Moody's Talks - Inside Economics - Cruise Controls or Smoke Signals

Episode Date: July 18, 2025

Automotive economists Jonathan Smoke (Cox Automotive) and Michael Brisson (Moody's Analytics) join Mark and Cris to discuss industry conditions, tariff impacts on production and pricing, and their divergent views on auto credit's future. Inside Economics producer, Sara Rodriguez, makes a special guest appearance to settle the podcast's ongoing chit-chat debate.Read more articles by Jonathan Smoke hereRelated Research on today's topic: Click here and hereGuests: Mike Brisson - director - Economic Research, Jonathan Smoke - Chief Economist & Economic Advisor for Cox AutomotiveHosts: Mark Zandi – Chief Economist, Moody’s Analytics, Cris deRitis – Deputy Chief Economist, Moody’s Analytics, and Marisa DiNatale – Senior Director - Head of Global Forecasting, Moody’s AnalyticsFollow Mark Zandi on 'X' and BlueSky @MarkZandi, Cris deRitis on LinkedIn, and Marisa DiNatale on LinkedInQuestions or Comments, please email us at [e-mail]. We would love to hear from you.   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 Sandy, the chief economist of Moody's Analytics, and I'm joined by my trusty co-host, Chris DeReedies. Hey, Chris. Hey, Mark. So you're back in your white shirt? Oh, this is a light blue shirt. A light blue shirt.

Oh, yeah. Baby blue, powder blue. Yes. It looks good. So what? You have white shirts and baby blue shirts? Mostly white shirts and occasionally, you know, like a wild with a light blue shirt.

Well, it looks good. It looks good. You've got the traditional, was that a Vero Beach T-shirt? Yeah, yeah. You know, it's the dead of summer. It's brutally hot outside. Therefore, I'm freezing inside. It's like my wife is killing me.

I'm telling you. You know, we have a battle over the thermostat, you know, constantly. And but here I am. I've been reduced to wearing my Vero Beach. what would you call this? It's not a sweatshirt. That's a long-sleeve t-shirt. Yeah, long-sleeve t-shirt, yeah.

It's kind of like a surfing shirt, like a surfing shirt, if people can imagine. But this gets to a point about, and we've got a couple other guests, which I'll introduce in just a second, but this gets to, well, maybe I'll introduce them now. Why don't I do that? And then, because I want to talk about chit-chat

because, you know, this creates a bit of a controversy. And I want to welcome Jonathan Smoke. Hey, Jonathan? Hey, Mark. Jonathan, this is your fifth time on Inside Economics. How does that, that's a record. No one has been on more than you on Inside Economics. I'm a loyal listener and I was fully aware that at least someone else had reached four.

So it was time to be on to keep the leaderboard. Keep it going, man. Yeah. Thanks for, thanks for coming. And you're with Cox Automotive. But you're Director of Research, I've kind of lost track. I know you're running the show over there. Chief Economist.

I also support the rest of Cox's business as economic advisor. So I've been here for now over eight years. Eight years. But as you know, I started out in housing and spent over 20 years doing that. So certainly pay attention to the macro trends and what's going on with the consumer. All right. And it looks like you're hailing from your office in Atlanta. That is right.

Oh, very cool. Talk about hot, I would assume. It's been even hotter than normal the last couple of weeks, yeah. Right. Well, thanks for joining. And we also have our crack vehicle analyst, Mike Brisson, on board. Hey, Mike. Hey, Mark, how's going?

Good, good, good. And I think you've been on at least five times, no? I think a little bit more, yes. Like the two of you come together. It's like, you know, chocolate and vanilla ice cream or something. Yes. If we can't get Jonathan, I'm on, but when I'm here, easier too. Yeah.

Well, it's good to have you. So, Jonathan, you know, because you're a loyal listener, we had this whole conversation around chit chat last week. And my son had said, you know, cut the chit chat. And so I was, we did a little bit of debate and said, we'll do a poll. and we, I'll have to tell you, enormous response rate to a poll we did on LinkedIn, you know, I think the response rate was higher than the Bureau of Labor Statistics, you know. That's not how people are passionate about it.

They are definitely passionate. And you want to know the result of, first of all, we'll describe the poll and then give you the results. And this is going to put the bed, you know, any questions about the chit-chat, I think, I think. So to help us with that, we're going to bring in Sarah, Sarah Rodriguez. Hey, Sarah. Hi, Mark. And Sarah, for all the listeners out there, is the engine for this podcast. She makes it tick, you know, from everything from figuring out a guest to making sure

that the podcast is well done. The production is with the resources, limited resources she has, you know. And we're getting more resources in terms of. of the production quality of what we're doing, to making sure guests get what they need to come on and making sure that we get the social media exposure that the podcast deserves, but from A to Z. And so you ran the poll on LinkedIn, right?

I did. Well, thank you for that introduction. We did have a poll. We had an enormous amount of votes. We had over 400 people vote. 400. It's overwhelming. People love the chitchat.

91% want some form of chichet, whether it's a little bit or a lot of it and they live for it, people like the chit-chat. Okay. There is a bit of a distinction though, right? We made the chit-chat, give me all chichet. The other was give me. Three options. Okay.

One was I live for the banter. One was a little is fine, but be brief. And the other one was none straight to the data. But only 9% of people voted for no chit-chat. Renaud Chichot. And that doesn't include all the comments that we got of people saying how much they love talking about Bachi Ball, Chris's lifestyles of the rich and famous. Pickle ball. People loved all the little stories that go along with the podcast.

Yeah, you know, the whole rich and famous thing, it's so true, you know, he goes off to Italy, you know, with his with his Bitcoin winnings. His college shirts. Can you say botchee ball again? I know we're mispronouncing it. Well, how do you say it again? Bochette ball, bonce ball. Jonathan, did you know? Of course you knew that because you were a long-time listener.

