This change in the inflation mindset is likely not “temporary.”
By Wolf Richter for WOLF STREET.
Record new-vehicle retail sales despite slashed incentives by automakers, record new-vehicle transaction prices, spiking used-vehicle prices and trade-in values, very tight inventories on popular models, and record dealer profits – that’s what stimulus and stock-market gains along with supply disruptions produced in May. It has inflation written all over it, as the whole mindset has changed.
The average transaction price (ATP) of new vehicle sold to retail customers in May reached a record $38,255, according to J.D. Power estimates. The ATP is a function of the price of new vehicles sold to retail customers and of the mix of new vehicles sold: the shift to higher-end trucks and SUVs that we have been seeing in recent months helped push up the ATP. The chart, based on data provided by J.D. Power, shows the months of June and December in every year except in 2021, when it shows the ATP for May:
The MSRP (manufacturer’s suggested retail price) doesn’t normally change during the model year. What changes are the automakers’ incentives paid to dealers and/or to customers, and the prices negotiated between dealers and customers.
Retail sales, despite much lower incentive spending, jumped by 10.6% from May 2019 to 1.35 million units, according to J.D. Power estimates.
This surge occurred despite automakers slashing their incentives, with the average incentive spending per new vehicle dropping by 24% compared to May 2019, to $2,957.
But fleet sales plunged by 49% from May 2019, to just 167,000 units, amid complaints from rental car companies that they have trouble ordering new units for their fleets as automakers are juggling supply chain issues and component shortages due to the semiconductor shortage, and are prioritizing high-profit margin retail sales with high-end retail models, such as pickups and SUVs.
And overall new-vehicle sales – strong retail sales and dismal fleet sales – at 1.53 million units are still expected to be down about 2% from May 2019.
The mix of new vehicles sold to retail customers continues to shift from cars – generally lower-priced and lower-profit-margin vehicles – to trucks and SUVs that are generally higher-priced and high-profit-margin vehicles. In May, trucks and SUVs accounted for 76.2% of new-vehicle retail sales.
This trend toward high-priced vehicles and strong retail unit sales, created another record in terms of dollars: Consumers are on track to spend a record $53.1 billion on new vehicles in May, up by 27% from May 2019, according to J.D. Power.
And new-vehicle dealer profits soared. Gross profit and profit from Finance & Insurance (F&I) combined are expected to reach an all-time record of $3,245 per new vehicle sold.
Soaring used vehicle wholesale prices, which pump up used vehicle trade-in values, helped create new vehicle profits through trade-ins.
Prices of used vehicles that were sold at auctions around the US through the first half of May spiked by 45% from May 2019, according to the Used Vehicle Value Index by Manheim, the largest auto auction operator in the US. All vehicle segments experienced large price increases at auction, and prices of pickup trucks exploded — though I suspect that some but not all of that spike will eventually unwind:
These spiking wholesale prices of used vehicles have the effect to raising trade-in values, and people that might have been upside down in their vehicles – owing more than trade-in value – might now find themselves less upside down, or even having positive equity in their trade-ins, which makes it a lot easier for the dealer to put a highly profitable deal together.
New vehicle inventories are tight, and very tight in some popular segments. The pace of sales has been exceeding the supply of new vehicles, where production is constrained by the semiconductor shortage, and the situation has not yet improved.
On average, the number of days that a new vehicle was in dealer inventory before it was sold dropped to 47 days, when 60 days is considered healthy. And 33% of the vehicles were sold within 10 days of arriving at the dealer, up from 18% in May 2019. This is an indication that the hottest units, such as trucks, are often sold when they’re unloaded. This includes vehicles that were ordered by retail customers.
Used vehicle inventories are tight as well. Retail supply was down to 38 days in mid-May, according to Manheim; and wholesale supply was down to 18 days (23 days is normal).
That companies can increase not only their prices – based on strong demand and mangled supply – but also their profits to the extent shown by record new-vehicle gross and F&I profits, shows that the entire inflation mindset has changed, that this time, consumers are willing to pay more. This is a theme we’re now seeing across the economy. And that change in mindset is likely not “temporary.”
Enjoy reading WOLF STREET and want to support it? Using ad blockers – I totally get why – but want to support the site? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.
Many experts agree that metal roofs are a great defense against wildfires. Click here or call 1-800-543-8938 for details from our sponsor, the Classic Metal Roofing folks.
Classic Metal Roofing Systems, the leader in fire safe roofing for residential applications, manufactures products that are 1/20 the weight of most tile products and eligible for Class A, B, or C fire ratings as determined by roof preparation.