Economist Jonathan Smoke Says The Market's Not Crashing—It’s Accelerating

Paul J Daly: 0:00 Good morning. It is Friday, August 29 and today we're bringing you a little bit of a special morning show. I had the opportunity at the name at annual meeting to sit down with the chief economist at Cox automotive, Jonathan smoke. It's been a while since we've caught up, and I got to ask him some questions about his thoughts on what's happening with, of course, tariffs, but more importantly, what he sees as happening throughout the rest of the year, what we should be paying attention to in the industry, and the things that he thinks we can change and adjust, and the things that we're just going to have to wait and find out. So I hope you enjoy this conversation I had with Cox chief economist Jonathan smoke. All right, so I am here with a long time friend, but we haven't gotten to catch up in quite a while. Jonathan smoke, Chief Economist at Cox automotive, Paul, it's, I mean, it's been a while. Jonathan Smoke: 0:48 It has been but you know this we've been living through dog years lately. That is a great way to Paul J Daly: 0:53 put it. It had does feel like that feels like 10 years. It's probably only been 18 months. So last, I think the last time we actually spoke in person is when you were taking on the new role as chief economist, and not just of automotive, but across all the verticals. So get bring us up to speed. How's the last year your plus Jonathan Smoke: 1:12 been? Well, that started at the beginning of 2024 Yep. And obviously the the election. Paul J Daly: 1:19 My timing isn't that bad. I said, 18 months. No, right about there? Okay, how bad my dog Jonathan Smoke: 1:23 years are keeping up. You know, the the election happened, I remember that, and this year has been crazy, dealing with, you know, the most massive change in policy, driven by an executive, you know, from from the beginning of their new term and so and the auto industry in particular, has been ground zero for that. So there's been plenty of focus and effort on automotive but trying to make sense of where the economy is going, this has been a tricky year, because we'd never experienced tariffs reaching this level, the way that we have since the 1930s Paul J Daly: 2:06 is that, is that the comparison? Because I haven't, honestly, I've never heard anyone even compare it to anything. Yeah, historically, so in the 30s, something similar Jonathan Smoke: 2:14 happened the last time, and it basically was responsible for the Great Depression and World War Two. Oh, fun. I think it was, you know, when, when you look at that history, I sort of fell in that camp of, well, let's be slow to jump to the conclusion that the world's going to end tomorrow, right? But we knew some rules were changing rapidly, and we needed to see how the economy was going to, was going to hang out. And since automotive has been right in the, you know, the front burner of all the changes that are taking place, I think we've had a front row seat to see well, tariffs are not necessarily, you know, life ending. Yes, they, they have yet to really manifest a huge negative change in the market, but it's unleashed periods of of roller coaster activity. I've used that word repeatedly since March, yeah, and we're living it week to week and month to month. I feel like, well, Paul J Daly: 3:17 what did so when? When this talk started happening and tariffs started getting talked about, and markets started reacting. How do you feel like we're landing right now based on where you thought we were going to land when this started? Right did you think we would be in this place or around this place? Like, could anybody have predicted the fact that right now it seems like, and I don't know, like this is, this is just my perception that there is a stabilization that's happening that most people didn't think was possible, Jonathan Smoke: 3:46 a stabilization and possibly a re acceleration in consumer activity this summer. We're still trying to parse that out and make sense, but when you look at consumer spending more broadly in the economy since the beginning of July, we're back to April levels of spending growth year over year. So the consumer hasn't thrown in the towel in the auto market. You know, we had seven teens in March and April for the SAR saw then some pullback in May and June, but 16 four in July, we think August is on pace for at least 16 Yep, based on what we've seen, you know, month to date. So we certainly are not seeing a devastating pull ahead from what happened earlier in the year. And I think you've just got a lot of moving parts, yes, and none of them have been definitively negative. But most importantly, manufacturers are playing poker with decisions about tariffs and specifically changing production, changing pricing. I. Um, they don't want to show their cards to the White House or to each other, and so as a result, the consumer's perspective is, gee, this isn't a bad time to buy, right now, that's right. And if I, and I think I try to think of that, I get that question in consumer media, by consumer media outlets a lot, is this a good time to buy? Course, that's the question right? And frankly, for the last several years, the answer to that is probably not, unless right a specific model or a specific segment, Paul J Daly: 5:29 like historical pricing, interest rates and all those things compounded. But