covid-19 market update · 2020-06-16 · covid-19 market update staff. there is a concern that this...

COVID-19 MarketUpdate6-16-2020

SUMMARY Fueled by continued stimulus payments, the success of the Federal Paycheck Protection Program, and unsatisfied demand from April and May, last week continued a story of rebounding wholesale prices, with volume-weighted overall car and truck segments both showing gains for a third week in a row, gaining 0.62% overall. As for specifics, the overall car segments increased by 0.88% (compared to 0.16% the prior week) and the overall trucks and SUV segments increased again this past week at 0.52% (compared to 0.08% the prior week).

Wholesale prices declined 1.5% in May – a substantial improvement compared to April when prices dropped by 5.9%. As a result, Black Book’s Seasonally Adjusted Retention Index had a very respectable comeback in May, only dropping by 0.7% (vs. a 6.9% drop in April). The decrease in April was driven almost exclusively by the collapse in consumer confidence, along with high levels of uncertainty about the financial markets due to the COVID-19 pandemic. Since the middle of May, we have observed the stabilization of prices, as shelter-in-place orders are being relaxed throughout the country.

Auction sales volume is finally returning to pre-COVID-19 levels, although most auctions are still operating in a digital only environment. Over the past several weeks, we also measured a substantial increase (compared to previous weeks and compared to last year) in volume of rental units sold, as rental fleet companies are reducing their fleets to match much weaker consumer and business traveler demand. As supply continues to grow, we are concerned with the throughput of major auctions as they operate with reduced staff. In speaking with management teams from two auction chains last week, they are trying to continue to execute on the increased volume and customer demand without immediately bringing back significant amounts of furloughed

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COVID-19 Market Update

staff. There is a concern that this uptick may be short-lived and the need for increased staff may be temporary.

Since the beginning of April, weekly initial unemployment claims remained at record levels. Last week, the Labor Department reported that the US added 1.54 million new jobless claims. The US unemployment rate in April was 14.7%, the highest monthly rate since the Great Depression. In a surprise to many economists, May unemployment decreased to 13.3% due to the success of the Federal Paycheck Protection Program (PPP) and other stimulus measures. The Labor Bureau also noted in its report that there was a classification error in its survey, and the real unemployment numbers should be about three percentage points higher for both April and May. There is also concern that without further Federal stimulus, these gains will be temporary and employment numbers may deteriorate once PPP expires. The unemployment numbers are similar to Black Book’s projections for our Most Likely Economic Scenario, and these were used for short term residual value projections in our recent publication of June residual values.

With a weakening of the economy, consumer confidence is low. The University of Michigan’s Monthly Consumer Sentiment Index in May was 72.3 points (a slight uptick from April’s 71.8). With one-time stimulus payments and extended unemployment benefits helping the economy, the preliminary index for June increased to 78.9. As a reference point of how uneasy the consumers are about the economy, the Index was at 101 in February.

As more economic data for the second quarter of 2020 arrives, “the GDPNow model [from the Federal Reserve] estimate for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2020 was -48.5 percent on June 9th.”

The overall weakening of the economy is causing demand for vehicle purchases to decline. In addition, gasoline prices reversed the May trend, and started to increase, up $0.25 since the end of April to $2.04 per gallon last week, according to the U.S. Energy Information Administration.

At the same time, we expect a large, incremental influx of used inventory to hit the marketplace over the next six months, coming from prolonged lease return delays, downsizing of rental fleets (including the expected sell-off of a large number of Hertz’s units), increased repossessions, and un-sold inventory from the March-May time period.

Due to these factors, we expect both wholesale and retail prices to deteriorate later in the summer. On the other hand, due to better than expected (but still very high) unemployment numbers, it is possible that the automotive industry will avoid a more catastrophic economic scenario (severe prolonged recession) that was considered as one of the scenarios in our residual value projections.

Although the economic effects of the pandemic will continue to be felt as far out as three years from now, we still project that wholesale values will return to the pre-COVID-19 baseline by 2023. Used supply will decline due to cuts in retail and fleet sales throughout 2020 and into 2021.


