Tariff threat dampens dealers' optimism

With a timer ticking on President Donald Trump's tariff decision, franchised dealers are bracing for a negative impact to their business, according to the latest Cox Automotive Dealer Sentiment Index survey.

The survey gauges dealers' perceptions of the last 90 days and expectations for the next three months. It identifies key factors affecting retailers' optimism or pessimism. Cox Automotive began reporting survey results in the third quarter of 2017.

The latest survey, for the first quarter, was conducted Jan. 28 to Feb. 8, on the heels of the longest government shutdown in history and in the midst of a polar vortex that impacted much of the country. Of the 1,164 respondents, 617 were franchised dealers and 547 were independents. The survey tracks how dealers view their market on a scale from weak to strong. A score higher than 50 indicates optimism, while a score below 50 indicates a negative outlook.

The bloated optimism of last year is beginning to fade, the survey found. Sentiment is weaker for franchised dealers, down to 50 — the lowest level Cox has reported since the survey's launch — from 55 in the first quarter of 2018. For franchised and independent dealers combined, sentiment is 48, down from 49 a year earlier.

More than half of franchised dealers are concerned that tariffs will drive up vehicle prices at their stores, according to the index, with 64 percent wary of higher prices on all new vehicles and 63 percent worried about higher import-vehicle prices.

The White House received a report from the Commerce Department on Feb. 17 on whether auto imports pose a national security threat, starting a 90-day clock for the administration to negotiate any deals with China, the European Union and Japan.

A report from the Center for Automotive Research estimates the price of a U.S. light-duty vehicle would increase by $2,750 on average if tariffs are enacted. Cox predicts pull-ahead buying activity would result and would lift new-vehicle sales in the short term. In the used-vehicle market, Cox expects auction prices to rise as dealers rush to acquire additional vehicles.

Outside tariffs, weakening profit and slower customer traffic are driving down franchised dealer optimism, and sentiment around new-vehicle sales has dimmed to 53 from 65 the year earlier. Sentiment on used-vehicle inventory rebounded to a score of 62 after three straight quarters of declines, indicating dealers are having less trouble acquiring the vehicles, Cox Automotive Chief Economist Jonathan Smoke told Automotive News.

"We're seeing what would be a typical seasonal improvement. However, we definitely are well away from the tax-reform-induced euphoria," said Smoke.

Consumer confidence was the fourth-ranked concern among franchised dealers, compared with seventh the year earlier, and some of that reluctance relates to the new tax law.

For example, an Infiniti dealer in the Northeast said the government shutdown "had many clients unwilling to commit, and with the uncertainty of the 2018 income taxes, it seems to prolong the winter doldrums."

Cox found that dealers who operate outside high-tax states such as California, New York and New Jersey felt substantially more optimistic.