Emma Hancock [00:00:00] Hi, everyone. In the driver's seat today, we're looking at the state of the economy, how it's affecting lending across our industry for both dealers and customers. Joining us today is Mike Skordeles, head of US economics and a senior vice president at Truist Financial. He's responsible for analyzing the U.S. and global economies and financial markets, as well as helping formulate and communicate investment strategy and publishing commentaries for Truist financial clients. Mike joins us today from Atlanta. Welcome, Mike.
Mike Skordeles [00:00:31] Thanks, Emma. Great to be with you.
Emma Hancock [00:00:33] It's great to have you here, Mike. Okay. Let's start with the big question first. Are we going to have a recession?
Mike Skordeles [00:00:39] Yeah, that's the kind of 900 pound gorilla, if you will. It's sitting right in the middle of the room. We do think that our view is a recession is likely accompanied by eventual job losses. Again, that's how we define a recession. It would be unprecedented for us to avoid a recession given how weak leading indicators have been, higher interest rates, tighter financial conditions and tighter credit conditions. It's just a soup of things that are really not heading in the right direction. I know a lot of people are talking about a soft landing and the possibilities there. We wouldn't rule that out, but it's certainly a possibility. That said, if we look at percentages, probably a 60% chance we have a recession, 40% chance we don't have those job losses that I mentioned earlier. Inflation has been cooling down over the last six months. We think that it continues for the most part to continue to cool down from those really extreme levels we saw during 2021 and then again in 2022 because of the Ukraine conflict and pushing up oil prices. Again, that's come back down. That's the good news. The bad news is we still have a quite resilient economy. And so, the Fed can't take their foot off of the brake to end up saying, we're going to cut rates at some point. They're going to leave rates higher for longer. That's going to take a while. So, I think the real take home point for the audience is we're not going back to these sub 3% on the ten year treasury, sub 3% interest rates. In fact, if you want to say we're kind of going back to normal, so it's not a new normal, but back to normal. So, prior to the great financial crisis, prior to 2007-2008 timeframe, interest rates regularly had a ten year treasury, had a three or four handle on them. At some point they even had a five handle. We're back into that sort of regime rather than this depressed level that we had over the last decade plus since the great financial crisis.
Emma Hancock [00:02:52] You mentioned sort of back to normal with interest rates. How have recent changes in interest rates impacted borrowing costs for customers and businesses in the automotive industry? How are customers holding up?
Mike Skordeles [00:03:06] For the most part, the economy has done pretty well. It's been pretty resilient. The difficulty here is there's kind of a tale of two consumers. So prime borrowers, those that have good credit ratings and businesses for that matter, the good credit ratings, borrowing costs have increased certainly from their lows over the last couple of years, but they're not way out of line for historical measures and they're not really holding back growth. So that's one side. On the other side, if you're in the median income and below and you don't have a good credit score, those financing costs, they've jumped dramatically. Let's just take something like credit cards. Credit cards, prime borrowers, they don't really have credit card balances. So, what that credit card financing rate is, it doesn't really matter to them. But for that median and below, it likely has a 20 handle on it today. Similarly, somebody that's financing a car, if you're buying a new car, it probably has a seven on the front of it. Now, yes, that's more expensive than it has been recently. And yes, most of the nameplates, most of the OEMs, they've been increasing those interest rates. So, you don't have zero interest rates anymore. But that, again, a 7% rate, it's higher than it was, but it's not dilatory. It's not going to hold people back dramatically, particularly in the new car market. But on the used car side, it likely has a 17 or 18 handle. And if they are in the subprime, it's well above 20%. So that's having an impact certainly on used car sales and sales overall. The days of very low interest rates, both for borrowing costs across the board and certainly for businesses and certainly car dealerships that are trying to finance things. Those low interest rates, those are likely a thing of the past. We're not going to revisit those. Even if we have a recession, we're not likely to go back down to those extreme low levels that we saw over the prior decade.
Emma Hancock [00:05:19] Such a huge difference between the used rates and the new rates. I'd like to talk about that new car insight for a second. So, given all that we've discussed about the economy, consumers and interest rates, what do you see for new auto sales in the coming year?
Mike Skordeles [00:05:38] New auto sales have been impacted dramatically over the last couple of years. Some of it early on was supply chain issues that had it another leg down after the Ukraine crisis, because some of those car manufacturers had steel and other things that were sourced from the Ukraine so that impacted things. If we look at things over the last few years, really 2021 and 2022, we were averaging as far as a SAAR on the new side of what was being sold. It was a 14 and a half kind of range. Here in 2023, we're running in the mid-15, so 15 and a half-ish range. But if we look at the pre-pandemic, three year SAAR on the new side, it was 17 plus for most of that time period. So, we have quite a bit of a backlog on the new side. So, I think for the most part it's all about production. Toyota shut down for a couple of weeks because of a plant fire in the Balkans, among other places. But there's still some supply chain issues that are holding things up for various nameplate. That's going to impact things, particularly on the new side. But I would say regardless of whether we have a recession or not, and regardless of U.S. borrowing costs and the price of cars are more expensive, that we probably continue to trend closer to that 16, 16 and a half really long term average for SAAR on the on the new card side.