this Jonathan Smoke: 5:33 summer, when you think about the perspective of, are you likely to pay more in the future, are you likely to get a better deal in the future? I think a lot of people have concluded it's better now, right? Plus we think there's a substantial amount of pent up demand, so that's part of the equation Paul J Daly: 5:52 too. Let's talk about that. Because back when the inventory shortage was going on and then pricing was out of control, we kept talking about sideline demand, and how has that re entered the market? And you say there still is some So can you explain how that demand, that was pent up? Is still there actually some Jonathan Smoke: 6:09 of it? We I have been persistently seeing evidence of that, because activity visits and looking at vehicles, on auto trader, and on Kelley Blue Book and on dealer websites. With dealer.com we've generally seen the same level of visit activity. We've seen changes in clicking on on detail pages for vehicles, and as the inventory has ebbed and right Paul J Daly: 6:38 you have, like, kind of a front row seat into the first party data, yes, where consumers are hand raising, saying, You know what, I'm shopping Jonathan Smoke: 6:43 around. So there's been this high level of interest that's been persistent. Then you do the back of the envelope calculations of, well, how many transactions did we not have in 2021 2022 23 and 24 because of pricing, interest rates, credit, lack of availability from a supply perspective. And the answer, I think, was around 10 million units. Now some of those units, I don't my conclusion is we have about 7 million in pent up demand. Still today, still sitting on the sidelines. Wow, but it's sitting on the sidelines looking for a monthly payment, a price that has not been easy to find. But I also think psychology has impacted that. And I think this summer has had a sea change in the consumer psychology that again, back to that hypothetical question, is this a good time to buy a car? Unequivocally, if you have good credit. Right now is the best time we've had to buy a car in at least four years. Okay? Because interest rates for people with good credit, lease deals, incentive levels and no question if you're interested in buying a plug in hybrid or an electric Paul J Daly: 7:57 that was going to be my next question this all time, because, you know, the Fed just came out and said, We're you don't have to take delivery by September 30, right? You just have to have a contracted deal, right? You can take delivery after that. What are you seeing, as far as the EV market goes, right? It's a great time. We know that the deal is the price of an EV is now below the average price of an Ice Vehicle, right? And so are you seeing more activity people like making, trying to make, Jonathan Smoke: 8:23 absolutely highest, highest share. We calculate 9.1% in the preliminary data that we have for July, and when all of the data comes in, point 1% of the total new vehicle market. So in the US, highest share ever. Yeah, was in July. Volume wise, last December, slightly beat it, but I think, you know, relative to the time of the year, it's much stronger activity. But it's not just the expiring tax credits. Manufacturers are wanting to move that inventory, and so we've seen a substantial increase in incentives, more discounting. There is no question this is a great time to buy or lease an EV or a plug in hybrid right now. You know, post September that that that sure, that rule statement, I think, is going to be interesting. Because actually, when we look at the activity in July, we're wondering if we'll run out of inventory that maybe buys some room, because I'm asking, well, how flexible are they? Right? Do you need a deal with a specific Vin so it needs to be manufactured and in transit? Or, Oh, that's Paul J Daly: 9:32 it, yeah, I didn't think of that. Like, can it be a new vehicle that you ordered, right, that you Jonathan Smoke: 9:36 signed on in con? Or is it something a little bit more immediate? And Paul J Daly: 9:40 I have they haven't figured out they need to answer that question yet, Jonathan Smoke: 9:43 right? And I think they will, because if we keep the pace up in August that we had in July, we're definitely going to run out in in total, and I'm not so certain that manufacturers want to ramp up production, knowing that demand. Paul J Daly: 10:00 No, well, it's a big question mark. Yeah, right. It's, I mean, I think everyone who's made EVs most have done it unprofitably, right, and so. But there is still this momentum. And I feel like I drive an EV I have an f1 50 lightning, and I love it. I think it's a superior power train, and it fits. I do see more like the steady momentum of charging infrastructure happening and people just being more open to it as they learn more about it, right? And so I'm curious to see, like once now we know the incentive dollars are going away, which was kind of creating an artificial demand, right? What do you think is actually happening within EV demand? Jonathan Smoke: 10:37 I think this is just a speed bump. So obviously I'm expecting the fourth quarter, and likely the first quarter of next year. The first quarter is has for the last several years been the worst quarter of the year for EV sales, because so much is pushed at the end of the year, and then we have a hang on. I Paul J Daly: 10:54 also think the winter has something