What Happens When We Run Out Of Pre-Tariff Cars?

The most concrete conclusion I’ve come to since President Trump started his trade war is that I’ll probably never misspell the word “tariff” again. I kept trying to use two Rs and two Fs, but it’s just one R. Having now written the word 45,397 times, I’ve got it down. Tariff is the new Koenigsegg. Everything else is a little more up in the air.

I took a look at my retirement savings this morning, which is almost always a mistake when you’re in your early 40s. Not because it’s down, but because it’s up and I don’t trust it. While my investments are well-hedged (I hope), a huge drop in the economy would not be great. The success of my investments feels at odds with my general sense of where the economy is going. It’s troubling.

Of course, The Morning Dump is a car news roundup, and so I’m going to make this about cars. A new report out shows that new car inventory is shrinking, which is generally good, but a lot of that is pre-tariff inventory. I’m curious how long all of this holds together when pre-tariff inventory shrinks.

Chinese automaker BYD reported a strong first half but a weaker Q2, and everyone is going to run to talk about how this compares to Tesla, but there’s an argument to be made that Tesla isn’t as much in the conversation anymore. GM’s EV sales are going “great guns,” as they say in the Commonwealth countries, but that doesn’t mean the company is going to start producing a lot more EVs. Across town, Ford seems like a company with a ton of potential growth if it could only get its recall problem under control. It still hasn’t.

About One-Third Of New Car Inventory Is Pre-Tariff Inventory

If I didn’t have this gig, I’d want to be an economist. It’s a job with a fun mix of statistics, history, public policy, and psychology. I’m also sort of glad that I’m not an economist right now, because the world feels like it’s at an inflection point. That would normally be exciting, except it’s felt like we’ve been at an inflection point for the last three years.

In theory, something has to give, but it hasn’t. Here’s the top-down view from Bloomberg:

Economists anticipate ho-hum US economic growth for the remainder of the year and well into 2026, with steady, tariff-driven inflation buffeting consumers.

Gross domestic product is now set to grow 1.1% in the second half of the year, a downshift from average growth of 1.4% during the first six months, according to the latest Bloomberg monthly survey of economists. Consumer spending, the economy’s primary growth engine, is also seen expanding at a 1.1% pace in both the third and fourth quarters.

At the same time, economists expect core inflation — measured by the personal consumption expenditures price index — will top out at an average of 3.2% in the fourth quarter. While year-over-year inflation is expected to gradually ease through 2026, it will remain above the Federal Reserve’s 2% target.

Slowing growth is bad. If you get slow growth + rising inflation + high unemployment, you get stagflation. That’s real bad. One of the arguments the President has been making is that the Federal Reserve Bank of the United States, aka the Fed, needs to cut interest rates to counter slow growth. That’s fine, and maybe coming, but if you do that while spending is up and inflation continues, then, well, bad things happen. Here’s another Bloomberg article from this morning:

Inflation-adjusted consumer spending rose 0.3%, according to Bureau of Economic Analysis data out Friday. The advance was boosted by income growth and driven by goods.

The so-called core personal consumption expenditures price index, which excludes food and energy items and is favored by the Federal Reserve, rose 0.3% from June. From the prior year, the gauge picked up to 2.9%, the most since February.

The latest data, which showed a pickup in services prices, could fan concerns about a more worrisome rise in inflation as President Donald Trump’s tariffs also work their way through the economy. For now, Americans continue to spend, but it’s unclear how long that momentum will last amid rising prices and a weakening job market.

It’s worth remembering that the President sacked the person whose job it is to count the number of people getting or losing jobs, claiming they were fake numbers (they were not), because no one wants to be the President who drags the country into stagflation. Especially when, pre-tariffs, it looked like the economy had rather remarkably gotten through the post-pandemic period without a major economic shock. Inflation was bad, and remains bad, but people mostly kept their jobs.

We’re now in this position where inflation remains elevated, people are still spending money for now, but the job market looks weak, and economic growth is slowing. Something has to give, right? One of the biggest fears is that lumping tariffs on everything and killing the de minimis exemption will, at least in the near term, cause prices to go up a lot. That then results in inflation.

There’s a strong echo of this phenomenon in the car world. Sales have so far remained fine. They’re not increasing as much as carmakers had hoped last year, but they’re not entirely in the toilet. With all the uncertainty, though, carmakers have pulled back on some production and paused some deliveries. While this is smart for automakers to do, it might represent a belief that things aren’t going to get better when cars get more expensive.

According to S&P Global Mobility, new vehicle inventory in America dropped to 2.65 million new cars in July, which is down 6.1% month-over-month and 4.4% year-over-year. If you’re worried about the economy slowing down because of, oh, I don’t know, more expensive cars and slow economic growth, slowing production relative to demand is what you do (this gets very complex, and we’ll need a bunch of quarters of production numbers to get a better sense of it, especially as production shifts from Japan and South Korea to the United States).

Again, I think managing inventory this way is entirely logical.

The other interesting datapoint is that carmakers are also still burning through pre-tariff cars, albeit at a fast clip.

While the overall advertised inventory is down 6.1% month-over-month, pre-tariff inventory dropped from 948,000 units in June to 884,000 units in July, or about 6.8%. Right now, pre-tariff inventory makes up roughly a third of the total market.

