Moody's Talks - Inside Economics - CPI, Cars, and Credit Conditions

Episode Date: April 14, 2023

Jonathan Smoke, chief economist of Cox Automotive and colleague Mike Brisson join Mark and Cris to discuss what’s going on in the vehicle market. After a rundown on this week’s inflation stats we discuss prospects for vehicle prices, sales, production, and the implications of tighter underwriting and weaker credit quality in the auto loan market. We also take up the tough new emission standards and what they mean for EV adoption.Full episode transcriptFor more on Jonathan Smoke,  click here.Follow Mark Zandi @MarkZandi, Cris deRitis @MiddleWayEcon, and Marisa DiNatale on LinkedIn for additional insight. Questions or Comments, please email us at [e-mail]. We would love to hear from you.  To stay informed and follow the insights of Moody's Analytics economists, visit Economic View. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to Inside Economics. I'm Mark Zandi, the chief economist of Moody's Analytics, and I'm joined by my trusty co-host, Chris DeReedies. Hi, Chris. Hi, Mark. Good to see you. That's good to see you as well. We're missing, Marissa. What's up? She's still under the weather? She might be. She might be. So she was going to join us today. Well, maybe so join us. She may surprise us. Yeah. Dip in here at some point. Yeah. Yeah. Now, how are you feeling, by the way? I'm on the mend. I'm getting there. Yeah. Yeah. You don't look any worse for the wear. That's, you know, power of cameras and things here. I got a special filter.

You don't help me out, buddy. I don't know. Yeah. Anyway, well, it's good to have you back on up and running. And we've got two guests. One internal, one from outside our little world. Hey, Mike. Mike, Brisson. How are you? Good, Mark. How's going? I'm good. I'm good. I, you know, I am getting a little older. Yes, you can tell it for my, well, in many ways, but mainly from my hairline. But I went to the gym yesterday. I do go to the gym, you know, pretty regularly. And I'm sitting there in the gym observing this one fellow doing an exercise. I'm thinking, oh, I should try that. Huge mistake.

Oh, no. Huge, huge error. That's why I'm kind of bent over here. I've been taking Advil. Wish me a luck on that one. But, and, you know, at my age, injury is a problem, right? Because, you know, once you get injured in your optimal, but getting back is really, you know, not easy. So you got to be careful. You're

the Kell Ripkin of this podcast. You didn't miss one. Right. Well, you asked how I was doing. I thought I'd actually tell you how I'm doing it. Is there a metaphor for the economy there? What did you have in mind? Oh, you know, you know, you, you know, Keep an expansion. You shouldn't try any new thing, new monetary policy, or try to reset inflation to a higher level or anything like that. Stay the course. Stay the course, baby. Yeah, I think you're probably right.

And we have Jonathan smoke. Jonathan, good to have you back on Inside Economics. Oh, I'm happy to be here with you. You're looking particularly dapper. Are you in your office there? I am in my office in Atlanta, and it's a brand new renovated digs. So, hopefully nothing technical breaks today. I thought you guys were remote.

No, did I miss that or something? Well, my team has always been kind of hybrid because we've got folks around the country. But, no, we've got a pretty large campus in Atlanta and increasingly more people are coming in. Oh, cool. And you're the chief economist of Cox Automotive. I should have said that right up front. Welcome. Yeah, it's good to have you.

And we're talking autos. obviously. Mike's our expert on the auto industry, and Jonathan, you're the global expert on the auto industry. So it's good to have you both. We're going to talk a lot about autos. A lot going on there. But before we kind of get to that, maybe this past week, the big economic news was around inflation. We've got the consumer price index. I think they came out on Wednesday, and then the producer price index that came out on Friday. Chris, you want to give us a rundown? What would the number say to you? Yeah, so CPI, I would say, was a good report, right? But certainly better than the consensus. CPI is coming. Consumer price index inflation is coming down. Some would say perhaps according to script or right according to script. But we saw some some improvement pretty much across the board. Who would say that, Chris? Who would say sticking the script? I don't know. Anybody you know? It seems so common. I hear it all the time. You hear it all the time, yeah.

Fair enough. Sorry, sorry to interrupt. No, not at all. So we had improvement pretty much across the board, right? So overall top line, CPI increased 0.1% in the month of March. That's 5% year over year. So pretty hefty decline, both in terms of month-a-month and year-over-year. especially as we're rounding the corner here in terms of the increased prices that we experienced a year ago as a function of the Russia-Ukraine war.

So we saw a substantial decline in energy prices, down 3.5% on the month, 6.4% on the year. So that's certainly beneficial. Food prices, which had been pretty sticky in terms of an increase. We're flat this month. So that is improvement. All right. So getting some relief there. And if you look at the subcomponents in certain categories, you actually see quite substantial relief.

Eggs, for example, that's the big story. Egg prices coming down fairly quickly here. So that certainly is a benefit to consumers. The core CPI also came down a bit. It's 0.4% on the month, 5.6% year over year. So still far from where the Fed wants it, but making some progress slowly, slowly towards the goal. But that I think is at the crux of the debate is the progress fast enough for the Fed at this point, or will they continue their rate hikes as a result of a still fairly elevated level for the core CPI excluding food and energy?

I think I'll highlight one part of it and then maybe turn it back to you. Housing, right, is of course a very important component here. And there we are seeing some signs of the rent growth moderating as we expected. So pretty significant moderation, right? So not actually turning negative, of course, but the month-month increase much smaller now than it has been in previous months. So do we expect to continue to see some of the market rent declines or at least deceleration that we've seen continue to filter into the CPI. So that should continue to put some downward pressure on the CPI going forward. So I thought that was beneficial.

Obviously, we can talk about the speed. It would be great to see that come down even faster. But given what we know about the markets, I would say that that was right in line with expectations. Yeah, I, you know, obviously inflation is critical to the outlook, the economic outlook. You know, if inflation remains high, persistently high, then the Fed's got to raise rates more and ultimately we're going into recession. Some argue that I think it might be you, Chris, that there's, we're already going into recession, given what's happened so far. But, you know, getting inflation down here in a reasonably graceful way is really, really important. And in my mind, this was a reasonably graceful CPI report.

It felt pretty good to me. I mean, I'm growing increasingly confident that inflation is going to head back to the Fed's target over the next year or so. It'll take about that long to get back down the Fed's target, but we're headed in that direction. And kind of the frame I have is that there's three phases to the slowing in inflation growth. You mentioned one explicitly, that's housing. And that feels like that's baked, right? Because we know market rents are flat to down. We know that that takes some time for that to translate through into the cost of housing services

as measured by the Bureau Labor Statistics, the keeper of the CPI data. And it feels like over the next six, maybe nine months, we're going to get increasingly it's not going to be a straight line month to month, obviously, but generally over the next six to nine months, we're going to see a steady deceleration in the cost of housing services. And that's a big chunk of the CPI. I think it's over a third of the CPI, I think well over 40% of the core CPI excluding food and energy.

