Going to be tough for a recession to gain momentum with this kind of demand-overhang going into it.
By Wolf Richter for WOLF STREET.
Sales of new cars, SUVs, vans, and pickup trucks in Q1 rose by 11.7% year-over-year, to 3.68 million vehicles, according to data from the Bureau of Economic Analysis. It was the best quarter since Q1 2021, when the chip shortages began. But still far from normal-ish: Q1 sales were still down by 7.6% from Q1 2019:
New vehicle inventories are recovering, but still woefully low.
Supply chain issues have been getting resolved step by step, and production has been ramped up, and new vehicle inventories have been rising for months.
Overall, inventories remain far below healthy levels, with some models in short supply or out of stock, and customers still have to deal with waiting lists and long waits after they order. But other models – including many truck models – are in ample supply.
Inventories of new vehicles on dealer lots and in transit have more than doubled since the low point in the fall of 2021, to 1.80 million vehicles at the end of February, according to data from Cox Automotive. But this was still less than half the inventory in 2019:
Massive pricing distortions to be worked through.
Dealers and automakers have pushed up prices into the absurd, and in addition, automakers have pushed their models even further upscale over the past two years, to where the average transaction price (ATP) in the industry is now nearly $46,000, according to JD Power, up by $13,000 from 2019, which is crazy.
Automakers have worked hard for years to turn the average new vehicle into a luxury product that the average hard-working American can no longer afford. At first, those efforts were backed by artificially low interest rates. Then, as automakers were grappling with supply shortages, they prioritized the high-end to protect their dollar-sales, given that production and vehicles sales had collapsed. And now supply is picking up, and interest rates are much higher.
The way this gets dealt with is with cuts to MSRPs – we’ve already seen some price cuts among EV models – and with bigger discounts, incentives, and rebates as inventories begin to build. There will also be a shift in production to less-loaded and more affordable models.
Pent-up demand grows to 6 million new vehicles.
Yes, it’s a thing in the auto industry – always has been. Americans love their motor vehicles, and they’re not going to just drive them into the ground and then switch to riding bicycles or whatever.
Most people can continue to drive what they already have for a year or two or longer. And when the supply shortages hit, and when the ridiculous pricing games started, some consumers decided to wait for supply to arrive and build to adequate levels, and for these shortages-driven pricing games to end. But eventually, those who’ve been waiting a couple of years to buy a new vehicle will buy one. This is the pent-up demand.
We can estimate this pent-up demand: Over the seven quarters since the chip shortages hit vehicle sales (starting in Q2 2021), automakers sold 24.1 million vehicles. Over the equivalent seven-quarter period just before the pandemic, automakers sold 30.1 million vehicles. So by now, consumers and fleets (rental fleets!) have bought 6 million fewer vehicles than over the equivalent period before the pandemic.
This piggybank of 6 million new vehicles of pent-up demand will continue to grow until vehicle sales and supply reach normal-ish pre-pandemic levels.
So if there is a slowdown, enough consumers with money or borrowing capacity will be desperate enough to buy a long-delayed new vehicle when supply is adequate and when the pricing games stop.
Normally, the pent-up demand builds during a recession as consumers, who’d splurged on vehicles before the recession, cut back spending, thereby triggering the recession, or making it worse. Inventories pile up as sales drop. So there is this supply-overhang. Automakers react by cutting production and laying off people, further worsening the recession.
Then, at some point, buyers are coming back out to make their recession-delayed purchases. This pent-up demand, created during the recession, supports sales in the years following the recession – hence the recovery.
So, normally, there’s this supply-overhang going into a recession. Now there is this demand-overhang going into a potential slowdown.
But this will be the first time I can think of that the US economy might enter a slowdown with pent-up demand for new vehicles fueling sales even as other parts of the economy slow.
Now we have this pent-up demand for 6 million new vehicles – on top of regular demand. And given how important auto manufacturing, component manufacturing, auto sales, and everything around them are to the US economy, this pent-up demand might put a damper on the hopes for a recession.
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