September 2, 2022 • By Martin Romjue • Bookmark +

Roundtable host Joe Miller dove into detailed economic outlooks with panelists (L to R): Jonathan Smoke, chief economist at Cox Automotive; Tom Kontos, chief economist at ADESA; and Dr. Alex Yurchenko, chief data science officer at Black Book, at the International Automotive Remarketers Alliance's annual Summer Roundtable in Nashville, Tennessee, on Aug. 17, 2022.

The U.S. economy does not appear to be in a typical recession, if at all, with plenty of consumer money, vehicle demand, and available jobs on the sidelines.

That could redound to the used vehicle markets, wholesale and retail, which appear to be drifting to a more normal balance but still must trek a long way to get there, according to the sum total of comments and figures presented by remarketing economic analysts at the IARA Summer Roundtable in Nashville, Tennessee, on Aug. 17.

Host Joe Miller of AutoIMS moderated a panel, “Economics As a Service: A Real-Time Look at the Economic Drivers of Remarketing,” which drew insights from the solid troika of familiar remarketing industry experts Jonathan Smoke, chief economist at Cox Automotive; Tom Kontos, chief economist at ADESA; and Dr. Alex Yurchenko, chief data science officer at Black Book.

The panel first addressed the question of whether the U.S. economy has dipped into a recession. Short answer: No, thanks to conflicting indicators that don’t add up to a traditional recession.

“A true recession is broad-based decline in economic activity that goes for a few months,” said Smoke, who led the panel on the overall U.S. economic picture. “Although we’ve had two negative quarters, GDP is not actually measuring net income, just product. What gave us a negative 1Q, was a surge in imports because congestion ended.”

Russia also invaded Ukraine, causing inflation to shoot up, resulting in negative net exports for the first quarter, Smoke said. Since retailers did not sell as much in the first quarter, inventories grew, and then did not grow in the Q2, resulting in a slight decline, he added.

 “Consumer spending continued to be strong in each of the quarters, but slowing,” Smoke said. “It feels like a recession, with housing and the pain in the tech sector, but the rest of the economy is holding in there. I’m in the camp we are not in a recession now, and I do believe we can avoid going into one.”

Overall, the chance of recession is about 45%, said Smoke, who relayed that figure to executives at his company. Business leaders should prepare for both.

Smoke said if the next two quarters this year sees stronger economic behavior, then it could result in 2% annual growth, down from 6% in 2021. In many parts of the U.S. the cost of a gall on gas has fallen below $4, a decline of 21% over the previous six weeks.

Jonathan Smoke, chief economist at Cox Automotive, told the IARA audience that he puts the chance of a full recession at 45%, however, enough pillars of the economy appear to be holding together.

For the automotive industry, this so-called recession brings rare circumstances.

“We’ve never gone into recession with zero supply,” Smoke said. “Some of the dynamics will be challenging. The consumer is still hanging in there. The consumer is not pulling back but adjusting.”

Consumers may be shifting spending away from big durable goods amid higher interest rates, but so far are not throwing in the towel, as evidenced by credit card data that does not signal a large pullback, Smoke said.

And the reason is they are still employed. Payrolls have recovered from the pandemic and job losses are small. As of August, the unemployment rate was the same as in February 2020 and in 1969: 3.5%.

“You always had thousands of jobs lost before a recession began,” Smoke said. “Inflation is still biting into income, and households are not doing as well, but if we convince ourselves into a recession and behave like one, then we’ll be in a recession.”

Most household are in solid financial shape, with many having refinanced their homes or bought them with low interest rates, Smoke said. “Debt coverage ratios are very strong. 80% of households have more liquid money, which is three to five times more money relative to when the pandemic began.”

That leads to a potential upside, with $3 trillion of savings in American consumer accounts enabling many households to withstand inflation.

While the auto market is experiencing a down year, the positive numbers of 2021 are tough to repeat given the unprecedented stimulus that has now subsided, Smoke said. “The auto market is dealing with inflation and declining consumer sentiment. We have far less supply than when we started the year.”

In addition, the Omicron variant depressed numbers in January, followed by delayed tax refunds that many consumers use to buy vehicles. “All of that took normal energy out of used vehicle retail market,” he said. Now the combination of supply chain constrains and rising interest rates over the summer has added pressure and changed the math on monthly payments.

Those median household income struggles will deter more buyers of used vehicles, since they must spend more on rent, food and energy, Smoke said. They will drop out of big purchases.

“The average used vehicle payment is $400,” Smoke said. “Most households with used vehicles can’t afford to spend more than that. Those consumers can’t buy anymore.”

 Meanwhile, wealthier households, who are in better shape, likely will opt to buy the used vehicles instead of even higher priced new ones.

“Upper income households are going into markets they usually don’t,” Smoke said. “The No. 1 selling used vehicle is the 2016 used Honda Accord, but now higher income and credit consumers are buying the vehicle. They’re buying more used because they can’t buy new.”

In the geo-political world, two big risks lurk for the automotive market: Russia-Ukraine and China-Taiwan.

Given the relative stalemate between Russia and Ukraine, the energy and food markets have calmed somewhat, but Europe is facing a tough winter with squeezed energy supplies.

A Chinese attack on Taiwan, however, would be a major disruptor, leading to reverberating consequences in the supply chain, especially with semiconductors used for vehicle production.

“The heart of the semiconductor industry is Taiwan,” Smoke said. “What gave us problems last year in production and supply, would give us problems again. You would have winners and losers in that situation.” While Smoke put the percentage chances of such an event in the single digits, it begs the question, “How would we react in a world that faced that problem?”

More likely than not, absent a full-blown war, the automotive industry could end up oversupplied, Smoke said.

“We pore over the data every week, and we have seen an uptick with inventory levels with one data point. We’re on the verge of starting to see some of the challenges alleviating. We could very quickly go from being undersupplied to oversupplied. I think we are close to the end.”

The U.S. economy is resilient, and the recent federal CHIPS and Science Act will succeed at giving the U.S. chip market options and alternatives if China turns negative, Smoke added.  

“There is no major recovery in sight on the supply drought. We have fairly flat growth in dealer consignment volume," said Tom Kontos, chief economist at ADESA.

Tom Kontos elaborated on Smoke’s economic picture and numbers, pointing out that the wholesale used vehicle supply situation has maintained inventories at higher levels than during the peak pandemic period.

In detailing the market, Kontos reported:

Dr. Alex Yurchenko, chief data science officer at Black Book, predicts it will take years for the used vehicle wholesale market to return to a full normal.

Alex Yurchenko added that wholesale vehicle prices are declining but remain above pre-COVID levels for the foreseeable future. They are still 80% above pre-Covid prices. “It will take years to return to normal levels.”

“We are on a roller coaster for week-over-week wholesale price changes,” Yurchenko said. “Consumers are pausing on buying used vehicles.”

He shared some key stats on used vehicles:

Analysis Article: Used Vehicle Market Hints at Normalcy Again

Originally posted on Vehicle Remarketing

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