And that feels baked. I mean, that's going to happen with a high degree of confidence. Second phase is related to the cost of service. And we'll come back to that later in the later in the discussion. But even there, that feels like we're moving in the right direction. If you look at like the core services X housing and energy, you know, the health care, hospitality, personal services, still strong inflation, but that feels like that's coming in as well. And then the third phase, and this is the phase that, you know, we're in the middle of right now,

is related to goods prices and getting. getting on the other side of the supply chain issues of the pandemic, the labor market issues from the pandemic, the Russian invasion impacts on energy and commodities more broadly. And the one area where we are still waiting to see some improvement, and I'm expecting it soon, but here we're going to go turn to the auto guys and get their sense of it is weaker new vehicle prices. Use vehicle prices have come in somewhat, although they've shown some strength in recent months.

We should talk about that as well. But new vehicle prices, they keep going up. The pretty big increases in new vehicle prices. And we've been waiting for quite some time for that to roll over. And that's also really important to this outlook for the sanguine outlook for inflation going forward. Before I turn to Jonathan and Mike to start digging deeper into the vehicle price, part of all this story. Does that frame sound about right to you, Chris, and sort of, you know, my thinking around how that's playing out? It does. It does. I think the debate is really just about the speed. And can you land the plane or do you blow through the bottom as the trend is downward?

But, you know, what does that, how does that trend play out over time is really the debate? I don't think there's any question about the phases you laid out there. Yeah. And even on the trends, I mean, we were at 9% CPI, consumer price inflation. year over year at the peak back in June of last year. As of March, with this data point we got this week, we're at 5% on the nose. And the target is 2.5% on the CPI, I think. Fed has a 2% target on the core consumer expenditure deflator, but because of measurement issues, CPI is probably about a half a point higher per annum. So about 2.5.

So I think that's our bogey. We went from 9 to 5, and now we've got to go from 5 to 2.5. clearly nine to five is a lot easier because of, you know, a lot of that's energy effects and food effects than going from five to two and a half, but it feels like we're moving in that direction pretty quickly here. Any argument there? Yeah. No.

Yeah. Yeah. The question is to blow through it. Yeah. Okay. With the recessions. Yeah. And you're still, you still think at this point, well, we'll come back to that,

but you're still, your instinct is still, we're going to need a recession to get it back in a fast enough way to satisfy the Federal Reserve Board? That we need a recession, I don't know, but that we will have a recession. We will have a recession. Okay. The probability of a recession is high. Let me put it that way. Yeah.

Edge a little bit. Okay. Let's turn back to the vehicle prices. And, you know, maybe Michael, turn to you first. You want to characterize, you know, what's going on with new and used vehicle prices. It feels really weird, you know, what's going on there. to my eye. Yeah.

So the new vehicle prices, let's start there. The new vehicle prices, according to BLS, they've been rising dramatically over the past year, year and a half. So we got another positive number this month. And the way I characterize it, it's a story about MSRPs. And the auto manufacturers can only reprice their vehicles when the new MSRP comes out. So there's an upper bound there on where, you know, each yearly increase can go, whereas use vehicles, it's a dynamic system so you can go above

and beyond that MSRP, whereas the manufacturers are trying to keep their dealerships just at that top upper bound. And so there was a number of dealers that were selling above that, but generally, let's just say there's this upper bound of MSRP. And so as there's the price increases, they happen every year, there's going to be a lag effect. Just, just MSRP, manufactured, suggested retail price. Yep. Yep. Yep. Okay. Yeah, probably. everyone in the world knows that, but just to make sure that everyone knows that. Or simply the sticker. Or simply the sticker price, right?

Yes. Everyone knows that. Yeah. Okay. Sorry, right. Yeah, you always wanted to get below the sticker now. Now you just want to get at the sticker if you can. Give me the sticker, please.

Yes. So you have this lagged effect where the new vehicles being sold, let's say, in September, October, where the new 20-23 model years come out, there's a big jump in the MSRP from 2022 to 2023. So on the new vehicle sales side, you're going to have the 2023 model years being sold from October through the spring. And if we're not having any incentives come in,

and you're just at that upper bound of the new 2020-3 model year, you're going to have year-over-year increases for those new vehicles. So I think this lagged effect from the MSRP being an upper bound is the reason we're continuing to see increases in new vehicle sales. It's my expectation like yours

that these new vehicle prices will come down as we go throughout this year. So I've been saying the second quarter of 2023 is going to be when we first start seeing new vehicle prices coming down as incentives start to increase. And we are seeing incentives increase little by little for new vehicles. And so then we'll see those transaction prices come down throughout the rest of this year. When do you think that happens, Mike? I mean, March it didn't happen. Okay, later.

I called in October to you that we'd start seeing in second quarter of 2023. So I'm sticking with it. Oh, oh, you did. Oh, back late in October of last year, you were saying when? I said Q2, 2023 was when we'd see negative new vehicle price on BLS. From Bureau Labor 6. Okay. Jonathan, does that, is that kind of description of what's going on resonate with you?

And do you have a similar perspective? Yes, it does. I mean, there's all kinds of interesting dynamics related. to the sticker or the MSRP because it fundamentally makes, I would argue, the new vehicle market very inefficient in pricing when you have big swings in demand and supply. And far more dynamic is the used market. And of that, the wholesale market is like the closest thing you get to a stock market, kind of real live bidding that determines real fluctuations and prices.

I would add in addition to the discussion about the sticker that we've actually been seeing it in the data that we track from Kelly Blue Book and it's a part of the vehicle affordability index that we do together, that transaction prices have been down every month so far this year, mainly driven by changing mix of vehicles that increasingly there are more lower-priced vehicles over the last 18 months prior. basically manufacturers had prioritized their most expensive vehicles and within the vehicles they made the most expensive trims and configurations. So that caused the inflation over the last year in particular to be more significant than it otherwise would because the mix was richer. Well, the BLS controls mix to a degree because they have a fixed basket of vehicles. And whereas our is moving with whatever the average price looks like, so it's impacted by Mix. And I think part of the reason they had prices still going up in March when we're observing that real prices are actually coming down was because of that mix. And I too agree that it's inevitable you're going to see those prices

starting to come in in future months on the CPI. Okay. So you're saying that the BLS controls for Mix, and the data you look at does not. The transaction prices that you look at do not. That's right. But from trying to measure inflation, you do want to control for a mix, right? So the BLS number is more what you want to measure. Or is that an epistemological?

Yeah, I think it's a wonderful philosophical debate that we can have. Because you have this issue that is the back basket they're using, even reflecting what's available in the marketplace. I think they undermeasured the actual inflation that occurred last year, for example, that real consumers were experiencing. Oh, interesting. Okay. And this may be way down into the DNA of the data,

but when you say fixed weights, do you know, fixed to what? Like 2019 or 2022? So they have a basket? that fundamentally was first defined, as I understand it, in 2002, and then they do modest changes every year in September. That's why there's often an apparent break in pricing because they're addressing when they might need to replace a specific make and model of a vehicle because it's no longer available and that sort of thing in the data.

