UAW demands will cost consumers and crimp affordability

Consumers in the market for a new vehicle from the Big 3 Detroit automakers (GM, Ford and Stellantis) will be in for more sticker shock if the UAW gets what it wants, a 46% increase in wages for its union members, among other demands.? Wage increases of this magnitude, even if implemented over a multi-year timeline, would have meaningful knock-on effects for consumers, if not the manufacturers and providers of consumer credit. Higher wages will lead to higher prices (MSRPs), which will lead to larger loans and bigger loan payments, putting further stress on consumers' finances.

Exhibit 1 shows four scenarios of potential wage increases ranging from 0% to 46% [1]. A typical monthly loan payment for a new car could increase by as much as $63, pushing the monthly payment up to $969.

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Exhibit 1

Higher wages, higher prices

According to Kelley Blue Book, the average MSRP for a new car in America today is $48,334 [2].? Labor is generally thought to be about 15% of a vehicle's price.? So, assuming the entirety of the UAW's 46% ask is passed through to the consumer, new vehicles would cost $51,669 ($3,335 higher). Of course, the UAW may not get 46%, which far exceeds inflation expectations of 3.5%, 3.0% and 2.9% according to the Fed’s latest Survey of Consumer Expectations [3], so Exhibit 1 shows alternative outcomes - 15% and 26%. In any case, adding to the prevailing high prices in the new car market will create a headwind for the Big 3, who, with a combined 40% share of the US new vehicle sales, are sensitive to competitive pressures [4], especially as pandemic era supply chain shortages are easing and with more vehicles available on dealer lots.? Unfortunately, the incremental costs to consumers don't stop here.

Higher prices, larger loans

About 80% of new car purchases have some degree of financing [5].? Borrowers could either make a higher down payment or finance a larger portion of the purchase. It’s not uncommon for loan-to-value ratios on auto loans for new vehicles to exceed 100% and some go as high as 125%. Assuming an LTV of 110%, the average amount financed would rise to as much as $56,836.? Plus, today’s relatively high loan rates add another layer of pain for borrowers.? The average finance rate for new car loans at finance companies is 6.41% [6], and bank rates are higher at 7.80% for the most common loan term of 6-years [7].? Credit availability may tighten or credit underwriting may loosen as lenders and borrowers try to strike a balance between credit risk and affordability.??

Manufacturers' options

The manufacturers do have options.? For example, they could choose to absorb some of the incremental costs by sacrificing margin, but they each have only so much room to maneuver, especially considering management's fiduciary responsibility to shareholders.? As of June 2023, the net profit margins for GM, Ford and Stellantis were 5.7%, 4.3% and 11.1%, respectively.? R&D expenditures could also be reduced, but this choice puts their future competitiveness at risk. R&D is particularly important today as nearly the entire industry transitions from internal combustion engine vehicle (ICE) to battery electric vehicle (BEV) production. Other productions costs, including materials and equipment, more difficult to reduce in the short-term.

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FOOTNOTES AND SOURCES:

[1] Wage increases would likely be front-loaded and implemented over the term of a four-year contract.? Wage increases are the primary aspects of the labor negotiations analyzed in this article. Other dimensions, for example, the impact on prices caused by the strike itself as well as the temporal dimensions of any wage increases, are not considered.

[2] Tucker, Sean, "Average New Car Prices See Smallest Increase in a Decade ," August 9, 2023, Kelley Blue Book.

[3] New York Fed Survey of Consumer Expectations , July 2023.

[4] USA - Automotive Sales volume (August 2023). Marklines.com .

[5] Hormski, Chris, “Average Auto Loan Balances Grew 7.7% in 2022 ,” April 26, 2023, Experian.

[6] Board of Governors of the Federal Reserve System (US), Average Finance Rate of New Car Loans at Finance Companies, Amount of Finance Weighted [RIELPCFANNM], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/RIELPCFANNM , September 8, 2023.

[7] Board of Governors of the Federal Reserve System (US), Finance Rate on Consumer Installment Loans at Commercial Banks, New Autos 72 Month Loan [RIFLPBCIANM72NM], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/RIFLPBCIANM72NM , September 8, 2023.