Bochie ball. Yes. I would love to see him playing, but save that for another day. Aren't you envious of Chris in his lifestyle? I mean, it's like, you know. I'm envious of that lifestyle. We did get some detractors, Sarah, I'll have to say. Very few.

Very few. Yeah. There was one comment about baboon or something I can't remember. Very impassioned. Very impassioned. We did have someone email that was very much against the chit-chat and you guys know how much. That was my son, I think. I think it was my son.

It's another Zandi. It's another Zandi. Because I'm not even going to go into what the guy said, but I thought it was pretty funny. Anyway, all right. Okay, enough chit-chat. Unless someone has something else to say on the chit-chat. Mike, do you have any views on the chit-chat? You didn't weigh in.

I love it. You love you. You're all up to, yes. Very good, very good. Actually, I would have been devastated if people didn't like the chit-chat, you know? What would I have done? Yeah. What would I have done?

I mean, I would have been, like, so depressed. but fortunately we would have we would have recorded and then just edit it i know yeah this is the funest part for i thought to tell you i think i've said this before i love doing this podcast i just love it because you know so relaxed we just really uh you know talk about lots of different issues in a in a free flowing way you know we're not you know uh guarded so i really enjoy it um okay uh well let's get down to brass tax uh you know uh uh Jonathan, I'm going to turn to you first. I get this question three, four, five times a day.

It's a difficult question. It's like, how's the economy doing, Mark? It's like, how do you answer that question? How's the economy doing, Jonathan? Well, I get those questions too, Mark. And I know. I can definitely say the last quarter in particular was quite a ride in terms of the roller coaster that we've all been on for the economy and especially the auto market.

Part of the reason I've been on here five times is because the auto market continues to be ground zero for major things happening in the economy and now add tariffs to the mix. But because auto really was the beginning of this quarter that the tariffs on all imported vehicles and then a month later the tariffs on parts went in. into effect. And I would say looking at the hard data, what we've seen thus far has certainly not been catastrophic for the economy or the vehicle market. Everything has turned out a little bit better or benign so far. And actually, I would argue for the vehicle market, the second quarter wasn't bad at all because we had initially a surge in buying activity that basically

boosted sales in both new and used vehicles as people wanted to get ahead of potential price increases. But as a result of that, the quarter was absolutely useless for predicting what comes next because it was merely the beginning of the roller coaster ride and most of that was the car going up And what happens next is dependent on a couple of things. One is how the economy fares. So that's why the chit-chat and dialogue and the real substance every week about what's really going on in the economy is so important. But then frankly, what Mike and I are looking at in the underlying data

is we really haven't seen too much of a real impact in the auto market from tariffs coming through. So we're in the early chapters, the early stages of really seeing how the on-the-market adjusts, and yet, you know, here we are three months into tariffs, quote-unquote, being in effect. And I certainly, on the one hand, can say that the market's been resilient and really showing not a substantial amount of decline so far. We basically had a frenzy, and now we've come off that frenzy. more or less where we were before the frenzy began. But I think we have substantial risk of cooling demand because rates are high and are not unlikely to go lower because of the uncertainty with geopolitics, inflation, interest rates,

and meanwhile, in the auto market, the endgame for tariffs remain incredibly high. So I think we've gone from urgency to now a severe problem of consumers and businesses who buy vehicles basically saying that we need to know where tariffs end up before we decide to act. And so I think we're very likely to see a pretty substantial slowdown. But it's more in the new vehicle market. As you know, we cover the used vehicle market in depth too. And I would say the net effect of that is actually the use market is especially likely to remain very resilient because we are an economy that is very dependent on personal transportation.

and people have accidents and people still have jobs and need a way to get to get around. And so I think the net effect is really more of an impact we're going to, we're going to be seeing in the new vehicle market, but it's yet to be evident in the data. Okay. So I asked you, how's the economy doing? And not unexpectedly, you look at it through the prism of the vehicle market. And you're saying, well, it's up down all around, you know, but look at the economy. through the volatility, it feels like it's okay. I'm kind of paraphrasing just to make sure I got it right. But it sounds like you're just nervous about where things are headed here, given all the

moving parts. Is that roughly right? Yeah. And in the broader economy, I think what we see in the retail sales numbers, and I've shifted to paying attention to Bloomberg publishes a second measure of consumer spending, which is only about a two-week lag in the data. You could and observe what's happening week over week. And it's mirroring what we're seeing in the auto market, meaning there was a surge in buying and spending activity. In April, it's been slowing since, but it's not turned negative on a year-over-year basis.

It's just slightly positive. It lines up with what we see in the lagged retail sales numbers and the personal spending numbers. I think the labor market represents a huge amount of risk. That's been the key story to the result. consumer and largely the hard data has has not turned negative yet, but, you know, I believe that we're likely due to see, just like you've discussed in recent podcasts, the revisions when we get the August data is probably going to indicate we've had far fewer jobs created

over the last year than, than we've been relying on. But, you know, the silver lining is, I don't think they're negative. I think it's just been more consistent with what we all were expecting to happen, which was a pretty dramatic slowing in hiring. But thankfully, the layoff numbers are not growing. We're not really seeing new initial claims break out into a negative story. It's more that hiring has slowed and so people who do lose their job are staying on unemployment benefits for a longer period of time. And things, you know, the housing market couldn't be weaker. And all of those things sort of contribute to vehicle demand. And so, of course, we're paying very close attention to it. And then credit is the other piece that I think is hugely complicated. The, you know, we've had

the passage of the bill that's not going to help us lower long-term rates. It's likely to, you know, be a modest... talking about the big beautiful bill, the BBB, the reconciliation. That's right. Yeah. Yeah. I think it generally provides a little bit of modest boost for the economy the rest of the year and next year, like, for example, with the business benefit of expensing, you know, per capital investments. And so, you know, net, net, that's now a positive and we certainly taken a negative off. But the biggest negative of it is deficit spending that ensures that longer-term rates are not likely to get lower.