So it's slow moving, and they don't reveal the exact details of the basket. So it's impossible for us to really measure just how closely does it relate to the market. But if you think about it, 20 years ago, sedans ruled the world. And sedans are a minority of the vehicles sold today. SUVs and pickup trucks combined rule of the world. So there's been a tremendous change in what consumers actually buy. And by the way, what is available to sell, which is a huge part of the affordability. challenge for new vehicles in particular.

It's funny. Anytime you dig deep into any kind of data, maybe this applies to everything that you dig deep into, you go, oh, boy, this is not as clear cut as I thought. This is a mess. Yes. So you have to exist on two planes. You know, I was actually a double major in economics and religion. Oh, my gosh.

That is cool. There's an element of kind of both that sometimes you can't allow yourself to doubt the fundamental truths that you believe in, even though the evidence may be pointing to the contrary. Or the data. Maybe evidence is too strong a word. The data is pointing in a different direction. That's right. Yeah. Yeah.

Oh, that's interesting. I thought you guys, though, were going to maybe you have to peel the onion back another layer to get here. I thought you guys were going to talk about global supply of new vehicles and that, you know, you know, you know, you know, production in Japan of new vehicles, production in Germany of new vehicles, and these two countries are obviously critical to global production levels, are still well below pre-pandemic, and they're having a hard time getting that production up. Therefore, you have just fewer new vehicles out there. And of course, here in the U.S., we buy a lot of those Japanese-German vehicles.

So if there's not enough of them, that means higher prices. And that fundamentally is what at the root of the higher new vehicle prices. and why the dealers can get the MSRP, why they can get the sticker price because of that fundamental dynamic. Am I wrong? No, we are still supply constrained. The current new vehicle inventory is less than half of what it was in 2019. But we've come a long way from the tightest supply conditions, which were a year ago.

We're up 70% compared to a year ago. So to frame that at the lowest point, and for many months, almost 12 months in a row, we only had about 1.1 million units of inventories sitting on dealer lots or in process of arriving at dealer locations to be sold. And we're up to 1.8 million now. But back in 2019, in the older days, it was usually over 3 million in any given time sitting on dealer lots. So it's still supply constraint. As Mike was describing, that produced the condition that with the MSRP being a governor that we had 20 straight months until March, that the average transaction price was actually above the average sticker, because dealers had more pricing power given the really tight conditions. But one by one, segment by segment, manufacturer by manufacturer, that has started to shift with the improving inventory.

But when you dive into the data, yes, there's huge variation. We see Asia and especially Japan furthest behind in terms of being able to catch up. So good luck if you're trying to buy a Toyota, Subaru, Mazda vehicle. Those are going to be the hardest to find and closest to sticker or above sticker. The other end of the spectrum, North America is closest to being fully back. And if it weren't for labor, would be completely back. But labor is another dynamic because we've got, UAW contracts and potential strike coming up in September.

So that creates behaviors that are not typical historically. Like you would see, I think, more incentives with manufacturers that are further along in recovery and getting closer to normal in supply, but they're still being fairly disciplined to keep pricing high. So far, that's influencing not seeing bigger declines in the prices we're observing. Oh, go ahead. Let me jump in here, take labor side of the argument. My dad was a union steward in the electricians union, so I'll take labor side on this one.

So it is, is it management or is it labor side? So management's throttling production on the U.S. side of things because of the contract negotiations coming up. Are they purposely limiting the number of vehicles being produced? We're seeing the lowest level of U.S. production now in February since mid-2020. So we're not rising in production. We're decreasing in production in North America over the past few months. And is it because of the upcoming negotiations this summer that maybe we don't need that many employees? We can negotiate the two-tier wage scales.

So it might be a negotiating employee as long. And they're able to make sure they don't have oversupply for any possible economic downturn. And at the same time, they want to make sure that they're maintaining pricing power and those profit margins that they've become accustomed to over the past couple of years. Okay. So just to make this clear, Japanese production is way down below pre-pandemic. No, no question. Supply chain issues, probably. German production is well below pre-pendemic. Probably. They're doing better.

You're doing better? Okay. But still, they're not there yet. They still haven't gotten production back. Here in North America, U.S., we got production back up to pre-pendemic. But now in recent months, it started to slide a bit. And you're saying not quite clear what's going on, but it could be that the manufacturers are actually restraining.

production, one, because there may be fearful of demand because of a recession, and or they are focused on these contract negotiations that are coming up. And if they cut production and jobs, they might have some negotiating power, you know, with the unions as this contracting process unfolds. That's what you're saying. Yes. And I, you know, put another way, if you know, you've got this very contentious negotiation period coming up, because historically that has been the case and often led to complete shutdowns and disruption of production, then why would you aggressively push now when you're worried about what the economy and demand might look like in a few months? Why would you aggressively go to three shifts in every factory when the key impediment is

actually having the labor numbers to be able to do that. So better to stay at this pace of sub 15 million until you get through that uncertainty. Okay. Sub 15 million meaning sales. Yeah. Production in North America is more like 10 or something, right? I mean, okay. Okay. Okay. Interesting. So going Mike to the forecast that new vehicle prices are going to roll over here, you know, in this quarter, you know, second quarter is now, we're in April, that you're making some, I guess, assumption around the negotiations with the UAW and getting to the other side of that in a reasonably graceful way. Is that what you're assuming? Yeah, okay. Yes. Okay. Because if that doesn't go well and production is shut down for any length of time, prices are coming in. That'll happen in

September when the contracts are up. Oh, okay. So this is, this is a, this is not a Q2 event. This is more a Q in Q3 about. And the Q3, Q4 will be the impact. Okay. Okay. Okay. Okay. Very good.

So we should see new vehicle prices come in. Now, just to kind of round things out in terms of pricing, use vehicle prices, at least the transaction prices that we measure, they've been rising in recent months. First question, what's going on there? Second question, if I look at the BLS, Bureau of Labor Statistics, consumer price index for use vehicle prices, that keeps declining. So what's going on there? Again, going back to the theme here, this is pretty weird what's going on here in the auto market.

Mike, do you want to take a crack at that? Sure. So there's a couple of things going on. The first get to the BLS versus our wholesale indexes. So we have the Moody's Analytics Index, and then. There's the Mannheim, which Jonathan and Cox produce. And so our wholesale indexes differ from the BLS methodology. Can I ask who's is better?

I'm just curious. I, of course, would say Moody's, but Jonathan has his own. We've got 25 years of loyal followers. That says it all. We weren't asked who's is used more. Yeah. Sorry, I didn't mean to interject. Yeah, I did intervene to, but go ahead.

So the first thing is the wholesale versus retail. And the numbers that the BLS is looking at, they're more of a retail with some discounting for utility in the basket. So they're looking at kind of different things first. So there's the retail prices and the wholesale prices. Whereas our wholesale indexes have seen a jump up in prices. Part of that, the majority of the jump came in January and February. from the Moody's Index. And a lot of that was pushed forward seasonality.