The latest tariff action and agreements mean that, potentially, car price increases won’t rise as much as initially feared. At the same time, prices will probably go up, and automakers learned last time that they could find other ways to make their margin, which was bad for consumers. Incentives are already starting to drop, according to this report, and while 2025 MY cars aren’t seeing huge price increases, new models are.

My sense of all this is that car sales will muddle along through the rest of the year so long as the economy doesn’t crater. Next year, though, is going to be harder. Even if the tariffs do what the administration hopes and there are more big projects announced, it’ll take time to work its way through the economy. In the interim, fewer cars will be built/imported, and the ones on the market will get more expensive either through trimflation, pricing adjustments, and lower discounting.

Or maybe nothing happens? That’s also an outcome.

Is It Really BYD Vs Tesla?

I woke up this morning to these two headlines:

• “BYD profit dives 30% as price war takes toll on EV champion” – Nikkei Asia
• “BYD Profit Jumps as Aggressive Overseas Push Bolsters Sales” – Bloomberg

Uhh… what?

The short answer is that the first article is looking at Q2 and the second article is looking at the full first half of the year, so they’re both right. The temptation is to compare the future of BYD to Tesla, which would make BYD look a lot better.

There’s an argument that was made this week by analyst Tu Le that, maybe, this is the wrong way to view the dynamic. The basic premise is that this ignores the many other Chinese automakers and that BYD will probably sell more 4.5 or maybe even 5 million+ vehicles this year, while Tesla isn’t even going to sell half of that.

I think BYD vs. Tesla is a reasonable framing device because Tesla is still a massive player, including in China. However, his argument that Tesla is becoming less of a volume player and isn’t a premium brand anymore is quite persuasive:

That WAS true when Tesla entered the Chinese market in 2014, but over the last few years through numerous price reductions, they’ve pulled themselves more and more into the mass market. When Job #1 of the Model 3 SR rolled off the line at ShanghaiGiga on Dec 17, 2019 the MSRP was: ¥356K (~$50K), today the MSRP is: ¥236K ($33K).

[…]

Most importantly, traditional premium isn’t a thing anymore in the China market, if it was would Audi, Merc, Bimmer and especially Porsche struggle the way they have over the last few years in China?

Premium in China is being redefined by technology and user experience. That’s how Xiaomi is winning. Broken record: It’s really difficult to understand that if you’ve not been to China in the last several years.

Here’s the kicker though, it’s not been about BYD vs Tesla in a VERY LONG TIME as much as the media and some analysts want to make it about that.

If you continue to lower the price of your product, it’s no longer the “premium” product it was. While the price war made life a lot harder for a lot of Tesla’s competitors, and helped lower the price of EVs for some markets, it might have done so at the expense of Tesla’s aura.

GM Is Slowing Down Hummer EV And Escalade IQ Production Just A Bit

While BYD is on its way towards huge EV sales this year, GM is temporarily slowing down production of the Escalade IQ and Hummer EV at its Factory Zero plant. Why? Here’s what the company told the Detroit Free Press:

Production is slated to stop the day after Labor Day and resume Oct. 6. Meanwhile, the temporary layoff in place for second-shift production also is going to be extended until Oct. 6. The move impacts approximately 360 employees.

“Factory Zero is making temporary adjustments to production to align to market dynamics,” GM spokesman Kevin Kelly said in an emailed statement. “General Motors updates schedules as part of our standard process of aligning production to manage vehicle inventory.”

I guess the market dynamics don’t support a bunch of extremely expensive, heavy electric SUVs.

Ford Is Recalling Newer Cars

Ford CEO Jim Farley goes on a lot of road trips. I like this about Jim Farley. If I were CEO of a major car company, I’d do the same. Perhaps he should take a few more trips to visit his own plants and suppliers, as Ford’s ongoing quality problems haven’t gone away.

From USA Today:

Ford has recalled over 800,000 vehicles due to issues with rear brakes, tail lights and air bag issues that could increase the risk of a crash.

The wave of recalls, which also include certain Lincoln vehicles, are part of three separate notices that Ford issued on Aug. 22 to the National Highway Traffic Safety Administration (NHTSA) and were posted by the agency this week.

The recalls include vehicles such as the 2015 to 2018 Ford Edge, the 2016 to 2018 Lincoln MKX, the 2025 Ford Explorer, the 2025 Lincoln Aviator and the 2024 to 2026 Ford Ranger.

Even if Ford did massively improve quality going forward from, say, 2023, then the company would still have to contend with recalls related to older vehicles. It sucks, but what can Ford do about cars built before it made a big push to reduce recalls? What’s troubling here, though, is that the vehicles included are the 2025 Explorer/Aviator and 2026 Ford Ranger. Those are newer vehicles.

What I’m Listening To While Writing TMD

In honor of Funkmaster Flex’s last show on HOT 97, I’m breaking my “I don’t want to think about Kanye West” rule to play Flex’s historic 22-minute version of the song “Otis” from the Jay-Z/Kanye album.

The Big Question

What are your Labor Day plans?

Top photo: DepositPhotos.com