Originally published in March 2021.
Today we’re going to talk about what the near term future looks like for the retail automotive industry under a Biden administration. Spoiler alert – it’s not pretty.
If that spoiler sounded dire – and it did – please do not think I’m trying to play partisan politics here. I am not. Rather, I’m looking at objective facts and applying what I hope is logical analysis. If you as a viewer believe I am misstating the facts of making errors of logic, please contact me. I’d love to hear your feedback and, if your points are sincere and well-reasoned, I’d be happy to address them in a future episode.
Keystone Pipeline Cancellation
On, then, to the facts as I see them. On Biden’s first day in office he signed executive orders cancelling the Keystone XL pipeline project, revisiting the CAFE/SAFE fuel economy standards, and stopped oil and gas leases in the Arctic National Wildlife Refuge. On his 8th day in office, he signed another executive order ceasing new oil and gas leases on federal lands. He also rejoined the Paris Climate accord, which is expected to cost over 1,000,000 American jobs and further frustrate the production and use of fossil fuels.
Other facts of interest to the retail automotive industry include Biden’s promise to increase personal and corporate tax rates. Now let’s apply some logic to those facts.
We all assume prices are driven by the laws of supply and demand. During the Trump presidency, when he approved the Keystone XL pipeline, opened up drilling in ANWR, and replaced the CAFE fuel economy standards with the more realistic – though still stringent – SAFE standards, American became energy independent for the first time in my life (and I am not a young man). Why? Because his policies were aimed at increasing supply.
On November 3, 2020, the average price of gasoline in the United States was $2.11 per gallon. Today it is $2.87 and trending higher. That’s a 74% increase in just 5 months. Biden’s policies are aggressively restricting domestic supply. As supplies go down, prices go up. This is not rocket science.
More logic: 70% of American GDP is consumer spending. As consumer spending goes up, so does the economy, including retail automotive. Reducing taxes increases the money that drives consumer spending. Increasing employment increases consumer spending. It therefore stands to reason that policies that lower taxes and increase employment will increase consumer spending, energize the economy, and help the retail automotive industry.
Reversal of Trump Era Tax Cuts
Trump’s Tax Cuts and Jobs Act did both these things. In every year since that Act went into effect, tax rates were lower and tax receipts were actually higher. The problem for retail automotive is that Biden has promised to reverse those tax cuts. Logic suggests the results will reverse as well, lowing employment and consumer spending.
When consumers have less money to spend, they buy fewer and cheaper cars. When times get tight, F&I products are the first thing to go in a retail transaction. And that’s why I think the near-term future looks grim for the retail automotive industry. And if the Republicans don’t retake the House or Senate in 2022, the long-term future doesn’t look so hot, either.
Finally, this episode could only scratch the surface of the topic. If you’re interested in more detailed analysis, including some of the resources I used in preparing this episode, we’ve included links at the bottom of this page.