Last year at this time, the auto industry was largely concerned with the possibility of a recession. Now that those fears appear to have abated, the focus is on a different “R” word: resilience. That’s exactly what the industry has demonstrated over the last three years, and it’s what dealers will continue to need as we head into 2024.

We recently spoke with Erik Johnson, Vice President and Senior Economist, BMO Economics, to discuss the issues impacting the auto industry, including the U.S. autoworkers strike and macroeconomic developments. Following is a summary of our discussion.

North American consumers have been especially resilient despite strong headwinds in the form of inflation and rising interest rates. But another headwind has recently gathered strength: the United Auto Workers strike. The strikes are currently targeted to specific plants, though after one week it had expanded from three sites to 41. While that still represents less than 13% of the 146,000 UAW workers employed at the Big Three U.S. automakers, Johnson noted that the longer the strike continues and the larger it grows, the greater the impact will be from a macro perspective.

“There's a lot of acute regional pain that's going to be felt, particularly in the Midwest in the United States and in Ontario, where most of those motor vehicle assembly and parts manufacturers are located,” Johnson said. “In the Canadian context, there's not much more that might be needed to tip the Ontario and Canadian economy into a little bit more of a downturn.”

In Canada, Unifor's ratified agreement with Ford, which covers more than 5,600 workers, is a positive development that Johnson believes points to a strike being averted among Canadian autoworkers. “It's also going to put a little bit more pressure back on the UAW to come to terms a little bit quicker than they would have if Unifor joined in on the strike on both sides of the border,” Johnson said.

But Johnson cautioned that even if Canada doesn't join in the labor action, the country’s auto industry will still be affected if the U.S. strike drags on due to cross-border production interlinkages. With President Joe Biden expressing his support for the UAW’s proposed 40% pay raise, the risks of a prolonged strike appear higher.

“If it's a pretty small strike, it’s not going to have much of an impact on vehicle availability,” he said. “But anything approaching a month—and certainly longer than that—that's really when you're going to see inventories potentially slim. We've made a fair bit of progress over the last two years in building inventories back up, but they’re still under 50% of what they were pre-COVID. Even a month where the big three aren’t producing and you have spillover effects, that's going to eat into that progress really quickly, and that's where we’ll see a lot more pressure on new vehicle prices, which eventually will hurt demand given where interest rates and affordability are today.”

Johnson also pointed out that any potential shocks from the strike won’t be uniform across different auto brands. “Some automakers, like Stellantis, have more supply in the pipeline at dealerships than other brands, so they're better able to absorb some of those shocks as opposed to the producers that have less supply, like Toyota.”

Johnson noted that BMO’s forecast that inflation would improve in 2023 has largely played out. We’re currently in what he termed “the last mile” in the fight against inflation, but that’s also likely to be the most difficult phase.

“Core inflation, which excludes volatile food and energy prices, has been hovering around 4%, and both country’s central banks would like to see progress on that front over the next several months before we can expect to see any interest rate cuts,” Johnson said. Indeed, U.S. Federal Reserve Chairman Jerome Powell recently suggested that interest rates would remain higher for longer to bring core inflation under control.

“We certainly don't have tons of rate cuts built into 2024, around 50 bps in both countries,” Johnson said. “That's something that could change depending on how inflation evolves over the next several months.”

A continuing higher interest rate environment could have a big impact on auto dealerships, both in terms of core business practices like inventory financing and how it affects consumer spending. “The longer rates are going to stay at these higher levels, the more pressure there will end up being on the economy,” Johnson said.

Johnson noted that 2023 vehicle unit volumes are likely to be better than last year, with the Canadian market hitting roughly 1.7 million units and the U.S. market reaching about 15.5 million. But Johnson expects those trends to begin to diverge in 2024, as Canada’s strong population growth will help drive future vehicle sales.

“In the U.S., we've seen pressures with more limited population growth and some of the lagged effects of interest rates keeping levels around 15 million next year,” Johnson said.

Johnson also expects supply-demand tensions to continue. While there's still plenty of pent-up demand, production still hasn’t consistently reached pre-pandemic levels.

“If you look from March to August of this year, that's the first time we've really seen production levels get back to something that looks like 2019,” Johnson said. “They were just under 3% off 2019 levels over that same period. But we're going to need more than a year of that kind of production to start eating into some of those lower inventory totals that we’re seeing today. It’s not a one-month or a one-quarter story; it's a multiyear story, and that matters a lot when we're thinking about what's going to happen to prices and margins in the industry.”

One trend that’s on the upswing is electric vehicle sales (encompassing both electric battery and plug-in hybrid vehicles), which are set to eclipse more than 1 million units this year in the U.S. for the first time. The U.S. Inflation Reduction Act, and similar federal and provincial government incentives in Canada, should help fuel EV demand. But Johnson cautioned that the EV market isn’t monolithic.

“There's going to be very different demand in urban spaces versus rural spaces,” he said. “Because when you're driving longer distances through more rural parts of the highway networks, your access to charging infrastructure is a lot more tenuous. I think the thing to watch as we're going forward is what will happen in markets like Ontario or the bigger U.S. states like New York, Texas and Florida. Depending on where you're operating, you're going to see a very different flow rate and demand rate coming through your door for these products.”