Pent-up demand in time for the recession when supply could finally increase enough? This chaotic economy will continue to surprise us.
By Wolf Richter for WOLF STREET.
Automakers have now reported June new-vehicle sales, or second-quarter new-vehicle sales, for the United States, with the exception of Tesla, which does not report U.S. sales but only global sales. Every automaker, even Toyota, and now even Tesla, are grappling with ongoing semiconductor shortages, and they started June with desperately low inventory on dealer lots and in transit.
Thus, new vehicle sales in June fell 13.5% from the already horribly beaten June 2021, to 1.127 million vehicles, and collapsed 25% from June 2019, the last decent year in the world. industry, according to data released by the Bureau. of Economic Analysis today:
Monthly vs Quarterly Sales, and What a Mess It Is Now.
All automakers used to report US sales (deliveries to end users) on a monthly basis, except Tesla, which does not report US sales at all. Then GM decided in 2018 that it wasn’t going to do that anymore, and it moved to quarterly sales reports. Other automakers followed.
Ford moved from monthly sales reports to quarterly reports in 2019. But then, during the pandemic, Ford flip-flopped and went back to monthly reports, which now draw comparisons to the last decent year the industry had – 2019 – impossible because Ford only reported quarterly Sales. But there’s still 2018 left, so that’s where we’ll look for inspiration.
Today, Ford bragged that its June monthly sales jumped 30.5% from June 2021. But wait…
In June 2019, Ford only reported quarterly sales, so we can’t compare Ford’s monthly sales in June 2022 to June 2019, the industry’s last decent June.
But in June 2021, Ford ran out of inventory and sales crashed to just 115,789 vehicles, down 50% compared to June 2018 (230,635 vehicles).
And from that slumped base in June 2021, Ford sales have now jumped 30.5%, but they were still down 34.0% compared to June 2018!!
So you see where this leads. In terms of quarterly sales, in the second quarter, Ford sold 483,688 vehicles. In the second quarter of 2019, it had sold 650,336 vehicles. In other words, Ford’s second-quarter sales fell 34% from the last decent quarter, in 2019. And Ford, among the hardest hit by chip shortages, was among the worst declines in good moments (2019).
These are huge sales drops, and they hit all mainstream automakers to a greater or lesser extent.
Total new vehicle sales for the entire industry in the second quarter fell 20.8% from levels beaten in the second quarter of last year, to 3.29 million vehicles. Although up slightly from the first quarter, sales were down 21.3% from the second quarter of 2019. These quarterly sales figures of around 3.3 million were observed for the first time in the 1970s.
Not a demand problem, but a supply problem.
June began with 1.13 million new vehicles in inventory at dealer lots and in transit, down 70%, or 2.68 million vehicles, from the same period in 2019, according to Cox Automotive, based on its Dealertrack data. In 2019, the vehicle stock averaged 3.66 million vehicles. So far this year, inventories have averaged 1.10 million vehicles:
Under these conditions, customers end up having to order a vehicle and have to wait months for delivery. They always pay any price, including on the sticker. Automakers, with no inventory to promote, slashed their incentives from around 10% of MSRP in 2019 to just 2% of MSRP in June. And the average transaction price in June hit a record high of $45,844 due to price increases, overpricing and automakers prioritizing higher-end models to try to make up for lost volume.
These are signs of supply issues, not demand issues:
Pent-up demand in time for the recession when supply could finally increase enough?
Between February 2020 and June 2022, approximately 8 million fewer new vehicles were only sold during the period between February 2017 and June 2019. By the time production catches up to demand, there could be 10 million fewer new vehicles sold than during the equivalent pre-pandemic period.
These 10 million vehicles would represent a huge shortfall. But that came because supply plunged due to shortages, not because demand plunged, like during the Great Recession.
We don’t even know what the demand really is; we just know that it exceeds supply by a large enough amount to trigger these extraordinary price conditions, inventory shortages, and the sudden, large-scale drive by Americans to order vehicles.
Vehicles don’t last forever – they last longer than before, but not forever. And people cling longer to what they already have, but they can’t cling to their vehicles forever. Eventually, they will replace these vehicles.
So when the supply finally increases – which may be just when a recession could be waltzing through the economy – many people are in some cases waiting years to buy a new vehicle. A recession means some people lose their jobs, but most people keep working and earning money, and now, finally, there are vehicles out there that they can buy.
The pent-up demand might not be all 10 million vehicles, but maybe only a part of it, and it won’t materialize all at once, but it will be there when the supply comes, even if the prices above may have to disappear, and dealers may have to apply discounts off the MSRP, in order for these people to buy.
But that hidden demand is now there and growing every month, waiting for supply, waiting for the market to normalize somehow. I think that’s one of many factors – similar to labor shortages and other issues – why the next recession might not really be a recession in the real economy, even if the markets financiers will struggle with much higher interest rates, QT and inflation. .
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