Cruise Controls or Smoke Signals

Episode Summary

Executive Summary: The episode centers on the auto market as a lens on the broader economy, with guests arguing that tariffs, higher interest rates, and weak affordability are likely to slow new-vehicle demand while pushing more activity into used cars. They also discuss elevated auto delinquencies, the lingering effects of student-loan normalization on credit scores, and whether recent tax changes meaningfully offset the drag. The panel remains cautious but not recessionary, with recession odds clustered around 35%-40%.

Main Topics: Tariffs and the auto market roller coaster (Priority: 5/5): Jonathan Smoak and Mike Brisson argue that auto sales were distorted by front-running ahead of tariffs, creating a spring surge followed by a pullback. They expect tariffs to continue weighing on new-vehicle demand and pricing. New-vehicle prices, supply, and demand elasticity (Priority: 5/5): The discussion focuses on how tariffs, MSRP changes, lower incentives, and manufacturer responses could lift new-car prices by roughly 4%-8%, likely reducing sales toward a 15 million annualized pace. Used-vehicle market resilience (Priority: 4/5): Guests expect used vehicles to hold up better because personal transportation demand remains essential and the used market is more flexible, though it will still feel some inflationary pressure. Auto credit stress and delinquency (Priority: 5/5): Jonathan describes auto loan delinquencies and defaults as elevated, reflecting weak affordability, higher rates, and consumer budget strain, while Mike argues recent vintages may be higher quality and show some improvement. Student loans and credit-score normalization (Priority: 5/5): The panel highlights student-loan repayment and reporting as a key hidden stressor that lowered credit scores for many borrowers, raising borrowing costs and worsening auto-credit performance. Big, Beautiful Bill (BBB) tax provisions (Priority: 3/5): The group examines the auto-loan interest deduction and concludes it is a modest tailwind at best, likely affecting financing choices more than total vehicle demand. Recession risk and macro outlook (Priority: 4/5): Despite auto-market weakness and higher consumer stress, the panel does not see imminent recession, putting 12-month recession odds around 35%-40%.

Key Arguments: Tariffs have so far caused demand to be pulled forward rather than collapsing the market, but the underlying effect is still likely to be lower new-vehicle sales ahead. New-vehicle sales likely fall back toward roughly 15 million annualized as price increases and uncertainty reduce affordability and delay purchases. The auto market’s broad inflation pass-through is limited because weak demand triggers more incentives, so the ultimate price increase may be closer to 4%-8% than the full tariff rate. Used vehicles should prove more resilient than new vehicles because transportation is essential and the used market can absorb demand shifts more easily. Auto delinquencies are elevated because inflation, high rates, and student-loan obligations are squeezing consumers even with strong employment. Student-loan repayment and the return of bureau reporting have exposed previously inflated credit scores, causing many borrowers to migrate to worse credit tiers and face higher auto-loan rates. The auto-loan interest deduction in the BBB is real but small, affecting financing preferences more than overall vehicle demand because most buyers won’t receive a large enough tax benefit to change behavior. The new-vehicle market matters more for GDP because it drives manufacturing, while the used market matters more for consumers because it is larger by transaction count. Recession risks have eased somewhat because the labor market is still holding and higher-income consumers remain resilient, though there is little room for error.