And it's very expensive to finance a vehicle. It's very expensive, obviously, to finance a home purchase. And then we're also seeing less than perfect auto loan performance because delinquencies continue to be very high. And defaults are, my calculation on a year or today, default rate using Equifax data through June is closest to what it was in 2007. And I would argue that's not a good comp to be saying that the consumer is okay. So that doesn't speak to an environment that's super favorable for growth. So there's not a lot of room for error, I think.

You sound a little blue to me. I mean, on the dark side, on the negative side. There's a lot to unpack there and we'll come back to all of that. But let me turn to Mike and maybe you can put some numbers around this, Mike, in terms of vehicle sales. Because like in my mind, you know, coming into this year, the underlying rate of new vehicle sales, light vehicle sales was something 15.5 million-ish, maybe 15, 15.5 million. We got a bump when it became clear that we were going to get to. tariffs and people bought forward thinking that the tariffs were going to cause prices for vehicles to rise. So we got into the 17 million SAR seasonally adjusted annual rate. I think that was kind of, correct me if I'm wrong, but like a in March and April kind of period. And then now we're

back down to like 15, 15.5 million. And the question is where we go. Did is that, did I get those Mike numbers roughly right? And how do you, how would you answer the question about is the, how's the economy doing? Yeah, roughly right. So we had 15.8 million last year total. 15.8? Okay. Yeah, but a lot of that jump happened in the end of the year, kind of a Trump bump

after the election where jumped up to 16.7, 16.9 last two months of the year after the election. So remember consumer confidence jumped after the election. So people went out and bought. People also bought trying to purchase EVs because they thought that the tax credit go away rightly. They also thought that there was going to be tariffs rightly. And so there was a bump right after the election. And then kind of a slowdown in January, didn't really know what was going to happen. Then there was the introduction of tariffs in March. And that shot up to 17.8.

And then roll over into April when they were actually introduced and when they were implemented, because people are still buying the beginning of the month, 17.3. And then back down to 15.5. 15.6 in May and then 15.3 in June. So coming off that high, so the two separate bumps, two humped camel in the end of the year and in the spring, and then it's come back down in May and June. Yeah. Does I suggest there's more weakness dead ahead because of the pull forward? I mean, if I'm getting, you know, 17 million plus for a couple, three, four months, And I'm back down to where trend was, you know, before this all began, suggests that we still have a fair amount of weakness debt ahead.

Is that right? Definitely. And our expectation for new vehicle prices are to rise, whether that be from decreased incentives, increase MSRPs, we do expect new vehicle prices to rise. And the elasticity of demand on new vehicles, you expect it to decrease. I think we do a point one on that for us. So I think we took almost a million vehicles off of our new vehicle sales just from the expected price increase. I think we have new vehicle prices going up about 8% over the next 12 to 16 months.

So we do have a decrease in demand just from the increase in prices. The pull forward, it's going to move some of it, shifts it around. So you have a little bit less towards the end of the year than you would have based on the normal elasticity. but to spread it out over the next, say, 16 months, I think the real driver is going to be that price increase that drives down total sales. 16 months. Why 16 months? I mean, I would have said 12 or 18.

What's the 16? I'm just curious. Did you just pick that? 16 is exactly where they introduce tariffs to June, July of the next year. So it's 12 months from now, four months plus the, end of the... Okay, okay. All right, very good.

Very good. Jonathan, is that sound right to you? I mean, do you think there's some backside to the forward buying debt ahead? And are we going to get those price increases on vehicles? So our thinking is very similar with regards to the elasticity and what's expected with pricing. We put out a range of 4 to 8 percent because there will be choices by the manufacturing. manufacturers. And a good analogy is actually the last time we had an executive order tariff of this magnitude applied to vehicles. You only had a couple of single digit percentage

increases in prices because the vehicles affected, stopped being imported. And you didn't really have the flow through of the tariffs. And that was the chicken tax back in 1964. So we do think that it changes the overall fundamental demand and we go to the neighborhood of 15 million. And I really think that that's the SAR we're going to see for the next six to nine months is average closer to 15 as a result of that. But it's contingent on actually seeing what the manufacturers decide to do. When you look at the pricing, you basically see that there's two types of vehicles that are most significantly impacted by the tariffs. There are the most expensive luxury high-performance vehicles, think McLaren's and Lamborghinis, the kind of, Chris is driving to Bocci.

Bouchier, Bucci. So those likely have very low elasticity that you're not going to get out of line for your Ferrari allocation that you're waiting for. But the other end of the spectrum, which is very, the most price sensitive are all the vehicles that are priced under $30,000, the most affordable vehicles, 23 models, and what we would expect to see is many of them get eliminated. They just don't make sense to try to do anymore, which, by the way, is exactly what happened when you say eliminated. What do you mean eliminated?

Manufacturers stop making and selling those vehicles in the U.S. Oh, really? Especially. Because they all come. Almost all of them are made in either. Mexico, Japan, or South Korea. It doesn't necessarily mean that companies like Toyota and Honda and Hyundai are going to stop making those vehicles, but they may make the decision to stop selling them in the U.S. And they represent a pretty large volume of vehicles that get you to that 15 million number pretty quickly.

