Roundtable host Joe Miller dove into detailed economic outlooks with panelists (L to R): Jonathan Smoke, chief economist at Cox Automotive; Tom Kontos, chief economist at ADESA; and Dr. Alex Yurchenko, chief data science officer at Black Book, at the International Automotive Remarketers Alliance's annual Summer Roundtable in Nashville, Tennessee, on Aug. 17, 2022.  -  Photo: IARA

Roundtable host Joe Miller dove into detailed economic outlooks with panelists (L to R): Jonathan Smoke, chief economist at Cox Automotive; Tom Kontos, chief economist at ADESA; and Dr. Alex Yurchenko, chief data science officer at Black Book, at the International Automotive Remarketers Alliance's annual Summer Roundtable in Nashville, Tennessee, on Aug. 17, 2022.

Photo: IARA

The U.S. economy does not appear to be in a typical recession, if at all, with plenty of consumer money, vehicle demand, and available jobs on the sidelines.

That could redound to the used vehicle markets, wholesale and retail, which appear to be drifting to a more normal balance but still must trek a long way to get there, according to the sum total of comments and figures presented by remarketing economic analysts at the IARA Summer Roundtable in Nashville, Tennessee, on Aug. 17.

Host Joe Miller of AutoIMS moderated a panel, “Economics As a Service: A Real-Time Look at the Economic Drivers of Remarketing,” which drew insights from the solid troika of familiar remarketing industry experts Jonathan Smoke, chief economist at Cox Automotive; Tom Kontos, chief economist at ADESA; and Dr. Alex Yurchenko, chief data science officer at Black Book.

Are We in a Recession or Not?

The panel first addressed the question of whether the U.S. economy has dipped into a recession. Short answer: No, thanks to conflicting indicators that don’t add up to a traditional recession.

“A true recession is broad-based decline in economic activity that goes for a few months,” said Smoke, who led the panel on the overall U.S. economic picture. “Although we’ve had two negative quarters, GDP is not actually measuring net income, just product. What gave us a negative 1Q, was a surge in imports because congestion ended.”

Russia also invaded Ukraine, causing inflation to shoot up, resulting in negative net exports for the first quarter, Smoke said. Since retailers did not sell as much in the first quarter, inventories grew, and then did not grow in the Q2, resulting in a slight decline, he added.

 “Consumer spending continued to be strong in each of the quarters, but slowing,” Smoke said. “It feels like a recession, with housing and the pain in the tech sector, but the rest of the economy is holding in there. I’m in the camp we are not in a recession now, and I do believe we can avoid going into one.”

Overall, the chance of recession is about 45%, said Smoke, who relayed that figure to executives at his company. Business leaders should prepare for both.

Smoke said if the next two quarters this year sees stronger economic behavior, then it could result in 2% annual growth, down from 6% in 2021. In many parts of the U.S. the cost of a gall on gas has fallen below $4, a decline of 21% over the previous six weeks.

Jonathan Smoke, chief economist at Cox Automotive, told the IARA audience that he puts the chance of a full recession at 45%, however, enough pillars of the economy appear to be holding together.  -  Photo: IARA

Jonathan Smoke, chief economist at Cox Automotive, told the IARA audience that he puts the chance of a full recession at 45%, however, enough pillars of the economy appear to be holding together.

Photo: IARA

What Does the Alleged Recession Mean for Automotive?

For the automotive industry, this so-called recession brings rare circumstances.

“We’ve never gone into recession with zero supply,” Smoke said. “Some of the dynamics will be challenging. The consumer is still hanging in there. The consumer is not pulling back but adjusting.”

Consumers may be shifting spending away from big durable goods amid higher interest rates, but so far are not throwing in the towel, as evidenced by credit card data that does not signal a large pullback, Smoke said.

And the reason is they are still employed. Payrolls have recovered from the pandemic and job losses are small. As of August, the unemployment rate was the same as in February 2020 and in 1969: 3.5%.

“You always had thousands of jobs lost before a recession began,” Smoke said. “Inflation is still biting into income, and households are not doing as well, but if we convince ourselves into a recession and behave like one, then we’ll be in a recession.”

Most household are in solid financial shape, with many having refinanced their homes or bought them with low interest rates, Smoke said. “Debt coverage ratios are very strong. 80% of households have more liquid money, which is three to five times more money relative to when the pandemic began.”

That leads to a potential upside, with $3 trillion of savings in American consumer accounts enabling many households to withstand inflation.

While the auto market is experiencing a down year, the positive numbers of 2021 are tough to repeat given the unprecedented stimulus that has now subsided, Smoke said. “The auto market is dealing with inflation and declining consumer sentiment. We have far less supply than when we started the year.”

In addition, the Omicron variant depressed numbers in January, followed by delayed tax refunds that many consumers use to buy vehicles. “All of that took normal energy out of used vehicle retail market,” he said. Now the combination of supply chain constrains and rising interest rates over the summer has added pressure and changed the math on monthly payments.

Those median household income struggles will deter more buyers of used vehicles, since they must spend more on rent, food and energy, Smoke said. They will drop out of big purchases.

“The average used vehicle payment is $400,” Smoke said. “Most households with used vehicles can’t afford to spend more than that. Those consumers can’t buy anymore.”

 Meanwhile, wealthier households, who are in better shape, likely will opt to buy the used vehicles instead of even higher priced new ones.

“Upper income households are going into markets they usually don’t,” Smoke said. “The No. 1 selling used vehicle is the 2016 used Honda Accord, but now higher income and credit consumers are buying the vehicle. They’re buying more used because they can’t buy new.”