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Contents SUMMARY.....................................................................................................................................1CURRENT WHOLESALE MARKET OVERVIEW ................................................................................. 4 Auction Insights ....................................................................................................................................................4 Auction Volume .....................................................................................................................................................4 Sales Rate ..............................................................................................................................................................5CURRENT WHOLESALE PRICE TRENDS ......................................................................................... 5 Market Level View .................................................................................................................................................5 Segment Highlight – Small Pickups ....................................................................................................................7 Segment description ...........................................................................................................................7 Historical Trends .................................................................................................................................8USED WHOLESALE PRICE PROJECTIONS ...................................................................................... 9 Wholesale Price Impact Under the Most-Likely Economic Scenario .................................................................9 Short-Term Outlook (Summer / Fall of 2020) ......................................................................................9 Long-Term Projections (36-Month Residual Values, Summer / Fall of 2023) .......................................10 Wholesale Price Impact Under a Severe Recession Scenario ...........................................................................10RETAIL VERTICAL .........................................................................................................................10 Retail Prices ...........................................................................................................................................................10 Dealers Insights .....................................................................................................................................................11 New Vehicles Sales Outlook .................................................................................................................................11USED VEHICLE SUPPLY PROJECTIONS ......................................................................................... 12 Short Term Lease Return Projections ..................................................................................................................12 Rental Unit Returns................................................................................................................................................13 Longer Term Used Returns Projections ...............................................................................................................13


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CURRENT WHOLESALE MARKET OVERVIEW

Auction Insights

• Auctions, both physical and digital, continue to be hot with bidding activity and sales rates returning, and in some places exceeding expectations for this time of year.

• Supply available at the auctions continues to be low and is contributing to the increase in sales rates and higher prices that buyers are having to pay to secure inventory.

• A Manheim press release last week stated that it will be bringing back more of its furloughed employees to support the increased demand. The press release also states that it is making plans to relax some of its restrictions and pilot a physical auction later this month.

• Lease extensions and lack of repossessions over the last three months are resulting in some auctions being light on inventory to consign. The estimation by some of the auctions we’ve been in contact with are expecting to be low on inventory for another 2-3 weeks.

Auction Volume

Despite most auctions continuing to operate under an all-digital platform, sales volume has rebounded to a level consistent with, and on some days higher than, the same time last year. This is being driven by strong retail sales, which are then leading dealers to use auctions as a source of inventory. The number of sales bottomed out around an 80% year-over-year decline when most auctions closed their physical sales (and some closed entirely) at the end of March. The graph below illustrates the estimated year-over-year change in sales volume of the wholesale market.


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Sales Rate

At the onset of the pandemic, as shelter-in-place orders went into effect, sales rates quickly tumbled into the teens, but rates have been climbing each week. Black Book’s estimate of the Weekly Average Sales rate is presented below.


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CURRENT WHOLESALE PRICE TRENDS

Market Level View

Volume-weighted, overall car segment values increased 0.88% this past week. All car segments experienced increases, except for Sub-Compact Car, which has been on a continual decline since the end of March. For the past four weeks, the Compact Car segment has had the largest car segment increases, but this past week the top spot was taken by the Sporty Car segment with a 1.65% increase. When volume-weighting is applied, the overall Truck segment (including pickups, SUVs, and vans) values increased by 0.52% last week with all segments increasing except Full-Size Vans. The Minivan segment led the increases with a strong rebound of 1.65% after 11 consecutive weeks of declines.



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The graph below shows week-over-week depreciation rates for the entire market, including Cars and Trucks / SUVs / Vans for the last several months. During the last four weeks, we have observed that weekly depreciation rates have started to slow down, and now we are seeing a consistent pattern of increases in most of the segments. Full-Size Vans and Sub-Compact Cars are the exceptions with consistent, but small level week over week depreciations.



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Segment Highlight – Small Pickups

Segment description

The Small Pickup Truck (SPT) segment consists of seven current-production models. Only two of those models have been in continuous production, the Toyota Tacoma and Nissan Frontier. Both gained respectable market share by supplying consumer and fleet demands vacated by comeptitors. Since the return of Ford, GM, and Honda in recent years, SPT market share has grown from 2% to 4%. Jeep Gladiator is the latest newcomer and emerging models are rumored, including some with possible electric powertrains.