So that all makes sense. I would argue the pull forward, there's two countervailing forces going on. We do have built up pent of demand. The industry has delivered far fewer retail transactions over the last five years than they would normally deliver. And I think you can argue that there's somewhere in the neighborhood of three to eight million vehicle purchases that weren't made and people are driving the oldest vehicles we've ever had an operation. So if prices were lower and affordability was better,

especially from a monthly payment perspective, you would see people coming back into the market. So that helps to mitigate a little bit of any negative impact of pull forward. But I think even worse than the pull forward effect is the fact that we don't know where tariffs are going to end, where they land. And I think the prevailing wisdom on the part of the crowd of buyers, both consumers and fleet, purchasers, which are not a small part of the market, are basically airing on the side of the deal with the UK is more likely where tariffs are going to go, 10%, not 25%. So why pull the trigger anytime soon if prices are going up?

So I think you're going to see a very weak retail market with very high incentives to keep the market moving along while this uncertainty persists. And of course, that's going to negatively impact manufacturer margins, potentially dealer margins as well. It will have an impact on the decisions made for the economy. So it'll be a really interesting next couple of months. So the tariffs on auto autos is 25%. I think it's a sectoral, so-called sectoral tariff across the board. There's some carve-outs, I guess, for USMCA, Canada, Mexico, but 25%.

And it's not really a carve-out. They get credit for U.S. content, which effectively lowers their tariff rate to closer to 15%, we believe. 15. Okay. So if it's 25, 15, ultimately, what do you think the price increase is actually going to be on a new vehicle? Well, just like Mike, our calculation was 8%. 8%. Okay. But we think that to achieve that, the buyer has to be complicit in that transaction. Right. I'm not so certain that the market is capable of actually delivering an 8%.

So I think it's... You're saying demand is going to be weak because of the affordability and they just can't get 8%. And in the vehicle market, when demand is weak, incentives go up and effectively that means what people are paying is lower, not higher. Yeah. That's why you get, as you said, four to eight. So eight, you know, four to eight. Okay. The one thing I did see, and I didn't dig into it. So maybe you have, I did read a piece, and I think it was on Bloomberg, that the Japanese automakers, if you look at their export prices, which is our import price on vehicles, they were down a lot. So it suggests that the Japanese automakers are actually eating, you know, some of the tariff increases in the form of lower cutting their own prices. Are you observing that as well? Is that right?

Well, we are observing that we've yet to see any solid evidence of changes in pricing. And some of it is hugely complicated by prices are really slow moving in the new vehicle market. They're tied heavily to stickers. Stickers or MSRPs are effectively usually only changed twice a year by a manufacturer. and the most important one is when they launch a vehicle. And so beneath all of these dates and where we are is we are at the time of the year when normally the new model year, model year 26, is really ramping up. And we've not seen those vehicles show up.

And so part of why we haven't really seen a lot of change in pricing so far is because we're still selling off the 25s and there hasn't been any change. to sticker, a substantial change to sticker or invoices charged to the dealers. So there are a lot of nuances to it. And actually, I think the 16 month by Mike is brilliant because it gets us to model year 27 that effectively would be the end of this working through the roller coaster. Mike, you see how he's sucking up? I would never do that to you, you know? I know you would have Mark. You know, Jonathan and I'll ask Mac the same question.

Do you think the 25% and then 15% on Canada, Mexico vehicles, effective? Is that here to stay? I know that's like a terribly unfair question, but you know, you're doing a forecast like we are putting pen to paper. We have to have an assumption. Do you think a year from now it's still going to be 25% on the other side of the USMCA deal? Now, the assumption we've made for the longer term numbers is an effective tariff rate of 12%. So when you do think deals will be made that will reduce that closer to that level of 12%,

and if so, I think the market can handle it. There's still an elasticity impact that reduces the volumes and puts you in more of a 15.5, 16 million long-term rate as being the most viable. amount of fundamental demand. But, you know, as I was mentioning, the luxury part of the market, I can handle that increase. Yeah, right. There is an affordability problem that limits the vehicle market in total. But when you look at the individual segments, the people who really drive the new vehicle

market, the top two income quintiles, they don't have an affordability problem. They're not spending a record amount of money on transportation, even with the inflation that we've had in new vehicle prices already. Hey, Mike, you heard the 12.5% effective tariff rate. You know, we're at 25 excluding Canada, Mexico, and we get down to 12.5. Is that roughly consistent with our expectation? I think we're a little bit higher. A little bit higher.

There still is the 25% on Canada and Mexico for vehicles produced in Canada and Mexico. So they're just none of the Canadian and Mexican parts. They're supposed to have a system in place for the Canadian and Mexican parts to be 25% as well for those sectoral tariffs. But our pen to paper is second half of 26. Those will be back down to pre-tariff range. So we expect a new USMCA to be in place in the second half of 2026, which will end the Canada and Mexico tariffs. However, we do expect the ones on the EU, Japan, Korea, that's the majority of where our vehicles are coming from outside of North America, that we do expect to stay in place at 25% for the remainder of the president's term. Okay.

Hey, Chris, before I move on, anything you want to push back on here or tease out? I'm more of a curiosity about EVs, given the tariffs on copper now and just other tariffs. And also this idea of the segmentation that you talked about, Jonathan, in terms about upper end and lower end. Any thoughts in terms of the impact of all the tariffs on EV prices? Does this kill the market or slow it down considerably? Or do you see that as continuing? Removing the credits alone, I think you're putting us on a short-term roller coaster ride up and then a big decline down. in the in the fourth quarter. Yeah, if you take Tesla out of the numbers, you basically have

all of the high volume EVs are imported. So there's there's no question. There are challenges on the pricing of EVs that certainly then take the credits off of the equation and it's really hard to deliver an affordable, affordably priced EV in the U.S. market. Very great. Well, the other impact The other thing that has happened recently that, and I think you mentioned this, Jonathan, it could in fact demand, I guess as we make our way into 2026, is the deductibility of auto interest expense. This is a provision in the BBB, the big, beautiful bill, the reconciliation package. And I guess maybe you can just describe, you know, what that benefit, that tax cut is and what impact you think that's going to have on demand.