So we had the better weather earlier in the year. We've had strong consumer demand with the $1.6 trillion in excess savings. So that's pushing up consumer demand early in the year. We saw it in retail sales in January. So there's a demand side of things. You also had the slowdown in production in the U.S. that we had just talked about. These are the drivers that are kind of pushing up those wholesale prices as dealerships see the lack of production coming down the put.

I do think it's an anomaly, though, going forward. We are still projecting weakness in prices throughout this year and next year. Jonathan, do you have a different take on what's going on? Yeah, I would just add to the discussion that we are very supply constrained. The used market is a product of what was sold new, especially in recent years. And so the big decline in global production and new vehicle sales for three plus years now, means that the used car market is smaller. Or take a step back, if you look at the size of the car park,

the number of vehicles that are just out there own title and theoretically and available that somebody could sell them, it effectively has not changed in almost four years when normally we would have seen growth of about a net addition of four million vehicles per year. So you've shrunk the possible pool of what's available to sell, And that's especially true in what fuels the wholesale market and the used retail market, like sales that were leases or sales into fleets like with rental car companies and commercial companies. That's where the industry has really starved those outlets.

And so as a result, we're very constrained on both the wholesale and the retail side. So we started the year. January had the least amount of use inventory in at least 10 years. And our supply data on a daily and weekly basis only goes back that far. But I'm fairly confident, especially adjusted for population or something like that, it was probably the tightest January ever for used vehicles being available. So any modest uptick in sales, like caused by a better January weather-wise, was immediately causing dealers to have to restock their inventory, forcing them to go to auction.

And then we saw what was a run of 11 straight weeks of wholesale prices actually going up rather than declining. And then there's a disconnect because wholesale prices lead retail. We observe, especially over the last couple of years, about a two-month lag between wholesale and retail. So by the time we got to March, we started seeing retail prices going up. and wholesale in the second half of March was actually losing momentum pretty rapidly. And I think April could very likely be down in wholesale. But retail, because it's lagged behind those big moves in January and February, is still moving higher and is likely to be even higher in April.

Okay. So would you agree with Mike, though, that, you know, if you look into the latter part of it, So later this year, that with this improvement in new vehicle supply that we're anticipating, that should also take some pressure off the use market. And also the economy feels like it might be, and demand might be a bit softer. There's no question. Yeah. Okay.

We're already seeing it and credit, which we're going to get into, is also influencing so that there is definitely declining momentum and use, but, you know, improving momentum and new. So no question that's going to put pressure. Our assumption is the peak of prices is over for this year, and we're more likely to see downward pressure on the use side. Okay. So you're both, you guys are in agreement that both new vehicle prices and use vehicle prices

likely are going to be headed south here for the remainder of the year, certainly in the second half of this year. Does that sound right to you? That is right. However, remember we're supply constrained. So the likelihood of a major decline is very limited. It's very similar to the housing market, Mark. Yeah, the same dynamic.

And you were chief economists of a where you were also, you're a house or real. Realtor.com. Rilter.com. Oh, yeah. So you know what of what you speak on the housing side. Yeah, absolutely. Mike always does this to me. He's got one caveat.

Okay. Is it a big caveat, Mike? Just a little caveat. So we might see. some uptick in those BLS numbers, though. So we're talking wholesale numbers. Jonathan and I just make the distinction. So BLS is looking at those retail numbers.

So we're going to see, likely see another uptick in the second quarter for used vehicle sales in comparison where they are now month over month. Prices. Use vehicle prices. Yeah. Right. Okay. So in Q2, new vehicle prices, that feels like that might be already heading south.

But new, according to the BLS, we might see an uptick because of this lag between wholesale and retail. But by the second half of the year, we should see both new and used vehicle prices kind of moving south, not in a big way because of this underlying supply dynamic. And you're right, the housing market has the same dynamic. But still, when you take it back to the inflation story, it's a positive dynamic here, going to play out over the next six, nine months or something. Okay. For me, that's what I'm really focused on because, again, we're going back to inflation. We're going back to monetary policy interest rates. and ultimately what it means for the economy and recession,

and that does feel well, feel good. Okay, let's talk a little bit about vehicle demand, and then we're going to play the game, the statistic game, and then we'll come back and talk about some other things that going on in the auto industry. There's a lot of stuff going on in the auto industry. These EPA standards around, you know, tailpipe emissions of very interesting EVs. I just want to get your take on that. Well, I want to also talk about auto credit and, you know, what's going on in the auto credit

market. You brought that up. And maybe we'll do that now in the context of demand. And then we'll wrap it up with a broader discussion about the economy and prospects like we typically do. With that on demand, let me just frame it this way. I've been wrong. So I've been way too optimistic. This is self-preservation because I've been.

if I didn't say that, Mike would have been, you know, he'd be all over me if I didn't say that. I took the sword before he, you know, because he put it right through my liver, you know, if I didn't, if I didn't say it. So I've been wrong. I've been wrong. I admit it. I expected demand to come back more strongly than it has. It hasn't.

I mean, just, you know the numbers a bit better than me, but I think new vehicle sales are probably running somewhere between 14 and 14.5 million units annually. Before the pandemic, it was a rock solid 17 million years annualized. So that, you know, my thinking, my thought was that's kind of underlying demand and we'll get there as the economy improves. But we have it in part because of the supply issues and pricing and lots of other factors. But I am still expecting a slow, steady improvement in new vehicle sales here. And that's key to going back to the economy and growth and avoiding recession, because there is some what I would call pent up demand for vehicles out there that have built up. Not as much as I thought

because to Mike's, Mike made this point early on and I, I didn't digest it fully appropriately enough. We just drove so much, so so so much less during the pandemic that we just don't, we just didn't need as many new vehicles because our new vehicles, our cars weren't being used as much during the pandemic. But I do expect us to kind of steadily ramp back up to 17 million units plus by mid-decade. Okay, that's the frame. That's kind of, you know, the baseline forecast. Let me turn to you, Jonathan. What do you think of that? So I probably, I'm on Mike's side in the discussion. And there's a lot of banter about Penton. He took a knife. He decided not to go for the liver. Not to go for the liver, though. He didn't go for the liver. He's waiting for Mike to do that.

He kind of went a little to the right of the liver. Okay, go ahead. privileged to have, you know, views of supply and details that says yes, but to the equation. There's still lingering supply issues that mean that, you know, at best, we're probably looking at 15 this year and there's more of a gradual build. I would agree that we could get back to 17, but in our view, that's probably more of a five-year ramp. But I would argue on the demand side, the most crucial part is affordability. And I think in theory, we could be selling 16.5 million or more this year if we had 2019 prices, interest rates, and incentives.

