Tesla (TSLA 0.52%) is no longer a start-up automaker that doesn't have to play by the same macroeconomic rules as the rest of the auto industry. The EV specialist is building over 1 million vehicles per year, and if the auto industry collapses during a recession, there will be fallout at Tesla this time around. 

Recent data from the St. Louis Fed shows that sales of vehicles have dropped off in recent months. You can see below that the annual rate of 13.47 million vehicle sales in June 2022 is down from a peak of 18.78 million in 2021 as we started to come out of the pandemic. But there could be more headwinds from the economy as interest rates rise and the labor market gets weaker. 

Chart showing auto sales since September 2020.

Image source: St. Louis Fed.

The auto industry's headwinds

Over the last two years, the auto industry has benefited from strong demand and short supply because of chip shortages. But supply is ramping up at a time when interest rates are rising and we may be heading into a recession. 

According to a report from Cox Automotive and Moody's, the typical monthly payment for a new car rose 2.2% in June 2022 to $730, a record high. This reflects both higher interest rates and higher sale prices for vehicles. 

It may take time for interest rates to impact sales, but when rates double in a matter of months and incomes don't keep pace, the only two things that can give are the price of vehicles or demand (or a combination of the two). 

When we're talking about an average price of $47,000 -- and significantly more than that for a Tesla -- there's only so much prices can rise. We're already seeing that buyers are saying enough is enough. 

The employment picture isn't a headwind yet, but it could be coming. Tech companies are laying off thousands of people and Tesla even announced layoffs last month. We aren't technically in a recession yet, but if we are headed there, it'll likely lead to a drop in demand for automobiles.

Consumers are starting to pinch pennies

As everything from groceries to smartphones get more expensive, consumers are starting to think about where their money is going. This poses questions for Tesla: 

  • Will customers put off vehicle purchases for longer?
  • Will they trade down to less expensive EV options?
  • Will buyers forego the optional, high-margin Autopilot? 

The auto business is typically very cyclical because of high fixed costs and volatility in revenue. Problems only arise when we hit a recession and manufacturers see a loss of demand. Tesla has never been as big as it is now in a down cycle and has been able to grow in any environment. This time might be different. 

Tesla's wait times are telling

There's still a wait for Tesla's vehicles, but the wait is getting much shorter, which could indicate the start of a drop in demand. Below, I've outlined the wait times for base versions of each model in March 2022 versus the wait time today. (Note that upgrading to more expensive versions or adding full self-driving can lower wait times.)

Model March 2022 Wait July 2022 Wait
Model 3 Long Range 5 months 2 months
Model Y Long Range 9 months 6 months
Model S 8 months 4 months
Model X 10 months 9 months

Data sources: Inside EVs and Tom's Guide. 

In the last four months, Tesla has only sold about one month's worth of production, based on backlog in the U.S. 

Eventually, the company may have more capacity than it can sell, at least at today's price levels. At that point, Tesla will face the same cost challenges that automakers have been seeing for decades. 

What if the best is behind us?

Tesla has always been priced for perfection, but the company always achieved incredibly impressive financial targets. You can see the trend lines for gross margin, net income, and free cash flow have steadily gone up. 

TSLA Gross Profit Margin (Quarterly) Chart

TSLA Gross Profit Margin (Quarterly) data by YCharts.

But what if the best days are behind Tesla from an operational standpoint? What if consumers put off high-end vehicle purchases, question options like full self-driving, and look at lower-cost competition? What if the numbers don't always go straight up? 

Tesla's stock still sports a lofty premium, especially compared to General Motors (GM 1.23%) and Toyota (TM 0.14%) -- two automakers that have been through downturns before.

TSLA PS Ratio Chart

TSLA PS Ratio data by YCharts.

This economic cycle may not be different than a dozen other past economic cycles. But Tesla has never had the scale or operating costs that it currently has in an economic downturn. 

For Tesla, a recession could be very bad for investors who have gotten used to nothing but good news from the EV manufacturer.