Presumably, that helps to mitigate some of all the other things, the tariffs and some of the other things we're talking about. But to what degree, I guess, is the question. Yeah, I do think it was a benefit that was essentially an encouragement to have auto dealers, especially in the manufacturers to go along with. other changes happening, especially with tariffs. So it basically allows deductibility on interest on auto loans, which is really outside of mortgages the first time we've had this since the Reagan tax years and deductibility went away. But it has rules on limitations. It has to be U.S. assembled.

Obviously, it's just a loan. and there are income limits that phase out deductibility if you're a single filer making 100,000 or more. And if you're a joint filer, it's at 200,000. But it doesn't require itemizing. So it is a much broader pool than we thought it would initially be if it was only limited to itemizers. But it's one of those provisions of the bill that isn't permanent. In fact, it only lasts for calendar year 25 through 28. And yes, it's retroactive.

So if anybody's bought a loan, bought a vehicle with a loan, U.S. made vehicle or U.S. assembled vehicle, then you might be able to get an interest. Oh, this year. So if I bought a car in March on credit, if I used an auto loan, then I could duck. Oh, really? I didn't know that. Okay, interesting. You lease, though, Mark, right? Well, let's not go there, Mike.

So on that, I think that it's going to move the market a little bit from lease to loans, because if you're making that decision, you might as well take the tax credit yourself rather than take the lease. So on the margin, I think, it's going to move. We've just picked back up in leasing where we were even a little bit higher prior to the pandemic. So it went way down during the pandemic. People didn't know how much they were going to drive. So people stopped leasing for a little bit there. And then I think this is going to start to move the market back. down again on leasing.

Yeah, I agree. I think it's hard to argue that somebody is now going to say, I'm buying a new vehicle when they weren't thinking of it before because it can be deductible. And oh, by the way, when you think through the amortization of an auto loan, you don't have a lot of interest portion. So an average loan in a single year is producing between two and at most around $4,000 in interest expense.

And it declines with each year. So if you're trying to maximize the deduction, you would have had to have originated that auto loan on January. So you had to have known this was coming to get the max deduction. And the effective tax savings that you would end up making would be less than one of your monthly payments. So I don't think it's going to drive a lot of incremental demand. But I do, as Mike said, it's going to influence decisions about financing versus leasing.

And actually, what's been really elevated in the industry since interest rates have been going up has been a much higher portion of people that have been financing with, I mean, not financing. They've been paying with cash. And so it could influence an uptick in loans relative to the purchases already being planned. But I don't really think it's going to have a huge impact on the market. And by the way, if you take that, so 52% of our vehicles sold in the U.S. are assembled in the U.S. 82% of vehicles last year were financed with a loan. And then add to that the income limits, and you basically have about 84% of what's left. So it roughly turns into math that only around a third of new vehicle sales will end up qualifying for this deduction.

And the deduction will be, you know, about $2.2.000. $2,000. Sounds like that would have been a good stat for the stats game. Yeah. What we'll do is just in a minute. Mike, are you going to say something? And that one third,

those people are mostly people that were already taking out loans. So it's not going to drive a huge increase in balances because that one third figure that they're on the lower income scale. So they weren't paying cash and switching over to loans because they needed a finance to begin with. And the funniest thing about the tax bill, this specific provision, is there's a max deduction of $10,000. Well, to get the max deduction, you need an auto loan of about $120,000. Wow.

Mind you, it has to be U.S. made. So I don't know, Mark, you may drive fully decked out. That's Chris. It's all about Chris here. It's all about Chris. I was going to ask something. Oh, so what you're saying is when it comes down to how much of a lift this is going to provide to the vehicle market, it's on the margin. It doesn't feel like that big a deal.

It's a bit of a tailwind, but it's just a bit of a tailwind. That is right. I think it does benefit the manufacturers and the dealers who represent the U.S. assembled vehicles because that is a portion that they make more money when they finance vehicles. No question. No question. Okay. Hey, Mike, one other question before you go play the stats game. You know, Johnson made this point about the used vehicle market.

You know, the new vehicle market might get hit, but you might push more people into the used vehicle market. Do you, can you talk a little bit about, this may be an unfair question, but I'll ask it anyway. Do you know in terms of the impact on the broader macro economy, like GDP, and jobs, you know, all in, which is more important? Is it the new vehicle market, the used vehicle market? Do you have any sense of that? The new vehicle market. The new vehicle market.

Yes. Because it's production. It's all the production. Right. Okay. So the use vehicle market is that, I guess, the sales process, what's going on with financing, repair, but that's small compared to the production of a new vehicle. I wouldn't say small, but it's smaller.

Yes. Smaller. Okay. Yes. Jonathan, do you have any color on that? I've always been curious, you know. Well, yes, I would agree with Mike in terms of impact on GDP. There's no question the manufacturing component of the new vehicle market is far more significant.

And new vehicles have a lot more financing than used vehicles do. So that portion. But it's substantial. The used market, you know, the total new market is 16, 17 million. The total used market is around 40 million. So there are far more transactions. And in terms of how everyday consumers kind of deal with transportation, the use market is much more associated with the average household.

And so as a result, the use market touches the consumer and the economy more directly. And I would argue the used market is far more dynamic and far more efficient in terms of pricing movements. You know, the wholesale auction marketplace is the closest thing you can get to an efficient market outside of the stock market. So someday we're going to have to have you guys come join us at one of the Mannheim locations and see what this looks like in real time. Yeah, I'd love to do that. Yeah. So all of this means use vehicle prices are going to go up a bit. I guess it also means, I mean, new vehicle prices are going to go up somewhat 48%.

And the used vehicle prices are also going to go up, right? Because of demand and, okay. So this will add to inflation, you know, going forward. Okay. Yes. Yes. Okay. Okay.