And none of that is true. Something has to give. Now, as the industry comes back and we get inevitably to an oversupply situation because it's a high fixed capital, fixed cost business that is, prone to an oversupply situation, given the number of players with disparate kind of strategic objectives in mind. There's always one or two players who's going after market share gains, things that are irrational from an end profit motive for the overall industry. So it's inevitable we get to some level that is persistently oversupplied and more cyclically driven.

But in the near term, we're dealing with the most expensive vehicles, tighter credit, much higher interest rates, and all of those things factor into what's possible. And we've got an enormous percentage of the population that just can't afford certainly a new vehicle, but increasingly even a used vehicle. So sales are limited by supply, but you're saying the binding constraint here in terms of sales may actually. be demand. Is that right? In the near term. Once we solve the supply situation, we've yet to see that evident in the supply data.

We're not seeing a buildup suddenly of new vehicle inventory waiting to be sold. But I think we're close to that inflection point if we continue to see production recover. Okay. Mike, does that resonate with you too? That kind of thinking? Affordability is a major concern. and getting into the credit side, do the banks will even want to give out the credit if people do want to loan at these type of rates?

And rates are at multi-year highs. So do you want to go get an 8% loan on a vehicle when you're used to getting 0% interest rate with incentives or in the last vehicle you bought four years ago? So I do think that there is some demand concerns and there are significant demand concerns going forward as I expect the economy to slow. And we're all expecting the economy to slow here over the. next year or so. So I did want to pull out the knife a little bit, though, and talk about those new vehicle sales

numbers. I remember back in episode 11 of this podcast, you'd bet me that new vehicle sales would be averaging $17 million over the next five years. I did the quick math on that. I think we have to average 18.5 million vehicles over the next two and a half years from that point. So I don't know if you want to pay up now or do we want to. No, no, no, no. I take this down to the bitter end. Chris knows that. I'm still waiting for our housing starts. Yeah. Yeah. I think I owe a lot. What's that it going to happen? You know, I got to stop making these

dollar bets. I always lose the dollar bet. Okay, but we're just to just to get you on the record. We're say, am I right? We're at 14, 14.5 million annual hours. No, right now, well, we have 14.8 last month is 15.2, I think we average. So you think we're higher than that? You think we're closer to 15 million years? Yeah, and we're forecasting 15.3 for the year. Yeah, okay.

That's about right. About right. Yeah. Okay. Jonathan, you feel comfortable with that too, like the 15 million range? We're under 15, 14, 6 to 149, but it's because. we're expecting a much rougher third and fourth quarter. So the pace kind of falls off. For the economy broadly, you're saying. Because by the way, we've never had a situation in U.S.

new vehicle market when a recession did not result in production declining. Manufacturers would rather sell 14 million as profitably as they did last year than sell 17 million with excess incentives that essentially mean they don't make profit on those units. Right. That makes sense. And then next year, we're, where are we? Mike? I can't remember. Are we 16, 16 and a half, something like that? Just under 16. Just under 16. Does that sound right to you, Jonathan? Yeah. Again, we're a little bit lower than you, but we're moving in that direction. And so by five years, we're right at 17. Back to 17 million. Okay. All right. Okay, very good. Let's talk about credit because everyone's bringing this up.

So obviously this is in the context of the banking crisis, but even before the banking crisis, auto credit quality was eroding. Underwriting standards were being tightened, and the banking crisis just exacerbate all that. How big a deal is this, Jonathan, how big a deal is this development in terms of the availability and cost of an auto loan?

Oh, credit. Credit is huge. When you look at total transactions in the U.S., close to 60% of vehicle sales are financed. Within new, it's north of 80% are dependent on financing and then used. It's a little over half are dependent on financing. So if credit's not available or if it's very expensive, it's the payment that matters to most consumers. And that's where we've seen even more substantial. change than we've seen on the pricing side because it's the combination of the rise in interest rates. And auto has, along with prices that we just talked about, and auto has experience more of an sticky increase in interest rates than what we're seeing in other types of rates like mortgage rates. And some of that is because if you look at the lending in auto, So it's a serve-all kind of world. Every credit tier is represented because everyone needs access to transportation. And we've got an incredibly sophisticated and large set of lenders who cater to certain parts

of the market and a lot of very strong underwriting that knows how to deal with a higher percentage chance of lower credit tier to your consumers defaulting. and having to repossess a vehicle, but also dealing with the fundamental aspect, unlike housing, that vehicles are naturally a depreciating asset. So there's quite a sophisticated kind of credit world that exists and I think is appropriately adjusting for risk that they're observing in delinquencies and defaults that were deteriorating last year and have what we're leading to tightening. and one of the variables that has changed the most in the last year in credit is yield spreads. For a while, especially in 2021, we had, by historical standards, the narrowest yield spreads we'd ever seen.

So on top of very low interest rates, because of it predating the Fed starting to increase, it meant consumers were seeing the lowest rates ever. Yield spread, meaning the rate that a consumer would see if they got a lot of compared to the risk-free treasury yield. That's right. And we've now, and especially with the banking crisis in March, we observe yield spreads widening quite a bit. And they really reflect the momentum that we were talking about.

That New has positive momentum and used as negative momentum. Well, New has the manufacturers intentionally putting incentive money in their captive finance companies or in their strategic banking partners that keep the rates sometimes lower than the market rate otherwise would be. But the used market doesn't have that kind of player that's willing to kind of compensate for an increase in risk. And so we saw used rates on average go up by almost 90 basis points in March. Almost a percentage point. Yeah, almost a percentage point. So, you know, that that was kind of evidence of people who were thinking that the tightening credit conditions would be equivalent to the Fed having increased 75 basis points instead of a quarter. Right, right.

It's interesting that despite the very strong vehicle prices that we're seeing these credit issues, I mean, because, I mean, I guess use vehicle prices have come in a little bit, but they're still very elevated. from where they were pre-pendemic, right? And despite that, people are defaulting on their autos? Well, they're not defaulting at historical levels. They are just falling behind 30 and 60 days. I see. That makes sense. Yeah.

So I think it's evidence of stress. I think it's absolutely correlated with inflation. It's more severe with subprime than it is in other credit tiers. And it's the higher vehicle prices. And as a result, more people than not have more positive equity. in their vehicle than they would at this point in their loan. It gives them options and makes the lender more willing to work with them if they do run into payment difficulties. So we haven't seen delinquencies turn into similar level of default, but the delinquency level is unprecedented from a

rate perspective. Yeah, you observed that as well, right, Mike, from the Equifax data. Jonathan, I guess you look at that Equifax data too, don't you? Yeah, right? Yes. Yes. So, yeah, I think this march is the, if we seasonally adjusted, it's the highest level since 2010 for all autos, highest level for auto, so we break it out auto finance and auto bank. The banks are people that take deposits, the finance are going to be the, like the captives that don't take deposits, and the niche subprime lenders that also don't take deposits, but they lend to lower credit worthy individuals. So on the auto finance side, it's really, delinquencies are sky high, the highest they've been since the financial crisis. One interesting thing that I wanted to point out was the highest

increase from 2019 until today by credit score banned are those between 680 and 740. If you're looking just 2019 average delinquency rates, total loans to right now. And so I think that's this evidence of credit score inflation. These people are in that 680 to 720 range. now were people that were 600 to 680 four years ago. And so as these people had their student loans deferred, their mortgages deferred for a little bit, all of the fiscal stimulus that took place over the pandemic, they've been able to shift up the credit score spectrum

and now they may be worse borrowers than banks had expected going into making those loans to people that are just above subprime. Hey, Chris, you watch this data carefully as well. Anything you want to add? I mean, that's a lot of detail, but just to be complete. Is there anything that you'd mention? I guess, yeah, I would second all the observations here. I've been sounding an alarm on the current score inflation for a while, so it's not surprising.

