Earlier this month, during our quarterly Manheim Used Vehicle Value Index (MUVVI) conference call, there were a significant number of questions related to the health of the US economy, inflation and the impact of used vehicle prices on inflation. These are all important topics worth addressing.
First, as I noted during the call, the US economy has had a lot of headwinds so far in 2022, and consumer confidence is indeed a major concern. Consumer confidence declined further in the second quarter as Americans faced rising prices, a turbulent stock market and increasingly negative politics. It has recovered somewhat so far in July, but remains depressed and unlikely to improve much as more and more experts ask very publicly, “Are we going into a recession?”
The probability of a recession is definitely increasing, but I think a recession in 2022 is not likely due to the general strength of the consumer. We have a total unemployment rate of 3.6% and continue to see positive job creation. While there may be some tension in sectors such as real estate, mortgage financing and technology, the scarcity of workers probably means we won’t see much deterioration in the job market. And since the labor market favors the worker, wage growth is historically strong.
Yes, inflation is at its highest point in 41 years and real profits have turned negative. But to focus only on negative real incomes misses an important point: 80% of households have significant pandemic savings and are financially sound. We don’t see any indication in retail sales, broader consumer spending data, or auto sales that there is any meaningful consumer withdrawal.
There is no doubt that higher transportation costs are weighing on our automotive industry – both vehicle prices and fuel costs. New vehicle transaction prices hit a record high in June, according to Kelley Blue Book readings, at more than $48,000, and the Cox Automotive/Moody’s Analytics Vehicle Affordability Index for new cars continues to fall.
However, the new vehicle market is driven by ongoing inventory shortages, so the dynamics are tough. Supply remains very tight and is even lower than last year on an absolute basis. Car prices are high and incentives are historically low as demand continues to outpace supply for the most part. And with limited capacity to produce vehicles, automakers are clearly focused on building more expensive models and configurations to maximize revenue and profit per sale.
However, the second-hand market is a very different place. In fact, according to our recent data, the used vehicle market is returning to normality after more than a year of remarkable price movements.
Earlier this month, the government’s consumer price index (CPI) indicated that inflation accelerated in June. Annual inflation reached 9.1%, the highest since November 1981. The major categories that consume a significant portion of the consumer budget, such as food, rent and gasoline, posted significant gains. New and used vehicle prices also contributed to June inflation figures, although our June retail and wholesale used vehicle prices data showed both declines.
The used market has much more normal delivery conditions. Used goods supply started the year higher as dealers built up inventories in January and February, but has been on a declining trend since then. Used vehicle sales are healthy and shopping day supply has normalized in June, outside last year’s lows and very close to what we had in 2019.
Retail prices for used vehicles remain high, but sales prices for June fell to $28,012, compared to a revised $28,312 at the end of May. Year-on-year price growth was 28% in mid-April, but has since declined and is now 12% higher than a year ago. We believe further declines in retail listing prices will continue through the summer.
As prices fall, in a predictable and normal way, the demand for used will increase. That means we could see weeks and months in the second half of 2022 where we see the industry selling more used vehicles than last year.
At the wholesale level, data shows that values are clearly back from their record highs last winter. In June, we reported that the unadjusted average wholesale price was up 10.7% year over year, just under half of what it was at the end of March this year. We have mainly focused on unadjusted prices as the past two years have wreaked havoc with seasonal patterns. I won’t go into the details of seasonal adjustment algorithms here, but let me say that the market needs to be careful when considering seasonally adjusted metrics because of the highly abnormal patterns we see since 2020.
We expect year-on-year wholesale value gains to decline more in the second half of the year and turn negative in November as we round out the gains in the fall of 2021.
“Normal depreciation patterns” was a major theme of our MUVVI call earlier this month. Indeed, we believe that the used vehicle market has returned to equilibrium. We no longer see desperate buyers, but we don’t see desperate sellers either. Show me an expert at predicting prices, and I bet that person strives to understand the offer, and especially when the offer indicates selling pressure and when it indicates buying pressure.
Looking at the current supply of wholesale days, we see a market that looks quite normal. Our estimated daily stock for Manheim suggests that we have a balance between sellers and buyers. As a result, we should see mostly normal price patterns in the coming months.
Earlier this week, we reported that unadjusted wholesale prices fell 2.2% in the first half of July compared to the June MUVVI measurement. During the first two weeks of July, Manheim Market Report (MMR) prices saw higher-than-normal but diminishing declines. At that time, the Three-Year-Old MMR Index, which represents the largest model year cohort at auction, experienced a cumulative decline of 1.5%. The daily sales conversion rate also declined from June and was lower than the typical conversion rate at this time of year. These indicators suggest that wholesale used vehicle values will decline further in the second half of the month. And wholesale prices, we know, are a leading indicator of retail prices.
There is no doubt that used vehicle price inflation is now a reality in the market, but we believe that the biggest price increases have been in the rear-view mirror and should play less of a role in future CPI measurements. The Bureau of Labor Statistics uses a narrower view of the used vehicle market when assessing price increases, so it’s not surprising to see conflicting trends emerging from that reading on used vehicle prices. The Manheim Index typically leads the movement in the CPI with a 2-month lag. Given what we’re seeing right now and what we expect to see for the rest of the year, used cars will no longer contribute to inflation. In fact, used cars should be a source of deflation in the coming months.
Our more holistic view shows normal vehicle depreciation patterns returning to the market and an overall balance between supply and demand. Even with higher interest rates and a slowing economy, we believe there is very little risk of major falls in vehicle demand. The buzzword here is normal. And while that lasts, we enjoy it.
Jonathan Smoke is chief economist at Cox Automotive.