to do with that, and I don't know why, but it feels like managing an EV in the winter, or like trying to manage something new, especially if you live in the northeast, is like thinking of managing another logistic is probably something you would that's just my thought. Jonathan Smoke: 11:10 Otherwise, if you look at how adoption is going around the country, we've reached a level of adoption in many counties and zip codes that is self sustaining, because we've had a decent EV car park in place that now is in a replacement cycle. Yes. And now you add, there's a certain dimension of people who were raving Tesla fans, and maybe not so much anymore, and are eager. They're moving used to the EV lifestyle. That's right. And we see, you know, the research suggests that people who've had the right use case for EVs, such as yourself, are much more likely to keep that don't power train and be very loyal to that power train. So I don't see us going backwards in adoption. We've been for the last couple of years, looking at S curves by zip code, and almost every zip code in the country is continuing to show more adoption, not less. So Paul J Daly: 12:11 you get to look at a lot of economies of scale, global economics, global automotive industry. Do you think an electrified future is inevitable? Jonathan Smoke: 12:21 I do, because if you've got the right use case with today's technology and what it's capable of doing, I believe that for the typical household that has two or more vehicles, there is a place for at least one of those vehicles to be electric, because it makes much more economic sense. And the use case of how consumers use when they have multiple vehicles in a household, it's not pushing you to do things that are outside of what the vehicle is capable of doing, and it's a no brainer. It's far more convenient. I drive a public plug in hybrids because as an economist, I like to keep my options open, but almost all of the mileage that I get out of it is pure electric, because it's a perfect use case. My commute, how many miles do you get all battery I get around 3738 on a consistent basis, and my commute to the office is around 30 miles, round, perfect. So it's like literally perfect use case, and Cox has plenty of electric chargers. If they better, they better. This is my last question. I don't know if this is outside your your your scope of influence or your scope of understanding, but you definitely have an opinion on this. Okay, Paul J Daly: 13:30 just lost the question. I set it up, so great, and I you were, I was like, I know you're like, What is this question? It wasn't about. Oh, yes, when do you think if ever China will be selling one of their EVs in the United States. A Chinese EV will be sold in the US. Jonathan Smoke: 13:45 That's a great question, and I would argue it's probably one of the most important questions for figuring out how the industry is going to evolve. And I would say I expected, before the end of the Trump administration that there is a there's gonna be a deal? Yep. And there is investment that basically enables one or more Chinese manufacturers to be selling in the US and selling through dealers. That was my next question. And I view that, I mean, yeah, there's a lot of people that are concerned about technology, sort of the Tick Tock is this being used to track us or to do other things? But the reality is, they have the best technology, and they've reached a level of scale that we cannot compete, and we are doing a disservice to the American consumer if we don't have a piece of that down the road. And I know, I mean, if you ask the question, what would it take to get us above a 17 million SAR on a consistent basis, the simple answer to that is, China. How about that? Do you Paul J Daly: 14:52 have a song pick for us to round into q3 or into q3 What's the song we should be listening to for the next 60 days? Jonathan Smoke: 14:58 I think you're going to see. When I do my playlist in September, I'm gonna go heavy on Abba. So instead of a song, I'm gonna give you an album of a gold and it's why, because every presentation I'm talking about the OB, B, B, A, the big, the big, beautiful bill, which to me sounds like Ava. So whether it's money, money, money, gimme, gimme, oh my gosh, it's, you know, Stroke of Genius. Yes, I think that's what we'll be focusing on in the fall playlist. But that's your ideas. I'm crowdsourcing more of those song choices so that people feel more a part of Paul J Daly: 15:36 this. Well, Jonathan, thank you so much for giving us some time to talk to and let's not make it so long till next time. Absolutely All right, so there you have it, including the music. Well, he didn't give me a song. He gave us a whole album. He's going to release that playlist in September, but Abba, he said, what's his hint? So you have to follow Jonathan smoke. Follow him on LinkedIn. Also, he does. I'm trying to think of how you get to his economic forecast. If you just search it. We'll link it up in the comments. You can be on the mailing list to make sure when that economic report comes out, you get it. But as always, there are things we can change, things we can't change. So let's focus on the things we can and we'll just be ready for the things that we can't. As always, take care of the people, and they will take care of everything else in the business, including you. We'll see here tomorrow. You you.