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Historical Trends

When the domestic manufacturers exited the market in 2012, retention began to climb on the remaining models. The Black Book Retention Index in January 2012 was at 128.3 but climbed to a high point in 2015 of 151.1 and remained stable though the early part of 2019. In Q4 of 2019, the Index began to fall a bit, but the largest drop came in April 2020 due to COVID-19. The Index fell 7% to 130.4 in April before leveling off with a small 0.3% decline last month.

As we saw with the Compact Car segment, the Small Pickup segment rebounded at a much faster pace than other segments as the lower price point made for a “good buy” at the auctions as consumer demand resumed due to loosening of restrictions. Wholesale values have increased for five consecutive weeks and at a higher percentage rate than the overall truck segment average over the past three weeks. Values have recovered roughly 3% over the past five weeks after seven prior weeks of declines totaling roughly 7%.



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USED WHOLESALE PRICE PROJECTIONS

Wholesale Price Impact Under the Most-Likely Economic Scenario

Wholesale prices dropped significantly in April as uncertainty over COVID-19 impact and response dampened vehicle demand, resulting in an overall wholesale price decline of 5.9%. We saw a substantial improvement in prices during the last two weeks of May and the monthly decrease was limited to only -1.5%. As we entered June, wholesale prices continued to increase, and we now project that we will see an overall market appreciation for the entire monthe. As a comparison, last year’s prices declined by 0.9% over the same period.

Black Book’s preliminary July Publish Residual Values (dashed lines) reflect a new economic reality. Together with the temporary strengthening in demand in June, projected values will continue to stay well below pre-COVID-19 projections over the next two years, with the deepest declines in the next 6 months. The green line represents our most-likely economic scenario that does not include a possible second wave of COVID-19 and a still undefined second stimulus package. A more severe and prolonged recessionary scenario is shown in red. Projections are indexed to the pre-COVID-19 projections (black line). All values are weighted by the used vehicle sales volume (actual, where available, or projected). Short-Term Outlook (Summer / Fall of 2020)We project a drop in wholesale prices compared to a pre-COVID-19 baseline this Summer/Fall, as the US economy suffers through the effects of COVID-19. We anticipate that later this Summer/Fall, the wholesale prices will be between 10% and 15% lower than originally projected before the pandemic, due to a glut in supply



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and much weaker demand. Prices will start to recover in 2021 as the economy becomes stronger. We also anticipate that older (>6-year-old), cheaper vehicles in average condition will not decline as much due to increased demand for these units.

Long-Term Projections (36-Month Residual Values, Summer / Fall of 2023)

The effects of the pandemic will continue to be felt, but we continue to project that values will return to the pre-COVID-19 baseline as used supply will decline as a result of cuts in retail and fleet sales throughout the remainder of 2020 and into 2021.

Wholesale Price Impact Under a Severe Recession Scenario

In this scenario, we project a drop in wholesale prices of more than 20% later in the Summer and Fall, compared to a pre-COVID-19 baseline, with a slow recovery in 2021. The effects of the pandemic and recession will still be impactful in 36 months, and we project a 10% market level decline of wholesale prices as compared to pre-COVID-19 projections for the second half of 2023.

RETAIL VERTICAL

Retail PricesIn the age of proliferation of ‘no-haggle pricing’ for used-vehicle retailing, asking prices accurately measure the trends in the retail space. From the peak in early April until the end of May, retail listing prices decreased by about 5% - a much lower decline compared to wholesale prices. In the last ten days we saw a temporary stabilization of retail prices fueled by higher consumer demand due to stimulus payments and federal Paycheck Protection Program (PPP). We expect retail prices to continue their decline later in the summer as stimulus payments are exhausted and the protection in PPP expire.



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Dealers Insights

• The most common comment we heard from dealers this past week is centered around their lack of inventory, both new and used. Dealers are finding themselves having to pay more for inventory, resulting in a smaller margin when the unit is retailed. However, most dealers we’ve talked to would rather keep the inventory moving and make the money on turning volume to prevent getting stuck with any units if the demand slows.

• Dealers are still reporting being down by as much as 50% in available inventory. Lack of new inventory has some dealers concerned about making it through the month with their current supply.

• Availability of good condition, low mileage units are a rarity right now, and dealers are finding themselves having to settle for vehicles that require some reconditioning to be retail ready.