And we've already seen some increase in prices already without the tariffs actually having a tangible impact. because people are anticipating the reaction yeah taking advantage yeah okay which is not surprising okay I want to come play the game

and then I want to come back and talk about you know what's going on with the auto loan delinquency credit talk a little bit about student loans because I know you've been doing some work on that Jonathan

well let's play the game the stats game we each put forward a stat the rest of the group tries to figure that out with clues questions to Dr. Reasons the best stat is one that's not so easy. We get it immediately, one that's not so hard. We never get it. And if it's apropos to the topic at hand, obviously the vehicle market, all the better.

Because Marissa is not here, which has the benefit that at least one of us can win because Maris is a maven at this game. Let's go with Chris. Chris, you want to go first? Sure. My number is 89. Related to the vehicle market? No.

Oh. Is it related to a stat that can? came out this week? Yes. Small business survey? Yes. Which component? Not the headline.

Hiring. Yeah. Who got that? Jonathan got it. Hiring. Is it hiring? Nope. No.

No? No. Is it related to prices? No. Not directly. No. Investments. Put us out of us our misery, Chris.

What is it? It's the uncertainty index. Oh, right, of course. That's a summary of all the questions where the respondents answered don't know or uncertain. And the good news, it's coming down. It dropped five points in May, which is the most recent data point. And so it's back down to where it was in December. So somewhat of an improvement, but that's still relatively high.

compared to history. So it seems like small businesses at least are taking a breather here, at least getting a little bit more comfortable with the situation. Feeling a little bit better, at least for the time being. The one question or component I look at now more consistently is around prices, you know, average selling prices and the plans to raise prices. There's two, I think two questions in that survey, the small business survey. And they're also, they remained very elevated. And I think they actually rose. One of them rose.

The percent is saying they're raising prices actually rose until a very high level. Yeah, it's 32 percent. 32 percent, right. You know, obviously it was higher during the teeth of the pandemic, but it's pretty high by historical standards. Yeah. That's right. That's right.

Okay. All right. Mike, you want to go second? Sure. $31 billion. Related to the auto industry. Yes. announced investments by vehicle manufacturers.

No, but it is dollars. Okay. Auto loan credit? That's $1.5 trillion be. Well, the change change. That would be a big number, though. Wouldn't it be, Jonathan? 31 billion?

That would be a big increase. That would a big number, yes. And let's say it was year over year, maybe year over year that would be. But that's not what that's not what it is. 31 billion. Is it profit related or? Nope.

Has to do with interest. Interest. The interest payments on auto loans is no. I'll put you out of your misery. Okay, go ahead. It's the total cost of the interest deduction in the big beautiful bill. Oh, or a 10-year period. or however long it's it's for four years but yes four years yeah i'd love to check the math to make sure

that a cbo they'd never get wrong mark first on the uh committee there make sure yeah the advisory board so you think that's too high jonathan is that what you're saying 31 it's not 31 no it was more that i'd love to see the assumptions and see if they line up with what we're what you're saying yeah yeah uh i bet if you knocked on the cbo's door you're You might, I don't know if they published it, though. But they might give you some sense of that. Yeah. Well, is that, is that a, that's more.

You've got inside connection. You get some connections. Yeah, maybe we can, I'll help you out there. I'll at least I'll knock on the door and see if they can give us a sense of that. Mike, what do you, that sounds, is that big? Is that small? What do you, how do you think? It's not that big.

It's the same as that was on the deficit increase because of tips. It's about one-third of what it's going to be for the senior deduction, one-third of the overtime cost. So kind of looking at it from the prism of all these carve-outs that we saw in the Big Beautiful Bill, it's on the lower side. So it's not expected to be a huge deficit increase. Yeah. I can hear automakers and dealers saying, and it's far less than the revenue being brought in by the tariffs.

Oh, I'm sure they're saying that, right? Yes. Yeah. This is just this partial offset to the tariff, the tariff effects. That's the way they're looking at it, obviously. Yeah. Yeah. Interesting.

That's very interesting. Okay, Jonathan, you're up. What's your stat? All right. I'm going to do a Marissa-style pairing. Okay. These are percent changes for the month of June. negative 1.7% and positive 1.7%.

Oh, gosh. Auto-related? Absolutely auto-related. New versus used? Is that not? No, but that's a good thought. Okay. Sales, some form of sales, sales up for one thing, down for another?

Correct. Okay, so we've got to figure out what that is. Mike, do you have any sense of that? What's up? Is it in the month? Is it? Month or year over year? Month of June compared to the month of May.

Oh, okay. Up 1.7, down 1.7? No vehicle sales down 1.7? Yes, that was the new vehicle SAR was down 1.7. And used was up 17? No. The retail component was up 1.7. So I thought that was a great illustration

that, okay, even though the headline numbers are coming back down, the retail market is actually pretty resilient and is actually up 6% year over year. Because the headlines are typically includes around 20% of fleet purchases, and it's really been the fleet portion that has been weakest over the last three months. No, that's interesting. Do you think the fleets were forward buying too? They might have been, right?

Trying to get ahead. No? No, it was more. The fleets were really active last year. At the end of the supply chain crisis, they were finally getting allocations, they were updating fleets. And then you had this combination of, well, who are fleet buyers? Rental car companies, governments, and commercial businesses. So the commercial businesses put the brakes on.

Uncertainty in the economy does not make them want to buy more vehicles for their fleets, especially at higher prices. government has been modestly down for similar reasons. And the rental car companies effectively are worried about travel. And so they had pulled back and actually shrink modestly the size of their fleets earlier this year. Interesting. That was a good one. That was a little on the hard side, I'd have to say, Jonathan.

Well, with Mike on the call, I thought that's true. Yeah, you got half of it. Yeah, you got half of it. Yeah. All right, I got mine. $5.54. $5.54. Copper. Price again. Oh, way to go, Chris.

