Experts seem split on the notion that the U.S. is in a recession, and the effects of record-high inflation on car buyers could be wide-ranging. Historically, it may be reasonable to expect car prices to drop in a recession. However, there may be other factors that could significantly affect your ability to get a deal on the car you want.
What Is A Recession?
According to the National Bureau of Economic Research, a recession is a time between the peak of economic activity and its lowest point. A separate, often-cited definition of a recession is that one is likely underway when the Gross Domestic Product (GDP) is negative for at least two consecutive financial quarters.
So are we currently in a recession? That may depend on who you ask. In a recent statement by Federal Reserve Chairman Jerome Powell, unemployment rates are still near 50-year lows. However, with the national inflation rate at around 7% as of this writing, we're still well above the Fed's official target of 2% inflation.
To fight inflation, the Fed has raised interest rates multiple times to cool down the economy. These actions have faced criticism for causing higher mortgage rates, higher auto loan rates, and effectively reducing the average consumer's everyday purchasing power. Some assert that the rate hikes may trigger a recession.
Do Car Prices Go Down In A Recession?
Car prices typically go down when supply exceeds demand. However, unlike in past recessions, some automakers are making permanent changes to how they do business. For example, Ford unveiled a plan earlier this year to stock up to 80% fewer car configurations at dealers and encourage buyers to place orders instead.
Similarly, Honda may normalize low inventory levels to boost its profitability by reducing overhead costs. As a result, predicting whether or not car prices will go down in 2023 may prove difficult. For now, a chip shortage is still wreaking havoc on car production, resulting in big variations in car prices across the U.S.
But that's not all. Amid record-high transaction prices, we're also seeing some brands completely eliminate some of their most affordable vehicles. For example, Hyundai recently discontinued the Accent, one of the cheapest cars to buy. Honda also discontinued the Civic LX, the ever-popular sedan's entry-level trim.
Earlier in the pandemic, production stoppages at new car factories helped cause a surge in demand for used cars. According to J.P. Morgan, prices show signs of starting to drop and may have peaked earlier in 2022. However, it may be too soon to tell if and when things will ever get back to normal for car buyers.
There may already be a reason to rein in some of this possible early optimism. That's because, down the line, the lack of new car sales and leased vehicles around 2020 may result in a shortage of used cars around 2023 or 2024. This reduction in supply could result in high used car prices in many parts of the country.
For now, it may be best to accept that your results may vary if you're looking to get a deal. For example, not every dealer charges markups over MSRP. Still, other dealerships may compensate for a lack of sales with pricey add-ons or higher interest rates. We recommend shopping around to get the best price possible.
Sources: NBER, J.P. Morgan
