Dealers upbeat ahead of spring sales time

Dealers, always an optimistic group, are supremely optimistic heading into the spring selling season. Federal tax changes appear to be the main reason.

Those are some of the conclusions from the latest quarterly Cox Automotive Dealer Sentiment Index, released today, March 19.

The results from a first-quarter survey of dealers “blew me away,” said Jonathan Smoke, Cox Automotive’s chief economist and architect of the survey.

“I’m almost a little bit worried, actually, at that level of optimism,” he said. “It’s borderline euphoric.”

The survey is the equivalent of a consumer confidence index, showing how U.S. dealers feel about the current retail market and prospects for the next 90 days. It identifies which factors are most significant in driving dealers’ optimism or pessimism, as well as variations by region.

Cox surveyed 896 franchise and independent dealers Jan. 29 to Feb. 12. Dealer responses were weighted by dealership type and volume of sales to be representative of the national dealer population. The responses are used to calculate what’s known as a diffusion index, where any number over 50 indicates that dealers view conditions as strong.

Cox calculated overall results, as well as separate ones for new-vehicle franchise dealers and independent dealers. This report focuses on the responses by franchise new-vehicle dealers, unless noted.

Those dealers’ views of the market at the time of the survey remained strong, with the index edging up to 55 from 54 in the fourth quarter.

But their views of the market over the next three months went through the roof: to 73 from 57 in the third and fourth quarters of 2017.

The survey was launched in the second quarter of 2017, so year-earlier comparisons won’t be available until next quarter.

While Smoke was reluctant to point specifically to the late-December changes in federal tax laws as powering the rise in optimism, that seemed by far the most likely cause.

Here is how franchise dealers feel about the market now and for the next 90 days. A score above 50 indicates positive sentiment.

Even though only 11 percent of dealers said they were “very familiar” with the tax changes when they took the survey, 83 percent believed that those changes would have a positive impact on the market over the next three months.

Why? “Our customers will have more disposable income” was cited by 74 percent of dealers as a reason, while 64 percent pointed to a stronger economy following the tax changes.

Further down on the list, “Our dealership will be more profitable” was cited by 49 percent, while “We’ll pay a lower effective income tax rate” was cited by 45 percent.

They may have underestimated the tax rate, perhaps because so many respondents said they didn’t fully understand the tax changes. Those changes included both simplifying reforms and new complications regarding deductions and equipment depreciation.

Indeed, each of the publicly traded dealership groups, in reporting fourth-quarter earnings, has said that it expects to pay a lower effective income tax rate in 2018 vs. 2017.

Smoke noted that expectations for a positive impact from the tax changes were more muted in the high-tax states of California, New York, New Jersey and Connecticut, as well as in the District of Columbia, than in other states. Individuals in high-tax states generally are expected to see their total tax bills reduced less than elsewhere.

The percentage of all dealers — franchise and independents combined — who said they expected the tax changes to have a positive impact in the next three months was 48 percent in high-tax states vs. 61 percent in all other states. The percentage who expected it to have no impact was 47 percent in high-tax states vs. 34 percent in all other states.

And while 76 percent of respondents in the other states said tax reform would have a positive impact because “Our customers will have more disposable income,” 65 percent of respondents in high-tax states said that.

Here are the ways dealers say tax reform will have a positive impact on auto sales, given as a percentage of respondents listing that reason.

Outside of the tax changes, there was little to warrant such a dramatic surge in optimism. Dealers’ responses to questions asking them to rank the top factors holding back the business were little changed from the prior quarter.

Where they did change, the numbers improved. There were “no negative shifts in any of the questions we asked,” Smoke said.

That list saw substantial improvements in terms of lessened pressure to lower prices, and increases in dealerships’ ability to get credit and in new- and used-vehicle inventory.

Extra inventory, of course, can be either a blessing or a curse. “Right now, dealers’ view of inventory growing is still a positive. It’s not too much so as to hold back their business,” Smoke said. But he called that issue “something to pay attention to as we go through the year.”

In the fourth quarter, dealers in the South were by far the most optimistic, likely a result of those in Texas and Florida who were still seeing robust replacement demand in the wake of hurricanes there.

“This time, Southerners have come back to Earth,” Smoke said, while optimism rose dramatically elsewhere. Franchise dealers in the Midwest now have a slightly higher share of the optimists: 33 percent vs. 29 percent in the South.