• Manufacturing has resumed, but most of the facilities are not yet back to running all shifts and operating at full capacity. New deliveries continue to be few and far between, contributing to the increased demand for used units.

New Vehicles Sales Outlook

Our New Sales Outlook remains unchanged from last week. We anticipate a significant reduction in US new vehicle sales in 2020 (both retail and fleet sales) due to continued reduction in consumer demand. This is a result of several ongoing factors, including less miles driven due to remote work and shelter-in-place initiatives, high unemployment, and an overall feeling of uncertainty by consumers. Overall, new sales were down 23% during the first five months of the year, compared to last year (with a 30% YOY decline in May as most states started to lift shelter-in-place orders). Even as OEMs are restarting assembly lines, there are significant challenges to get back to a normalized production schedule as we reported in previous updates.

In our base economic scenario, we project a 25% drop (compared to pre-COVID-19 projections) in new sales in 2020 to 12.7mm units. In a deep economic recession scenario, we project a 40% drop in new sales in 2020 to 10.2mm units.



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In the longer-term, we expect new sales volume to return to pre-COVID-19 levels within five years. The table below summarizes Black Book’s projections for new vehicle sales for the next several years under both economic scenarios.

USED VEHICLE SUPPLY PROJECTIONS

Black Book projects a higher than expected used vehicle supply in the wholesale marketplace for the rest of 2020 due to several factors:• Delayed lease returns resulting from lease extensions offered by OEMs – more than 560,000 additional

three-year-old units• Extensive de-fleeting by rental car companies, due to lack of consumer and business traveler demand and

financial pressure to raise cash – at least 250,000 one- to two-year-old vehicles• Dramatic reduction in auction activities due to COVID-19 in March, April, and May• Increased repossessions due to deteriorating economic conditions in addition to delayed repossessions in

April / May

Short Term Lease Return Projections

When we started the year, lease returns were projected to hit a record volume of above 4.1 million units. Once the pandemic was underway, and most manufacturing stopped, OEMs started to encourage lease extensions in order to push returns further into 2020 when they would be in a position to provide replacement vehicles. As a result, we project at least 560,000 additional units in the second part of 2020 (compared to the pre-COVID-19 estimates) due to a slowdown in sales in April / May, along with expected turn-ins of the lease extensions.



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Rental Unit Returns

Business and leisure travel collapsed at the end of March. We expect a significant reduction in both categories for the remainder of 2020. In addition, there is no expectation that travel will return to pre-COVID-19 levels in the next several years. According to IATA (The International Air Transport Association), air travel will not return to pre-COVID-19 levels until after 2023. This puts tremendous financial pressure on rental companies that rely on air travel, to reduce both their current fleet and future acquisitions. At the end of May, Hertz filed for bankruptcy in North America as a result of the pandemic.

In addition to Hertz, we expect other rental companies to reduce their fleet during the Summer and Fall months to match lower demand for rentals. This practice will lead to over 250,000 additional rental units hitting the wholesale market over the next six months. Note that this is a base case scenario in which rental companies (excluding Hertz) can gradually reduce their fleet instead of a rapid-fire sale.

The graph below shows Black Book’s projections for rental returns. The purple line shows the difference between current (darker rectangles) and pre-COVID-19 projections (lighter rectangles).

In the longer term (later 2021 - 2023), the drop in rental return volume will benefit the price of newer used units, as supply will be limited.

Longer Term Used Returns Projections

With the reduction in retail and fleet sales over the next several years, we project approximately 75k used units per month less in the market in 2023, compared to previously projected returns. This lower level of used inventory will be beneficial to used car prices as supply will be limited, helping to bolster valuations.



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About Black Book Black Book® is best known in the automotive industry for providing timely, independent and precise vehicle pricing information, and is available to industry-qualified users through online subscription products, mobile applications and licensing agreements. Since 1955 Black Book has continuously evolved to ensure that it achieves its goal of delivering mission-critical information to its customers, along with the insight necessary to successfully buy, sell, and lend. Black Book data is published daily by National Auto Research, a Hearst company, and maintains offices in Georgia as well as the Canadian Black Book in Toronto. Contact

Black Bookp. 800.554.1026e. [email protected]

covid-19 market update · 2020-06-16 · covid-19 market update staff. there is a concern that this...

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