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Used-Car Recovery Continues, Supply Lags

By Jeffrey Bellant July 01, 2020
Charlie Chesbrough, Cox Automotive’s Senior Economist Charlie Chesbrough, Cox Automotive’s Senior Economist

Cox Automotive’s Mid-Year Review brought mixed news, but with a rosier outlook for used cars as we move later into the summer and fall.

Chief Economist Jonathan Smoke started with a high-level view of the economy and, not surprisingly, it wasn’t pretty.

“Obviously, the COVID-19 pandemic has produced a significant recession,” Smoke said.

The economy felt a 5-percent decline in Q1, even though the pandemic only really affected the second half of March, he said.

“We are forecasting that the second quarter, when all is said and done, will be down 39 percent on an annualized basis,” Smoke said. “That is unprecedented in the quarterly GDP data.”

That led to increase unemployment from 3.6 percent in May 2019, to 13.3 percent this past May.

However, consumer sentiment and confidence could have been worse,” said Smoke, who credits the economic stimulus payments as one reason for that.

Wages and disposable income were stronger than expected, he said, but the numbers don’t tell the complete story.

“The wage looks so strong because the low-wage jobs were disproportionately included in the job losses, so that the remaining employees tended to be at higher wages,” Smoke said.

The disposable income may be due to the stimulus checks, combined with the enhanced unemployment payments included with the overall stimulus.

Smoke said data is still positive in the areas of auto finance, interest rates, borrowing costs and mobility costs.

Mobility costs have dropped because of the lower price of gasoline, as well as the fact that consumers are not driving as much, he said.

However, gas and oil prices are now creeping back up.

In terms of dealer sentiment, the view is that the economy was weak as of April and May. Independents have a more negative view of the market than new-car dealers, Smoke said.

The biggest surprise coming out of the quarterly data for Smoke was that more franchise dealers than not are optimistic about the next three months.

Independents collectively expect the markets to be weak, Smoke said.

But he expects that by the third quarter, sentiment should be up for both new- and used-car dealers.

Used car sale recovery
Cox Automotive's used car sale recovery index

“The vast majority of economists – 69 percent –­ and that includes myself,” Smoke said. “believe that we’re going to see a Nike swoosh-shaped recovery.”

Despite sentiment, the data show there is – like the new-car market – a recovery in the used-car market, said Zo Rahim, manager of economic & industry insights.

He said the used market has “improved greatly” since the shutdowns in April.

“Though the market is still down year-over year,” Rahim said, “you can still expect continued recovery in the used-car market as we navigate the second half of 2020.”

The Manheim Index gained 9 percent in May and an estimated 6.6 percent by mid-June, Rahim said.

Retail prices remained fairly stable, even has wholesale prices dipped during the downturn. But wholesale prices were recovering in June for three-year-old units.

Both retail and wholesale supply are dropping, however.

On April 8, based on a rolling seven-day estimate of used retail days-supply, it peaked at 118 days.

“Normal used vehicle supply is about 44 days,” Rahim said. “The most recent seven-day estimate of used retail supply is at 30 days.

“We estimate that wholesale supply peaked on 149 days on April 9, when normal supply is just at 23 days. It was down to 27 days for the most recent seven-day period.”

Rahim said wholesale supply may be below normal by July 4. However, he sees “waves of supply coming in later this summer and fall from lease returns, repossessions and even rental car companies could lead to an environment where supplies during that period are higher than normal.

“CPO sales decreased 6 percent year-over-year in May, but were up 87 percent month over month,” Rahim said. “It’s just another sign of the recovery in sales being led by demand.

Younger used cars are expected to have strong interest the rest of the year.

Optimism is on the rise with franchise dealers
Optimism is on the rise with franchise dealers        photo credit Ildar Sagdejev

Senior Economist Charlie Chesbrough said that before COVID-19, the bottom of the new-car market this year hit the week of April 20, though based on year-over-year data, it was probably closer to the end of March.

 

“Since then, the recovery has begun,” Chesbrough said.

Current data shows the used market is up at last check, while the new-car market was lagging, he said.

But on the new-car side, seasonably-adjusted annual selling rates hit rock bottom in April with a sales pace of about 8.7 million – following 2019’s 17 million.

That figure is the lowest going back as far as the industry has measured, Chesbrough said.

He expects the rate for annual new-car sales will be 12.6 million for June.

Cars have done worse than trucks, with cars down about 40 percent and trucks only down 25 percent.

Retail activity is better among new cars, with fleet sales down 28 percent.

“Leasing activity is also down,” Chesbrough said. “It fell to 20 percent (of sales) by April.”

The 0-percent deals had a big impact on that

“On the optimistic side (for new-car sales), the worst of the crisis may be behind us,” Chesbrough said.

Among manufacturers, Hyundai and Kia seem to be the early winners. Nissan, meanwhile, is having the toughest year, Chesbrough said, in some part due to its aging products and reliance on fleet sales.

Chesbrough warns that sales numbers varied by states because of shutdowns over COVID-19. Texas and Florida won bigger market share because of the closings in the Northeast.

Florida and Texas are seeing infections spike while states that had lost market share during the worst of the crisis are not bouncing back, Chesbrough said.

Wholesale supply may be below normal by July 4
Wholesale supply may be below normal by July 4       photo credit Helgi Halldórsson

One concern is low inventory, which has dropped to a 71 day supply, below where it was at this time last year, Chesbrough said.

“This number could go down even further,” he said.

Michelle Krebs, Cox executive analyst, said delays in purchases began as a response to COVID-19, but more recently are affected by the recent civil unrest and overall uncertainty about unemployment and a potential second wave of the coronavirus.

Digital retailing has jumped as a result of the pandemic and 58 percent of customers felt buying online was a better experience, Krebs said.

“That is no surprise to us,” she said.

One enormous jump was in the category of year-over-year numbers for deals submitted online. May 2020 saw a 662 percent increase of deals submitted online compared to May 2019 of those types of deals.

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Last modified on Wednesday, 01 July 2020 13:22

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