Dr. Copper. I was going to say unleaded gas in California. Yeah, that probably is that too. Chris, why did you get it so fat? Was that one of your stats? No, I know you're Dr. Copper. That's your recession. Yeah, that's at a record high, $5.54 by orders of magnitude.

I don't think it's particularly useful anymore as a guide to how the economy is doing, though. You know, obviously it's being affected by the tariffs that were announced the other day by the president, I think 50% on copper imports. I'm not sure why we're doing that, but okay. But demand has also been strong. You know, a lot of that goes into all the stuff related to AI. And is there copper? And I was trying to get to think of the link back to the auto industry. Is there copper in vehicles?

I guess, yeah, EVs. EVs, absolutely. Yeah, EVs, absolutely. Yeah, EV demand. Evd demand. And there's been a few strikes across the globe. But, you know, copper prices are, yeah, they're, they're, about there's high as they've ever been, which is, you know, just another reason to believe that overall inflation is going to be headed higher here. Okay, good.

Well, I'm not, you know, I miss Marissa, but, you know, at least it gives us the rest of us a chance here. to win a little bit. Well, let's end the conversation going back to the auto market in auto lending. And I think you pointed out, or we were talking before we went on, that delinquency rates are up. You know, we get, I think we get the same data from Equifax, the Credit Bureau. And I was just looking at the June data for delinquency across all product lines, household product lines, but on auto.

And it is elevated. It's higher than, you said it's the highest it's been since 2007, Jonathan. Did you say that? The default rate on automons is now at a year-to-date level that is consistent with what it was in 2007. Yeah. How, how, I mean, here we are. The economy is at full employment, 4.1% unemployment rate. Wage growth is, you know, good.

It's higher than the rate of inflation. now for a couple, three years. And despite that, we've got these, it feels like, uncomfortably high auto delinquency rates and default rates. What's going on? What's happening here? Why is that happening? Well, it's certainly been one of those things that when you look at how is the consumer faring that lead you to say, all is not good, if you have this level of default, certainly. Now, delinquencies have been elevated, and per month, they're highly seasonal in their performance,

and we don't seasonally adjust what we see at Equifax. But essentially, almost every month for the last three years, has been a record high monthly rate, even higher than it was in the Great Recession, indicating that consumers are having a tough time managing their monthly budgets with inflation, higher, interest rates, higher. So even though with full employment and strong income gains, it still is an environment that is shaky at best for the average consumer. The silver lining was that defaults were not similarly elevated as delinquencies. But last

year saw that story rapidly normalizing and then becoming closer to the years leading into the great recession in terms of performance. We're still not seeing the number of defaults relative to the number of delinquencies that we would, but it absolutely says there's stress in the economy. And what I've come to be more aware of is going on behind the scenes is the impact of student loans, student loans becoming payable again, and then student loans actually being reported by the credit bureaus again. And that's been the wake-up call to me and looking at the data because in conversations with the folks at FICO,

they've helped me to understand that we've had an enormous shift in credit scores occurring as a result of this phenomenon. And so basically what it means, out of the auto loans that we have in place, including and especially impacted by loans made over the last cost, couple of years. We have over 20 million auto loans that now have a lower credit tier than when they were originated when you look at the Equifax data. Now, I haven't studied what's normal, but I believe, meaning you always have movement in credit. People are getting improving credit, negative credit. But I think in general, it's a bell curve. The two things balance out in a normal

economy, but we basically have 4 million people worsening more than the people are getting better. And so, delinquencies and defaults on loans that you thought were prime are really people who are subprime, and they just looked prime over the last couple of years when the student loans weren't being reported. And now on top of that, we still have relatively high inflation, we have income growth weakening. We have higher job losses occurring and the consumer now has to pay their student loans on top of the other debts that they took on. And I think that's adding some of the

stress. But it certainly for me means that auto credit is not going to get easier or cheaper regardless of what the Fed might be doing to rate rate policy. So we're likely to see interest rates remain very high the way that we have been seeing. So my interpretation of what you're saying is that lenders, auto lenders, actually extended credit to folks at scores that were artificially elevated. That, you know, if I'm a student loan borrower, because of the moratorium on payments, and then ultimately a moratorium on reporting to the bureaus, if I laid on a payment, scores reflected that. They were, they effectively got inflated. but now with those moratoriums over, the scores are normalizing, getting back to what they actually really were.

And the lenders are saying, oh, my gosh, you know, we got a problem. Actually, if they had the appropriate scores, it's not out of bounds. You know, they would have known that they would have seen these higher delinquencies because the borrower. That's right. Right. But now it's coming. And I guess the other point is more dollars and cents point. I didn't have to pay on my student loan, you know, and I didn't until I had to, which was

towards the end of last year, beginning of this, when the bureaus now are getting reports of delinquency. So the, and the average monthly payment is 350 bucks on a student loan. So I wasn't paying that. Now I got to pay it. And, you know, I'm already not saving that much. I'm kind of on the financial edge. I mean, something's not going to get paid. paid on time, thus what we're observing with auto delinquency and credit card delinquency. That's right. And then there's one other effect because what happens when you fall a credit tier or two in terms of the interest rate that you might have to pay on a new loan in the auto market? Well, the math is about three percentage points higher if you fell just one

credit tier. But we have a substantial number of people that have fallen to, and that's over six percentage points difference. So it doesn't bode well for affordability to be improving and enabling more people to buy new vehicles especially, you know, in the near term with this going on. Well, actually, you think about it in the context of this deductibility of auto loan interest, you're saying, you know, you may get a benefit there, but you're losing it on the other side here because now you've got to pay higher interest rate because my credit score is lower. So the net of all that may, who knows how that all washes out, but the net benefit of that all alone deductibility may not be that much at all, if anything. Yeah. Right. Especially with all these moving

