Very different from prior recessions when the industry was caught with huge inventories and large production runs.
By Wolf Richter for WOLF STREET.
Sales of new cars and trucks in the third quarter, at 3.48 million new vehicles, was up about 2.8% from Q3 last year, according to data from the Bureau of Economic Analysis. But last year’s Q3 had been terrible: It was the quarter when dealers had run out of inventory because automakers had been cutting production for months because they couldn’t get the components needed to assemble their vehicles, because component makers had gotten hit by the chip shortages starting in late 2020 and early 2021. The chip shortages, though improving, continue to dog the industry.
But now there’s this additional wrinkle, triggered by the spike fuel prices: A shift from full-sized trucks and SUVs to vehicles with better fuel economy and to EVs. And supply chains, which are long and complex and go all over the globe, cannot react fast enough for sudden shifts in buying patterns.
So, compared to Q3 2019, new vehicle sales plunged by 19%. Compared to three years ago, quarterly declines have been in the 17% to 25% range for the past five quarters in a row. But sales had also been declining in the years before the pandemic. Compared to Q3 2016, sales were down by 22%. And at 3.48 million vehicles, sales were right back where they’d been in the 1970s.
Over the past four decades, the industry has been stuck essentially in stagnation interrupted by huge declines and recoveries. The troughs before 2021 were related to plunges in demand: the Double Dip Recession in the early 1980s; the 1990-1991 recession; and the Financial Crisis when GM, Chrysler, and a big part of the component makers filed for bankruptcy.
But in 2021 and forward, the trough was caused by supply shortages – not a drop in demand.
Estimating the piggybank of unmet demand.
There hasn’t been enough supply to meet demand since spring 2021. There are long waiting lists for various models that people have ordered because there were none in stock. And demand has shifted some toward fuel efficient vehicles. And there are long waiting lists now for those. There are now reports of 2023 model-year production runs having already been sold out, such as for the Ford Maverik hybrid pickup.
New vehicle inventories remain near record lows. At the end of August, inventories of new vehicles on dealer lots and in transit, at 1.23 million vehicles, were still down by 65% from August 2019 – though there are vast differences between brands: Kia, Toyota, and Honda dealers are essentially out, but Ram, Dodge, Jeep, Buick, and Chrysler dealers have plenty or more than plenty:
Most people can continue to drive what they already have for a year or two or longer. And so most people can wait for supply to arrive. But eventually, they will need to and want to buy a vehicle.
The catastrophic flooding from a hurricane, such as Ian, can remove a few hundred thousand vehicles from the national fleet that need to be replaced quickly. (Watch out when buying a used vehicle with a clear title that had been flooded, which can cause mega-problems, and they will be showing up soon in distant states to be sold to unsuspecting folks).
So now there is this mass of potential buyers out there that haven’t bought a vehicle because they couldn’t get one. And this group of potential buyers grows with each quarter that production cannot meet demand.
This includes fleets, such as rental fleets, but also commercial and government fleets, that have had trouble getting their orders filled since spring 2021, and that are keeping vehicles in service long than they would have otherwise.
Higher interest rates will sideline some of the retail buyers, and they may switch to used vehicles.
We can estimate how much unmet demand has been building up. If actual demand would be on average in the 4.2-million-vehicle range per quarter, while supply has been in the 3.4-million range over the past five quarters, then each quarter, 800,000 vehicles get added to the unmet demand pile, which by now is around 4 million vehicles in total.
So even in a recession, this unmet demand for vehicles would be hanging over the market, and would turn into sales as vehicles arrive. As supply increases in a recession, sales might actually rise from today’s desperately low levels.
This is very different from prior recessions, where the industry was caught overstocked with huge amounts of inventory and large production runs to supply more inventory, just when demand suddenly sagged.
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