I think it's consistent. I would say that the defaults may be low still, but in part because we've gotten a little bit of a lifeline from the higher vehicle prices. So if someone's in trouble, they can potentially sell their vehicle and get out of the loan. But if indeed things turn, at those prices soften, that's when you'll see the defaults really wrapping up. So be a little cautious. We might be in this period where things look okay. Yeah, they get bad pretty quickly.

Prices start to decline. And thankfully, in the short term, we're in tax refund season. And so we saw in March the usual seasonal pattern that delinquencies came down and defaults came down. So we've got a couple of months of reprieve simply because of $300 billion flowing through consumer pocketbooks. It is interesting, you guys, though, despite the pretty dark perspective on what's going on with auto lending, you're still sticking to demand hanging in there, right? and actually improving this next year compared to this. No, right? I mean, despite all that.

Well, I'm characterizing our more conservative outlook for sales this year to be driven by the industry is replacing a supply problem with a demand problem. Okay. So we're at 146, 149 this year. It's weak. It's still weak. Well, the way you frame it is we're still a week. And the reason is not now it's less supply. Well, supply is an issue, but it's more now about demand.

And the weighing on demand is the tightening and underwriting because of what's going on in the auto credit market. So one way to look at it, you know, the industry is a serve every kind of customer. So subprime has a place in both new and the used market. Prior to the pandemic, about 15% of new vehicle loans was consistently subprime. And that is less than they are in the population, roughly 20%, which makes sense given the price of new vehicles. Well, last year we fell to 5%. So effectively 10% of the potential market is no longer there. And it cannot make it work with today's rates because the average subprime new vehicle loan rate is about 20%.

Right. Okay. Just one quick point, and then we're going to play the game. is that we are, even though sales, vehicle sales are still low by pre-pandemic standards, nobody is seeing a decline in new vehicle sales, which would be completely unprecedented, wouldn't it, if we had a recession? I mean, I know these things are simultaneous and, you know, causality is a little difficult to determine, but hard to get to a recession unless you actually see a recession.

unless you actually see some pretty sizable declines of vehicle sales, no? Well, that's, yeah, it's a great question. And we follow your scenarios very closely. And so in our baseline, the answer is, yes, we do not see a decline in vehicle sales. But in our recession scenario, which we follow very closely to your main recession scenario, the S7, I believe, we careful consumer. Yeah. We do anticipate there would be a decline in new vehicle sales close to 10%. Let me put it this way, though.

Okay. Prior to every other recession, I might be exaggerating because I don't know the data as well as you do. Correct me if I'm wrong. We have a what I would call spent up demand. A lot of incentives, people pulled forward their purchases because easy credit, you know, they could buy and they bought ahead of their demographic need, spent up demand. So when you got into the weak economy, that caused, that was a weight on sales and it added

to, contributed to the downturn, made it, made it worse. Vehicle sales, vehicle production, vehicle employment, everything, just craters. This go around, very different situation. We've got pent up demand. We can debate how much, but we're all saying pent up, pent up, not spent up demand. So that puts a kind of a floor under things or feels like it puts a floor under things. Yes. And it makes it less likely the vehicle industry is going to contribute to any economic downturn that we might suffer.

Therefore, it makes it less likely we're going to have an economic recession. Does that, does that resonate? Yes. I think it's, I think you would characterize it as more of a postponement of the recovery than you would a typical downturn. Right. Okay. Mike, does that sound right to you? It's a little tail wagging the dog, but...

Okay. It's hard to distinguish who's the tail, who's the dog here? I think the economy's the dog and the vehicle sales are the tail. Okay, okay. All right, very good. Okay, let's play the game. Let's play the statistics game. Jonathan, you're going to play this game?

Oh, yeah. Absolutely. Okay, very good. The game, just to reiterate is we all, put forward a statistic. The rest of the gang tries to figure that out through questions, clues, deductive reasoning. The best statistics are ones that are not so easy. We get it immediately, not so hard, we never get it. And if it's apropos to the topic at hand, inflation, autos, vehicles, recent data, that all the better. Okay. Chris, I'm going to go with you first.

Just so everyone gets the hang of it. So what's your statistic? Sure, in honor of Marissa, who usually goes first. Yeah, she usually goes first. What Happens. She's gone. She's when AWOL. Yeah, she emailed that. She can't, she can't join today. Okay. My number is related to the topic at hand. Vehicles? Vehicles and inflation. Ooh. Okay. 17.4%. I know it. Oh. Oh. Whoa. Should we, the rest of us know it, Mike? Or is this a very, this is in the weed kind of thing. I think I know it too. I'm going to just because I really. don't know it, but I, and 15%. Oh, and 15%. I don't have that one.

Okay. Could it be, because Mike, I know you know it. Jonathan, do you have any idea? No, not yet. Can I just throw out a, just go for it. Yeah, it's vehicle insurance. That is 15%. Yeah, there you go.

Jonathan. Now, that wasn't the original number. Jonathan, what do you think about what just happened there. Is that impressive or not? That is impressive. Okay. That's what I'm saying. Mike, did you hear that? He's impressed with what's, what's 17.4% though? Mike, oh, go ahead, Mike. What is it? The CPI for motor vehicle repair. Very good. Oh, year over year. Yeah. Yeah. Excellent. Yeah. Well, there's no way we would have got I would have gotten that if he didn't give us the clue up front about inflation and yeah. But that was good. Well,

Well, explain that. I mean that I just got my auto insurance bill and it was it was up. It was a shock. 20%. I mean, what's going on? Talk about affordability. I'm thinking about giving back one of my cars because that's like crazy. Those two are very related to one another.

It's the expense of the parts and the repairs. And the capacity is down in in the service business as well. So there's strong pricing power there. We actually have a software platform that many franchise dealers use to run their service department. And what we have consistently seen is that we've yet to see a recovery in the number of people taking their car in. But the average service ticket has been up double digits because when they do, they're doing more work. Plus, you have the inflation on parts and labor leading to, in many, cases double-digit increases in revenue related to service.