parts. Right. But it also helps you understand why the vehicle market was especially resilient in recent years because the reverse of this was happening back in 2020 and 2021. You had people in much better financial shape than they really were with much better credit scores and seeing record low interest rates, but then their specific credit tier was even better. So it was even better than they would have had otherwise relative to what interest rates were doing. Hey, Mike, does this sound right to you? Is this anything to add on this? I'll push back a little bit. I'm not as negative on the auto market as Jonathan sounds. I think a lot of those prime borrowers that got their loans. It was back in that 21-22, and we see that if you look at, just put some numbers behind it,

if you look at the delinquency rate for 680 through 720 risk score, they're 80% higher than they were prior to the pandemic. So we see a lot of that stress in there. But if you just look over the past few years, that stress has come down. So year-over-year rates have continuously come down. So it's sort of my contention that a lot of the tightening that's happened since 2023. So Vintages 23, 24, they're higher quality loans. So those newer loans of the banks started tightening when interest rates started rising. So the quality of loans, the five year cycle say as the auto loan cycle out, almost half of the loans were during a tightening cycle. And we do have very high delinquencies, chargeoffs are elevated. However,

I'm more positive towards the next year or so. Last month, we saw the first year-over-year decrease for banks and credit unions in terms of delinquencies. Earlier this year, we saw the first year-over-year decrease in over two years for the total market. In terms of delinquencies and year-over-year rates have come down dramatically. So I'm a little bit more positive in terms of where I think delinquencies and charge-ups are going. I am concerned to that point of where does this payment hire? hierarchy go. So now I have to pay my student loans. If I might get my wages garnished over this, I know I have to pay those because it's going to come out either way. So I might hold off on the

auto loan. So there is a lot of risk there. But if the labor market's able to hold up like we have in our baseline, if the economy is able to hold up, I am a little bit more confident than we've been kind of saying back and forth on auto credit. I'll tell you what. Let's let Chris decide who's right hear. Yeah, what do you think, Chris? Because I know you follow all this very closely, particularly on the student loan side. How big a deal is it? I think it's a deal. I don't know that it crashes the economy. I don't think this is the, you know, the straw that breaks the economies back. But I think there's more stress to come among consumer borrowers in general. And I think the auto credit is going to bear that out as well. I haven't really seen, I've been looking at those vintages as well. And

Maybe you can see some improvements, but even the 24 kind of early data doesn't show a whole lot of improvement for loans at similar points in their life cycle. So I'm nervous that as we do see student loans reengaging here and if there is some weakness in the labor market coming as we project, that's going to put some strain, further strain on the market. So I'm nervous. Let's put it that way. Hey, let's end the conversation with the probabilities of recession.

You know, this is a way that economists kind of articulate their perspective on the economy quickly. So what is the probability the economy is going to start or enter into recession at some point in the next 12 months? And, Chris, I'll begin with you. Last time we did this not too long ago, felt like you were in the high 40s or kind of mid-40s and getting more nervous. Is that still about where you are? I'd mark it down to 40. 40. You feel a little bit better from where you were.

A little bit better in terms of the next 12 months, yeah. Anything in particular behind the positive tilt? I mean, that's modest improvement there. Modest, okay. 40 is still a pretty high number. Pretty high. I think you do get a little bit of boost from the BB bill, from the higher income consumer so they can continue to carry the water, right?

labor market does seem to be holding, well, it's softening, certainly, but it's not falling apart quite yet. Right. I think there's some factors that could continue to drive things forward. Okay. Okay. Hey, Mike, do you have a view on this? Do you have a probability of recession? 35%.

35. Is that changed at all? No. I think there's going to be trade deals. I think that this is, tariffs are relatively temporary, especially the reciprocal. ones. So I think that there's a lot of negotiating tactics that are happening. They're dragging it down. If those go away, the economy will get a boost. Got it. And Jonathan, do you have a probability? Well, I thought on this topic, I would end up proving I'm optimistic, not pessimistic, since it sounds

like that. Like, I've been more negative today. Yeah, you have been more negative. But I'm exactly with Chris. I think 40% is about right, which relatively. speaking has been the lower end of the spectrum recently, but I do see these pieces that there's not a lot of room for error with some of the challenges in the near term. But I love Mike's perspective on that. And my second, I was weighing between 40 and 35. So I'm in between them, I think. Okay. Okay. Well, I've mentioned the machine learning model that we have developed, the probability recession. It fell in June to 38%.

So it was, I think it was 48, and now it's 38. So it's right where you guys are. Yeah. I'm at 45, only because I'm just a little bit more stubborn than you guys are. I thought you were fully adopting the model. I was kind of joking. Kind of sort of, if it spits with my view, then yeah, I'll adopt the model. Can't spell Zandi without AI.

Oh, I like that. Oh, I like that a lot. Yeah, very good. But, no, it's certainly informing my view. But, you know, my forecast philosophy is not to change too much too quickly. I think, you know, it's served me well over time. So I went from 48 to where it was, consistent with the model, to 45. If it still stays at 38 next month, I'll continue to lower it.

But maybe the way. way to think about it is I'm kind of like a three-month moving average of the model result. So I'm still model-based. I just a little bit of a tweak, a three-month moving average, you know, just to smooth out the volatility a little bit. Okay. Anything else, guys, before we call it a podcast? Jonathan, it was great to have you on. Always is.

Number five, you proved why you are, you know, the most favored guest here on Inside Economics. really appreciate you spending the time. I suggest we pencil number six for the fall when we really see what model year 26 worked out to do. All right. You got it. We'll do that right away. Okay.

Mike, thank you. Chris, thanks very much. And dear listener, thank you for listening in. And we'll catch you next week. Take care now.