According to data from the Q4 2018 Cox Automotive Dealer Sentiment Index, U.S. auto dealers became more negative than positive in describing the current market in the fourth quarter. The current market index fell to 44, down from 51 in the third quarter.

Expectations for the next quarter also declined and moved into negative territory for the first time in the survey's history. The index reading came in at 49, indicating dealers expecting conditions to be weak in the future outnumber those who think conditions will be strong.

"The fourth quarter represented a notable negative turn in overall dealer sentiment and their outlook for the future," said Cox Automotive Chief Economist Jonathan Smoke. "The big negative swing in expectations that was significantly lower than last quarter and the same time last year is especially alarming."

The downward shift in the fourth quarter marks a negative end to a roller coaster year for dealer sentiment. Even though the U.S. auto market started off the year weak, auto dealers were euphoric in the first quarter with very high expectations of a strong spring enabled by the passage of tax reform.

They got their strong market in the second quarter, but expectations cooled as higher interest rates and tighter inventory levels started to increase pressure on the industry, especially for independent dealers. The market remained strong in the third quarter, but dealer optimism declined again, impacted by fear of higher prices from tariffs and the stark reality of lower inventories.

As 2018 comes to a close, optimism has turned to pessimism. "Slowing customer traffic, growing pressure to reduce prices, and declining profitability aligned with a view of the market that retreated from strong to weak in the aggregate index," added Smoke. "Dealers remain worried about the negative impact of proposed tariffs leading to higher prices, but they are also now seeing a less robust used-vehicle market, which is also notably weaker than last year."

Cox Automotive Dealer Sentiment Index

Derived from a quarterly survey that Cox Automotive issues to a representative sample of franchised auto dealers – new-car dealers – and independent auto dealers from around the country, 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 also asks dealers to rate new-car sales and used-car sales separately along with a variety of key drivers including consumer traffic. Responses are used to calculate an index by which any number over 50 indicates that more dealers view conditions as strong rather than weak. When an index is below 50, overall sentiment is negative.

2019 Outlook Dims

Dealer sentiment toward the strength of the current market declined in Q4 to 44. The score indicates that more dealers feel the current market is weak compared to the number who feel that the current market is strong. The second and third quarter index levels in 2018 were strong, with the highest readings since the survey began in the second quarter of 2017.

The index for the next three months was 49, indicating dealers expecting conditions to be weak in the future outnumber those who think conditions will be strong. Explaining the significant decrease from last quarter's score of 57, dealers cite complications from rising interest rates and stretched consumer incomes as the top reasons for their less-positive perceptions. Higher interest rates and resulting declining affordability remain the key difference relative to this time last year.

One of the few positive takeaways from the Q4 survey was that the perception of the new-car sales environment by franchised dealers remained positive, as the new-vehicle sales index decreased only slightly to 57 from 60 between Q3 and Q4 2018.

Factors Holding Back Business

The top five factors holding back the business across all dealers remained the same in Q4 as Q3, but relative positions changed. Market conditions jumped to the most cited negative factor with 44 percent of dealers citing market conditions as holding back their business. Credit availability for consumers moved into second place. Limited inventory slid to the third most cited negative factor. Competition moved down to fourth place. Expenses remained in the fifth position.

The biggest changes from the third to fourth quarters were in market conditions and interest rates. Year-over-year dealers have been less challenged by regulations, consumer transparency in pricing, and too much retail inventory. At the same time, interest rates and limited inventory are now impacting far more dealers than this time last year.

Lack of Used-Vehicle Inventory Remains a Concern

The used-vehicle inventory index remained unchanged from last quarter at 48, which represents a substantial decline from last year. The used-vehicle inventory index has been under 50 for three consecutive quarters, which means that dealers overall are saying that they are seeing used-vehicle inventory decline. While dealers reporting limited inventory as a factor holding back their business fell to the third most negative factor, the percentage of dealers reporting inventory as a problem remained statistically similar to last quarter and is up substantially from last year. In other words, other issues surpassed lack of inventory as a problem, but it remained a substantial problem.

Specifically, dealers are struggling to maintain inventory on attractive vehicle segments, such as SUVs and trucks that are priced within the means of consumers restricted by the impact of rising interest rates on monthly loan payments.