Is low inventory the story, or is the lowdown a slowdown?

Tesla CEO Elon Musk isn’t the only industry executive with a “super-bad feeling” about the North American economy.

In Ontario, car dealer Michael Carmichael wonders whether the ongoing challenge of too many consumers chasing too few vehicles is masking underlying macroeconomic weaknesses.

“I wonder if the elasticity challenge we’re having on inventory is hiding an economic slowdown where we may look back and say, ‘Wasn’t it nice not having all those cars,’ ” said Carmichael, president of UpAuto, which has three franchised dealerships.

In June, Musk sent a companywide email saying Tesla might have to cut 10 per cent of its global workforce, according to Reuters. His warning about a looming recession comes as automakers post healthy profits, dealers enjoy robust margins and consumer demand outstrips supply during a grinding inventory shortage that isn’t expected to ease up until next year.

Meanwhile, interest rates, fuel prices and inflation are on the rise.

On June 1, the Bank of Canada raised its benchmark rate by 50 basis points to 1.5 per cent and indicated that more increases are on the way as it tries to corral inflation, which hit 6.8 per cent in April.

As of June 28, average prices for regular-grade fuel across Canada were slightly more than $2.01/litre. Forecasters said they could go higher during summer.

And if they remain above $2/litre, that could affect car buyers’ behaviour, says Robert Karwel, senior manager of the Canadian automotive practice at J.D. Power.
Add sustained high inflation and another jump in interest rates, and “something’s got to give at some point,” Karwel told Vancouver Correspondent Steve Mertl for a story on fuel prices in this issue.

Carmichael is already seeing a growing number of customers trading in their pickups for thriftier vehicles.

While some economists cite strong jobs numbers and healthy household balance sheets as reasons for optimism, wage increases aren’t keeping up with the rising cost of living and could make consumers tighten their belts. As well, forecasters are divided on how Canada’s overheated housing market will respond to rising interest rates. Will the sector execute a soft landing or a tailspin, taking the economy down with it?

For Carmichael, the economic uncertainty has him questioning whether pent-up demand will keep dealerships busy when the supply crunch ends.

“If we had the inventory right now, I can’t say with absolute certainty that we would be selling everything we’ve got like we are now.”