over the next few months, especially because of the differences in inventory levels at the end of the 2023 across automakers. We expect most automakers with products skewed toward light trucks, particularly pick-ups, to target 50-60 days of total dealer inventory on a portfolio basis (see chart 4). Compared with pre-pandemic levels of 80-85 days (in mid-2019) for light-truck-focused automakers, this is down more than 30%.

Table 2

Light-vehicle inventory at dealerships reflected a 42-day supply, up from 36 days a year ago, and a pre-pandemic range of 60-80 days. There is some divergence across OEMS, as some companies like Stellantis and Ford have higher inventory days and the major Asian players (Toyota, Honda, Hyundai) still have very low days' supply.

Chart 4

We Expect Pickup Truck And CUV Segments To Remain Strong

In 2023, full-size pickup truck sales increased around 9.4%, below the overall market, which grew 12.4%. Full-size pickup truck market share contracted from a peak of 15.5% in 2020, but the share has remained in the 13.5% to 14% range the past couple of years, which is still a long-term increase from the 11%-12% share prior to 2015 (see chart 5). Historically, pickup truck demand has had a strong correlation with housing starts. With the increase in interest rates, we expect housing starts to remain flat for several years at 1.3 million to 1.4 million, down significantly from 1.6 million in 2021 and 2022. While this could indicate a headwind for pickup truck sales, we expect this to be offset by pent-up demand in recent years (due to supply constraints) to replace aging pickup trucks.

The average age of vehicles in the U.S. remains at an all-time high of about 12.5 years in 2023, with an even higher average age for pick-up trucks. This will likely support replacement demand for some older vehicles given the supply constraints the past two years.

Chart 5

Crossover utility vehicles (CUVs) continue to gain share faster than the overall market, with sales increasing 18.9% in 2023, and now accounting for 48% of the total light-vehicle market. CUVs have taken share from passenger vehicles and larger CUVs have taken share from small SUVs.

Overall, across light vehicle segments, since 2010, the Detroit-3 automakers have lost some market share to Tesla and the European automakers, but less so against Japanese/Korean automakers. (see chart 6)

Chart 6

Possible Tougher Financing And Weaker 2024 Used Car Prices Adds Risk

With a shortage of new and used vehicles inflating prices, lenders are still willing to support loans of 72-84 months to attract borrowers with lower credit scores. Moreover, they're frequently offering loans that exceed the value of the vehicle. The downside risk is that it could prevent many buyers from re-entering the new car market for several years because vehicle owners who would usually trade in for a new model could end up owing more than the car is worth. We believe subprime borrowers are delaying vehicle purchases for now as higher borrowing costs and inflationary pressures affect their overall spending.

From an historical perspective, total subprime auto lending remains well below pre-Great Recession levels. Subprime loans as a percentage of all U.S. auto loans decreased modestly to 15.5% in the fourth quarter of 2023 after increasing to 16.7% in the second quarter, which is still lower than 17%-19% observed in 2009 after the Great Recession, and below the past 20-year average of 21.5%.

Auto loan delinquencies (over 90 days) have risen throughout 2023, across age groups, with buyers in the age group of 18-29 representing the highest delinquency rate (4.8%). Notably, captive debt is predominantly owned by prime borrowers and has performed relatively well. Superprime borrowers (with credit scores greater than 760) accounted for nearly 36% of all U.S. auto loan originations, the highest since early 2011 and a significant improvement from an average of about 22% in 2006 and 2007 (see chart 7).

Chart 7

Factors that will fuel demand include a higher level of incentives and subventions and attractive lease options that may help customers reduce the monthly payment. This could help manage the amount spent on motor vehicles and parts as a percentage of nominal U.S. disposable income which remained higher in 2023 compared to the past 10 year average, but still is below the 40-year average. This is due to the low interest rate environment since the Great Recession and the impact of the recent rise in rates (see chart 8)

Chart 8

After falling around 7% in 2023, we expect used vehicle prices to fall another 5%-7% in 2024 as increasingly difficult financing terms weigh on demand despite a limited supply of used vehicles and persistently high new vehicle prices. Recently, Carmax (the nation's largest used car retailer) reported a third-quarter comparable store sales decline of 4% due to inflationary pressures, higher interest rates, tighter lending standards, and weak consumer confidence. We think the unit sales used cars market has likely bottomed out and lower pricing could start to support a gradual increase in sales.

U.S. EV Demand Slows, Leading To Slight Revision Of 2025 Base Case

Following a slowdown in market share gains for EVs with rising inventories for several models, we believe the second wave (or early majority customers) of buyers will remain more price sensitive and depend on material improvements in cockpit experience, battery range, and charging experience.

This could slow revenue growth and delay profitability parity for EVs relative to legacy products, especially for issuers that do not achieve economies of scale.

Automakers will take a more measured approach on volume build-out in 2024 to avoid pricing wars with incumbents for upcoming launches. We view GM and Ford's recent plan to scale back on EV capacity (relative to prior plans) and balance growth with profitability as a slightly positive for credit quality over the next 12-24 months. This is because it appears to be an industrywide adjustment and we believe both automakers will benefit from product mix (higher contribution from profitable internal combustion engine full-sized trucks and SUVs.

For suppliers that support EVs, we expect higher research and development and working capital in the form of tooling to support the launch of new products. While there is the potential for greater revenue opportunities from newer EV-related products, initially this transition will be a drag on supplier margins and free cash flow. As a result of the production scale backs by automakers, we believe suppliers will take longer to achieve profitability on their EV products due to lower fixed cost absorption. However, suppliers should be able to lean on their combustion portfolio profitability for longer, thereby mitigating some of the impact of lower EV product volumes.

With manufacturer subsidies from the Inflation Reduction Act, investments in local supply chains, and tax credits, we still expect significant launches at more affordable price points. Together, we believe these factors will help reduce the U.S. EV market share gap with Europe and China by 2026.

Chart 9

Table 3

Related Research

• Industry Credit Outlook 2024: Autos, Jan. 9, 2024
• Economic Research: U.S. Business Cycle Barometer: Recession Risk Moderates, But Growth Is Limited By Potential, Jan. 26, 2024
• China Auto: Soft Demand Heightens Competition, Oct. 10, 2023
• Global Auto Sales Forecasts: The Pricing Party Is Coming To An End, Oct. 9, 2023
• Global Economic Outlook Q4 2023: Nearing The Rate Plateau, Sept. 27, 2023
• Economic Outlook U.S. Q4 2023: Slowdown Delayed, Not Averted, Sept. 25, 2023
• Credit FAQ: How Will The United Auto Workers Strike Impact Ratings In The U.S. Auto Sector?, Sept. 15, 2023
• Credit FAQ: U.S. Auto Dealers Navigate New Roads, July 20, 2023
• Industry Top Trends Update North America: Autos, July 18, 2023
• An Impending Electric Shock For Japanese Autos?, May 17, 2023
• Despite Higher Volumes, U.S. Auto Sector Ratings Upside Remains Limited Due To Macro Uncertainty, Pricing Pressure, And High Interest Rates, April 24, 2023
• Industry Risks And The Effect Of EBITDA Stress On Aftermarket Auto Suppliers, April 20, 2023
• Credit FAQ: How Will The Electric Revolution Impact The Credit Quality For The Global Auto Industry?, Oct. 20, 2022