How long does this continue? I mean, here, too, I mean, should we, I mean, it can't keep going up 15, 20 percent, can it? Well, you got a cyclical effect of if you're pricing people out of the new vehicle market, their alternative is to hold on to their existing vehicle longer, which makes them more inclined to take care of the vehicle and address needed investments. So I think you've got a long way to run on this for that part of the market to be more expensive. I'll tell you, though, this is just a zandy anecdote. I've got a lot of kids and they all had a car. They've gone to school and I've kind of just parked a couple of them in the driveway here in the garage.

And I'm thinking to myself, it's obviously disconvenience when they come home. They've got their car and they can go do what they want to do. But that seems like a pretty luxurious convenience, doesn't it, in the context of these insurance increase. So I'm thinking, I'm just going to sell one of these cars. If I'm thinking this way, other people got everything else way, no? Yeah, but if we couldn't get you to do that when prices were at their peak. Yeah, good point. Yeah, yeah.

But that's actually, in the government data, we see an expansion in households with multiple vehicles. That has actually grown when a lot of people had projected. that we would see a decline in vehicle ownership. The opposite is true, and it's principally multi-vehicle families and households that are responsible for that uptick. Interesting. Okay, that was a great statistic. Jonathan?

Why I chose it, my fear is that this increase in repair costs is going to lead to a credit event, right? With folks facing a higher expense with a used car, right? They hit a, you know, these cars are getting older. They're going to face some type of repair. can they afford to actually repair the car or did they give up and turn the keys back in at that point? That's interesting. Something to watch, particularly at that lower end where, you know, people are really stretched already.

They're trying to get into that used vehicle. And on top of that, they're going to face some very expensive repair. Yes. And in order to get a payment that works for them, they've had to consider an older vehicle three to four years older than they would have previously. And they've pushed terms to the longest that have ever existed in the used vehicle side. Yeah, that's very interesting. So, Chris, you think there's some real credit issues for auto loans coming up here, not only because prices are going to come, if prices are coming in,

but as you point out, these very high repair costs, yeah, yeah, good point. Okay, Jonathan, what's your statistic? All right, this is very timely. 4.6%. Is it related to the vehicle industry? To surprise you while and throw you off? No. I mean, it is indirectly, but...

Yeah. Well, everything is indirectly. Yeah. Is it in the CPI report? No. It'll come out this week. Yes. Okay.

Oh, it's a statistic, a government statistic that came out this week? Not government. Oh, okay. Oh, boy. All right. Yeah. So a trade group, it's not... Anything related to small business, is it?

No. No. What else? Oh, today. Wasn't that the inflation expectations? Bingo. University of Michigan. Oh, really?

That's the one year inflation expected median expected inflation jumped a full percentage point. That's weird. In the April Michigan preliminary. I don't believe that. I was surprised by it, too, but that's a substantial change. That doesn't make any sense. whatsoever. I know gas prices up a little bit, but not a lot. Gas prices are rising and there's been a lot of media coverage of the OPEC kind of

implication. So maybe. I don't know. Back to your point about data. What was that? What is that comment you made about data? Yeah. I don't know. That feels weird. What do you, Chris, does that feel weird to you? I don't know. A point feels like a lot. I could see that it ticked up. Yeah, I can see it take up with the gasoline price. That's pretty aggressive. Yeah, interesting, though. That's a good one. That's a really good one.

Scary one. Hopefully it's wrong. Okay, Mike, you want to go? Sure. Minus 8.9%. Is it in the CPI numbers? Yes. So it is a year-over-year price decline for some product or good or service?

Correct. Got it. Is it auto-related? Yes. Oh, gosh. Oh, is it a gas or energy? Not energy. Okay, so we did repair.

We did insurance. We did the actual prices. What's left? Oh, rentals. Yep. Oh, car rentals. Car rentals. Yeah.

That's deductive reasoning right there. Yeah, car rentals. They're down 8.9%. Year over year. Yes. Okay. Now that's, they're vulnerable though, right? They go up, down, they go all around, right?

I'm surprised at that. You know, why, Mike, do you know? Well, the lower costs for the vehicles themselves, lower demand. Everyone was coming out of the pandemic, and they started traveling more, and then that's come down a bit. So the supply side, it's easier supply and a little bit less demand. So they're getting positives on both sides, lower prices. Oh, interesting.

Do you think that continues here? It depends on how used vehicle prices go. If our forecast sticks to script and new vehicle prices come down and use vehicle prices come down and you could see more weakness in the rental space too. Yeah. Interesting. Are fleet sales still up? They're growing substantially. That's where the true pent up demand is coming through loud and clear. So those rental car companies are finally being able to replace and actually improves their performance because the cost of maintenance.

when you're principally using older and previously driven used vehicles was much worse for them. So it could be that, yes, you have sustainable declines in rental, and it's still positive for the rental car companies. Well, I'm going to skip my number just because we're running out of time, and I do want to get to what, really, you're disappointed. Oh, come on. Okay, all right. Okay, you asked for it.

It's not a good one. It's a good one. It just takes us a lot. It takes us a little off the script, but, uh, yeah, I'll do it. Go ahead. All right. All right. You know, it goes to my inherent optimism, you know, glass half full, you know,

inflation coming in. Those are all good, uh, clues. I'm going to give you three numbers. Uh, they're all the same, related to the same thing. 0.3.3.3.8. 5.6. This is a little hard. So, CPI related.

It is a, well, I don't, I'll let you ask another question or two before I give you another clue. It's on the service side of the economy. It's related to- Oh, was it the Supercore? Supercore, okay. So what's the point three? Well, that wasn't that month-to-month? Month-to-month, month-month, super-core inflated. SuperCore is services excluding housing.

So it's the part of the CPI that the Federal Reserve is most focused on, at least ostensibly. And it's been the most persistent, sticky source of inflation. So 0.3 is month to month. What's what's 3.8? The last was year over year. The last one is the year over year. 5.6 is year over year.

What's the, is that some type of moving average? Three month? Six months. Six months. Okay. Which I, you know, six months is generally what I consider to be near-term trend. Near-term trend. Okay.

Point three, three point six, excuse me, three point eight and five point six. That's super core for the month, six month in one year. And I bring that up because it is definitively coming down. You know, the, the, the, this. sixth month, which, again, is I think kind of underlying trend of 3.8, you know, that's within spitting distance of where it was pre-pandemic. You know, pre-pandemic, it was around three. So we're, it's coming in here pretty quickly. And, you know, I take a lot of solace in that. So going back to the beginning of the conversation around the inflation, it's three phases. Phase one is, is what we're

talking about related to the pandemic, supply chains and vehicle prices are kind of, you know, front and center for that phase one. Phase two is the cost of housing services. Talked about that. Base three is core services and all three phases of the slowdown in inflation are now, you know, working together and feels like inflation is coming in, you know, reasonably gracefully. So a reason to be optimistic. Okay. Is that enough to pause or? And in my view, absolutely, yeah. I mean, I don't get it, right? You've got inflation coming in. I just articulated the logic for that. Job growth is slow. wage growth is rolled over.