Data Points: LinkedIn poll response rate: Over 400 votes - Audience response to whether the podcast should keep its chit-chat segment Preference for chit-chat: 91% - Poll result showing listeners want some form of chit-chat Preference against chit-chat: 9% - Poll result for listeners wanting none/straight to data Auto sales total last year: 15.8 million - Mike Brisson referenced total light-vehicle sales for the prior year Post-election sales bump: 16.7-16.9 million SAR - Light-vehicle sales surged in the last two months of the year after the election March 2025 vehicle sales SAR: 17.8 million - Sales jumped when tariffs were introduced and buyers pulled forward purchases April 2025 vehicle sales SAR: 17.3 million - Sales stayed elevated as tariffs were actually implemented May 2025 vehicle sales SAR: 15.5-15.6 million - Sales fell back after the tariff-driven surge June 2025 vehicle sales SAR: 15.3 million - Further normalization after the spring pull-forward Expected new-vehicle price increase: 4%-8% - Jonathan and Mike’s estimate of tariff pass-through to prices Expected decline in new-vehicle demand: About 1 million vehicles - Mike’s estimate of sales lost from higher expected prices New-vehicle price increase horizon: 12-16 months - Time frame for tariffs and price pass-through to work through the market Effective tariff rate assumption: 12% - Jonathan’s longer-term planning assumption for tariffs after deals and adjustments Canada/Mexico effective vehicle tariff rate: Closer to 15% - Jonathan’s estimate after USMCA content credits Used-vehicle transactions: Around 40 million - Jonathan contrasted used sales volume with new vehicle sales New-vehicle transactions: 16-17 million - Approximate annual new-vehicle market size Auto-loan financing share: 82% - Share of U.S. vehicle sales financed with loans last year U.S.-assembled vehicles share: 52% - Share of vehicles sold in the U.S. assembled domestically Auto-loan interest deduction cost: $31 billion - Mike’s stat game answer for the BBB provision over a 4-year period Default rate comp: 2007 level - Jonathan said year-to-date auto-loan default rates are near 2007 levels Student-loan payment amount: $350 per month - Average student-loan payment cited as a budget squeeze for borrowers Credit tier deterioration: Over 20 million auto loans - Jonathan said many auto loans now sit in a lower credit tier than at origination Worsened vs improved credit: 4 million more people worsening than improving - Jonathan’s summary of credit-score migration after student-loan reporting resumed Interest-rate impact of one credit-tier drop: About 3 percentage points - Jonathan’s estimate of the rate penalty from falling one tier Interest-rate impact of two tiers: Over 6 percentage points - Jonathan’s estimate for borrowers who fall two credit tiers Small business uncertainty index: 89 - Chris’s stat game clue referencing the NFIB uncertainty measure Small business price-raising share: 32% - Discussed as a still-elevated share of firms planning to raise prices Copper price: $5.54 - Chris’s stat game clue, used as a signal of inflation and AI-related demand Auto revenue/household finance deduction window: Calendar years 2025-2028 - Jonathan described the BBB auto-loan interest deduction as temporary Potential qualifying share for auto-loan deduction: About one-third - Jonathan estimated only a minority of new sales qualify after rules and income limits Typical deduction amount: About $2,000 - Jonathan’s estimate of the average benefit from the auto-loan interest deduction Max deduction: $10,000 - Statutory cap on the auto-loan interest deduction Loan amount needed to max deduction: About $120,000 - Mike noted the deduction cap would require a very large loan to fully use Recession probability - Chris: 40% - Chris’s estimate for recession over the next 12 months Recession probability - Mike: 35% - Mike’s estimate for recession over the next 12 months Recession probability - Jonathan: 40% - Jonathan’s estimate for recession over the next 12 months Machine-learning recession probability: 38% - Mark cited his model’s June reading Mark’s personal recession probability: 45% - Mark said he was still slightly more cautious than the model

Pivotal Quotes: "People love the chit-chat. 91% want some form of chit-chat." — Sarah Rodriguez: Results of the LinkedIn poll on whether the podcast should keep its informal banter "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." — Jonathan Smoak: Explanation of how tariff uncertainty is affecting vehicle purchasing behavior "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." — Jonathan Smoak: Assessment of the auto-loan interest deduction’s limited but positive effect

Implications: Expect softer new-car demand, firmer used-car pricing, and continued consumer-credit strain. The auto market may stay volatile as tariffs, student-loan effects, and high rates work through the system, but the broader economy still looks more like a slowdown risk than an imminent recession.