More Notable Vehicle Trends

  • Smoke likened new vehicle production to an object bobbing along the ocean floor, due to the invasion of Ukraine, European energy shortages, Chinese COVID lockdowns, and earthquake in Japan. “2023 will be the start of a slow crawl off the ocean floor,” he said.
  • Days’ supply drifted higher because the sales pace has slowed. Low inventory, slower production, higher prices, higher interest rates, and fewer incentives all play into fewer deals.
  • As a result, the used market overall has edged closer to normal in days’ supply. While used vehicles are depreciating again, they are still high priced.
  • Summing up the new and used vehicle market signals, Smoke predicted, “We won’t see 17 million in vehicles sales for another five years.”

China-Taiwan, Russia-Ukraine & Chip Supply Wild Cards

In the geo-political world, two big risks lurk for the automotive market: Russia-Ukraine and China-Taiwan.

Given the relative stalemate between Russia and Ukraine, the energy and food markets have calmed somewhat, but Europe is facing a tough winter with squeezed energy supplies.

A Chinese attack on Taiwan, however, would be a major disruptor, leading to reverberating consequences in the supply chain, especially with semiconductors used for vehicle production.

“The heart of the semiconductor industry is Taiwan,” Smoke said. “What gave us problems last year in production and supply, would give us problems again. You would have winners and losers in that situation.” While Smoke put the percentage chances of such an event in the single digits, it begs the question, “How would we react in a world that faced that problem?”

More likely than not, absent a full-blown war, the automotive industry could end up oversupplied, Smoke said.

“We pore over the data every week, and we have seen an uptick with inventory levels with one data point. We’re on the verge of starting to see some of the challenges alleviating. We could very quickly go from being undersupplied to oversupplied. I think we are close to the end.”

The U.S. economy is resilient, and the recent federal CHIPS and Science Act will succeed at giving the U.S. chip market options and alternatives if China turns negative, Smoke added.  

“There is no major recovery in sight on the supply drought. We have fairly flat growth in dealer consignment volume," said Tom Kontos, chief economist at ADESA.  -  Photo: IARA

“There is no major recovery in sight on the supply drought. We have fairly flat growth in dealer consignment volume," said Tom Kontos, chief economist at ADESA.

Photo: IARA

Wholesale Used Vehicle Inventories Moving Up

Tom Kontos elaborated on Smoke’s economic picture and numbers, pointing out that the wholesale used vehicle supply situation has maintained inventories at higher levels than during the peak pandemic period.

In detailing the market, Kontos reported:

  • There has been a 33% or more decline in sales at physical auctions, based on Auction Net data. Sales have not returned to pre-pandemic levels of supply by any means.
  • Commercial, rental, manufacturer and captive supply has been down 60% since pre-pandemic, while dealer consignment level has declined 25% and the commercial consignment volume, 60%.
  • Fleet sales, hit early in pandemic, are now seeing more allocation, especially I rental cars which have the shortest half-life. Less fleet volume is recycling its way through wholesale channels than what was seen pre-pandemic.
  • “Used vehicle supply will be in semi-drought conditions for a few more years,” Kontos said.
  • New rental fleet sales remain low, but there has been a slight uptick in off-rental volumes.
  • New commercial fleet sales have been relatively steady, and off-fleet volumes are increasing.
  • Manufacturers are supplying a steady flow into commercial fleets.
  • A rise in subprime delinquencies suggests more vehicle repos may be forthcoming. “We’re seeing more repos of late from manufacturers’ captives,” Kontos said.
  • “There is no major recovery in sight on the supply drought. We have fairly flat growth in dealer consignment volume.”
  • Dealer consignment is likely to hold steady at decreased levels.
  • Wild card: Off lease volume reaching the wholesale market has been depressed of late. Those may grow in 2023 and beyond, as these leases were written after the pandemic effects on wholesale values were already happening.
Dr. Alex Yurchenko, chief data science officer at Black Book, predicts it will take years for the used vehicle wholesale market to return to a full normal.  -  Photo: IARA

Dr. Alex Yurchenko, chief data science officer at Black Book, predicts it will take years for the used vehicle wholesale market to return to a full normal.

Photo: IARA

A Long Return to Normal

Alex Yurchenko added that wholesale vehicle prices are declining but remain above pre-COVID levels for the foreseeable future. They are still 80% above pre-Covid prices. “It will take years to return to normal levels.”

“We are on a roller coaster for week-over-week wholesale price changes,” Yurchenko said. “Consumers are pausing on buying used vehicles.”

He shared some key stats on used vehicles:

  • Consumer confidence is correlated with gas prices, but still at record 30- to 40-year lows.
  • Fluctuations in vehicle pricing indicate a lot of uncertainty in the market. Numbers show a wide range of appreciation and depreciation rates among different vehicle segments.
  • Used vehicle depreciation so far is15% for 2022, compared to 28.7% appreciation in 2021, but will be more normal this year. However, “we’re not going back to pre-COVID levels anytime soon.”
  • Yurchenko surmised that vehicle values will stay elevated for at least several years with a shortage of used vehicle supply near-term. Rental and fleet returns will stay at lower levels in the next three to four years.
  • In a more positive sign, average retention of three-year-old electric vehicles appear to be loosening. With manufacturers expected to produce a much wider mix of models coming into the market, he estimated 71% retention in 2022 and 53% in 2025, up from 43% in 2021.
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