ATLANTA — U.S.-based automobile dealers are optimistic about the first quarter of 2018. They say inventory concerns from earlier this year have mostly subsided, according to insights found in the Cox Automotive Dealer Sentiment Index (CADSI) for the fourth quarter. 

Released today, the report showed that despite a healthy sales environment during the survey period, both franchised and independent dealers continue to feel pressure to lower prices, experience high costs of running their business, and report weak customer traffic.

“Although price pressures and costs are working against them, we continue to be encouraged by the fact that dealers are optimistic about market prospects,” said Cox Automotive Chief Economist Jonathan Smoke. “U.S. auto dealers are expecting a strong market in the first quarter of 2018.”

The quarterly Cox Automotive survey indicates that current dealer sentiment remained similar to the view of the market three months ago. The current market Index moved up a single point to 46 from the third-quarter reading of 45. Responses in the survey are used to calculate an index, by which any number over 50 indicates that more dealers view conditions as strong rather than weak.

“On the surface, it would appear that not much has changed for dealers over the last 90 days,” Smoke said. “But when you consider that last quarter’s survey occurred in early August before the market saw back-to-back months of the best new-vehicle sales of the year, it makes sense that the biggest changes in dealer attitudes came from franchised dealers and their views of new-vehicle sales and new-vehicle inventory.”

The view of the current market skews more positive for franchised dealers, with an index score of 54. Independent dealers were more negative about current conditions, scoring 43 on the index.

U.S. automobile dealers overall, however, were more positive about the next three months, with the index for the first quarter of 2018 sitting at 53. This is an indicator that more dealers expect conditions to be strong in the future compared to those who think conditions will be weak. Franchises were most positive, scoring 57. Independents scored 52.

Franchised dealers in the South are the most optimistic about the next quarter, while franchises in the West and Northeast saw declines in optimism. The drivers behind the regional variation causing the South to stand out so positively are unclear. Possible factors include weather, the uptick in sales following the hurricanes in Texas and Florida, and even the regional impacts expected from the proposed GOP tax policy.

“Dealer optimism is a leading indicator of likely continued strength in sales, so pay attention to new vehicle sales in the South as we start the New Year,” Smoke noted.

According to Cox’s sentiment report, total price pressure on dealers grew, driven by independents with an index score of 67, up from 62 in the third quarter of 2017. Franchise dealers were flat at 67.

“Independents are having to deal with the scarcity of five- to eight-year-old vehicles by shifting to what’s most available: less than four-year-old vehicles,” said Smoke. “By shifting to newer vehicles, they are paying higher prices yet they are also continuing to serve a value-seeking consumer who is more likely to have credit challenges. That translates into relentless pressure on price.”

In line with the improving new-vehicle sales index, the new-vehicle inventory index declined significantly since the third quarter. It fell from 67 to 62. Having “too much retail inventory” also significantly declined as a factor holding back business among franchise dealers from the third quarter to the fourth quarter.

The used-vehicle inventory index remained stable relative to the previous quarter, and fewer independents reported “limited inventory” as a factor holding back their business relative to the previous quarter.

“Inventory can be a positive or a negative factor for market conditions,” Smoke said, “but dealers seem to be successfully navigating shifts in new- and used-vehicle supply.”

Data for the fourth quarter Cox Automotive Dealer Sentiment Index is based on responses from 919 dealers gathered via online surveys between Oct. 25 and Nov. 2. Their responses were weighted by dealership type and volume of sales to be representative of the national dealer population.