It's moderating very quickly. And you have the banking crisis in that situation and how that's unfolding. Why in the world wouldn't you just pause at this point and take a look around? I'm not forecasting that's what they'll do. It feels like they want to raise rates one more quarter point. But why? You know, why do that? I don't understand it.

Anyway, let's end the conversation. I want to be respectful of time. with a little bit of a longer-term look, in this big decision, seemingly big decision by the administration and the EPA to really tighten down on emission standards in an effort to significantly increase electric vehicles here going forward. I can't remember what the forecast is, but they're saying 10 years from now what EV is going to be, what proportion of sales? 67% of light vehicles and half of the some of the commercial vehicles. Yeah.

So what do you think, Jonathan? Is this, what do you think of this move? It wasn't a surprise. It was widely understood that something like this would be coming. It clearly is, I think, aggressive. It is not necessarily substantially out of the range. of what's possible, but we look at a lot of production forecasts that I would say are more supply driven. And if the production capacity and what manufacturers have planned doesn't seem capable

of lining up with that number, then it makes it less likely because we've yet to get to the point with electric vehicles where consumer adoption is the issue. We're selling every one because there's willing takers when you're selling a million or less. But when we have to sell six million, 12 million, that's an entirely different proposition that requires middle America to purchase. And the reality is if we named affordability as the top issue, electric vehicles are much more expensive and still are than the average vehicle that we're selling. And so I think we've got a lot of things that are going to have to go right, both on the supply chain and production side and on the infrastructure charging network for further consumer subsidies, there's going to have

to be real consumer adoption for this to take place. I suppose it's one of those things, well, even if you don't get two-thirds, but it got a half. It's still victory, isn't it? I mean, that's still, maybe the two-thirds comes in 15 years, you know, or something like that. Yeah, and I definitely think on the light vehicles half in 10 years is entirely possible now based on what's already planned and in the pipeline. But vehicles take on average about five years for a new model to be planned and introduced. And it really, to try to go from 50 to 67% in the same time frame,

really means a lot of action has to take place in the next couple of years for that to even come to fruition. Mike, what do you think about this move? I agree with the 50% number. The move, you're basically making it impossible for companies to reach these new standards without bringing electric vehicles. So that's why they did it this way instead of putting in those mandates. It's a lot more politically palatable to say, oh, these are these new mandates, but these mandates aren't possible with current technology. So they're basically putting a mandate in for electric vehicle adoption, just being a little, backdoor with it.

So we do need to get there. This is a good way to get it through without all the backlash. In terms of the affordability, our forecast looks for price parity out into 2025. So I don't think that even this is sticker price, not even lifetime costs. Sticker price, if we are able to return to pre-pandemic battery cost depreciation or decrease in costs because of increases in scale and technology, if we get back to those pre-pandemic trends, we can get at-price parity in the next few years. And once we can get at price parity at sticker, I think 50% is easy in terms of demand. The other 50% in terms of the infrastructure, I know,

I'm thinking, in my own house, I don't want to be driving down to Florida and stop for an hour and a half with three kids in the back of the car to charge a vehicle. I want a car where they can fill up in 10 minutes. Have you actually done that, right, Mike? Have you actually done that? Once a year, yep. Yeah, that's like, that'd be like 22 hours or something. I can, the past, talking state line, or are you going all the way to Vero? Oh, good point.

Good point. Yeah, good point. Because that's another four hours, five hours. Yeah. Yeah. Okay, so that's interesting because you do a lot of work forecasting prices for electric vehicles. And you're saying by 2025, you said, that EV prices are going to be, on par with the IC prices.

That's what our projection was before the pandemic. There's been a lot of supply chain issues in terms of lithium and graphite, cobalt, all the things that go into the batteries that may have thrown that off. But that was our prediction before the pandemic. Is that with government subsidies? Yeah, I was going to ask. Without government subsidies. Oh, wow.

Interesting. Yeah. I just need to hold on for two more years or something. All right, I can do it. Yeah. Yeah. Does that sound right to you, Jonathan, about the price parity? I agree we will get to a point at some point.

I think there's a lot of complications, though, with even some of the moves that we have with incentives and the like that create more challenges with China that dominates and controls a lot of the battery magnets and critical inputs on the mineral. side that still you can't get to the number of volumes with today's sources and inputs. There's a lot of moves that are going to have to be done that we can't account for. And I would say similar issue is true. If you think about the demand side for the cost of electricity, the grid capability to handle the volume load, there's a lot of movement that has to be made on that side too. Now, I live in Georgia where we have plenty of capacity. It's not going to be an issue, but there are already states that are at their limit on what they can deliver in the near term without this adding to it as well.

So lots of things are going to have to move in concert in the right direction to make that 50% possible. And so I think it's going to be an interesting next 10 years. And the automakers, are they on board with this? Are they resistant to it? How do they view all this? The good thing, bad thing, or they're just this is the reality of the thing? they're going to execute? I think it's more the latter.

And all of them have stated goals and objectives, and some are more aggressive than others. Everybody sees this as the inevitable direction of where the technology and the industry is going. I think what they want to do, and it's part of what Mike was alluding to the way the rules were written, they want flexibility so that they can have slightly different strategies in terms of how it's delivered. And I think technically the rule is written that way that if you come up with a fuel cell alternative, you're delivering the same, you know, the results.

So I think, I don't think you're going to have the manufacturers largely contending with this. Yeah. And I guess what once you go down this path, it's going to be more difficult for future administrations, even if they were opposed to this to roll it back, right? because so much investment will have been made, so many sunk costs have been incurred, that rolling it back would be pretty disruptive. Is that fair to say? Because you would think that politically this is kind of a hot potato a bit and some future administration might.

I think the rollback risk is probably just the next election. And once you get asked that, you're absolutely right. Yeah. But by the way, when you look at electric vehicle adoption, there's two Americas. We have counties with electric vehicles, and we have far more counties with no electric vehicles. So there is quite a divide. Yeah, I guess it's urban rural, too, to some degree, right? Absolutely.

Yeah, we're good, for sure. Okay, I think we're at time. Just a quick open end to the question, anything big on the vehicle radar screen I missed? Entirely possible. We covered it pretty well. You want to go get at lunch. I can feel it. Yeah.

We hit all the right topics. We hit all the right topics. Okay, great. Well, very good. Jonathan was always a pleasure having you on. You know, I do generally take guests down in dirty into the data, but I never take them into the complete bowels of the data. And you did that. You went all the way into the bowels of the data.

I think you actually have a spreadsheet where you can actually calculate, you know, what the BLS is going to say on these things. But that's very impressive. Yeah, very impressive. And you've got a kindred spirit in Bristina. over here, you know, Brisson will go down, down into the bells as well with you. Chris, not so much. He's, he's more of a 5,000 foot kind of guy. Yeah. Anyway, it was a pleasure. I want to thank everybody for listening in. I do want to remind you if you've got any questions for us,

fire away. We're going to take some listener questions in the next podcast or two, and we'll talk to you next week. Take care now. Bye-bye.