FORECASTS & TRENDS E-LETTER
By Henry Rohlfs
March 19, 2024

Shifts in Gear: EV Momentum Stalls

IN THIS ISSUE:

1.  FOMC Meets This Week

2.  New Car Prices Still Elevated

3.  Electric Vehicle Prices Continue to Decline

4.  Toyota Hybrids Win the Day

5.  One Last Thought

It’s March Madness time! No, not the basketball tournament, but the Federal Open Market Committee meeting starting today! We’ll take a quick look at where the inflation numbers are and how the FOMC will likely respond.

We also see how new car prices have stabilized in the last year and the adoption of electric and hybrid vehicles by U.S. consumers.

FOMC Meets This Week

The Federal Open Market Committee (FOMC) begins their March meeting today and will announce its interest rate decision at 2 pm Eastern on Wednesday. Fed Chair Jerome Powell will hold its much-anticipated press conference at 2:30 pm.

The Consumer Price Index rose to 3.2% annually last month, faster than the 3.1% rate seen in January. Core CPI that ignores food and energy prices was down slightly to 3.8% annually, slightly above the consensus forecast of 3.7%. The Producer Price Index for final demand in February 2024 rose by 0.6% (seasonally adjusted), the largest rise since September 2023.

The February Personal Consumption Expenditures price index, the Fed’s preferred measure of inflation, will not be released by the Bureau of Economic Analysis until March 29. Early estimates for February’s PCE are at 2.4% – no change from January. With CPI coming in noticeably higher for February, I expect to see PCE higher as well.

Clearly inflationary forces have not been kept in check quite yet. Cuts in the Federal Reserve’s lending rate won’t be happening anytime soon, perhaps not until July 2024.

New Car Prices Still Elevated

My wife Karen and I have been SUV owners since we graduated from the minivan days of raising our three children. But after 20 years and nearly 300,000 miles, it was finally time for us to retire our Buick Rendezvous SUV this year. I had not looked at vehicle prices for several years, so needless to say I was shocked at the prices I saw.

The average new car price of model year 2024 cars comes in at $48,759 according to Cox Automotive. New non-luxury vehicles increased slightly to $44,827 as compared to a year ago.

Let’s not pretend that just because car prices are stabilizing at new highs, cars are somehow affordable. The average new car price is up 30% since 2019, when the average price paid was around $37,000. And if you’re looking for a truck, as we were, prices are even higher.

Electric Vehicle Prices Continue to Decline

But if you are in the market for an electric vehicle, or EV, you are in luck. EV prices continue to fall, led by market leader Tesla.

In August, the average price paid for an electric vehicle was $53,376, down from more than $65,000 one year ago. Tesla price declines are driving market prices lower. In August, Model 3 transaction prices were down 21% year over year. Other Tesla models also fell by 13%-17%.

Cox Automotive Chief Economist Jonathan Smoke notes, “The pressure dealers feel is from over-supply rather than a lack of demand. The No. 1 issue for consumers is price, and that’s a barrier even to considering an electric vehicle.”

The sales trend line for EVs isn’t slanting upward as sharply as many had predicted so the industry is lowering future estimates. Besides vehicle price, experts cite a number of reasons for this, including lack of charging capacity and confusing tax credit rules.

Toyota Hybrids Win the Day

Once thought to have made a strategic misstep, Toyota may just win back U.S. quarterly sales honors from General Motors, according to a projection by Cox Automotive. Part of Toyota’s success can be attributed to the Japanese automaker’s ability to source semiconductors more reliably than its competition. The other reason is its lineup, which is stacked top to bottom with hybrids.

Some automakers, seeing Tesla’s growth, have gone headlong into EVs and moved away from hybrids. GM has ditched them altogether. If geopolitics continue on the current path and energy prices remain volatile, hybrids will be a popular choice for consumers who can’t yet afford an EV. Last year, hybrids were 7.5% of sales in the U.S., more than double the market share for EVs, according to AutoForecast Solutions. Both segments are all but certain to grow this year.

Toyota’s early adoption of hybrid models has been extremely successful, so you would think the automaker would be quick to embrace full electrification like some of its competitors. However, the automaker seems to be taking a somewhat controversial approach to EVs, and a leaked dealer document about the brand’s electrification strategy lays out exactly why.

Toyota’s “practical path” acknowledges the challenges full EV vehicles have in the U.S. market. They are still committed to an electric future, but they realize there are significant hurdles to overcome before then. The hybrid vehicle is the answer to that for the near future.

One Last Thought

As my associate Spencer Wright wrote recently, new lithium and rare earth mineral finds have been discovered in Wyoming. This could become America’s answer to China’s lock on that market and a boon to the more cost-effective manufacture of EV batteries.

But the process of securing environmental assessments, mining permits and the construction of the mining and refining operations will take years to finish. Current relations with China, the primary supplier of these materials, has cooled, a near guarantee that battery prices will remain elevated in the near term.

The so-called Inflation Reduction Act passed in 2022 earmarked $7.5B to build tens of thousands of vehicle chargers across the country. To date, not a single charger has been installed by the program. The lack of readily available charging stations remains the other major impediment to EV adoption. We’ll see how long it takes to see that substantial change.

By the way, we ended up buying a GMC Sierra truck. We live in rural Texas and a full-sized truck seems to suit my wife just fine.

All the best,

 

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