Wholesale Prices Slip in January
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The theme that played throughout 2016 continued into the start of 2017 as wholesale pricing remained stable despite sharply rising supplies. Give credit to a retail used vehicle market that enabled dealers to quickly and profitably sell their auction purchases.
After rising by 14.5 million over the past six years, total U.S. employment grew by another 227,000 in January. Although January wage growth was a disappointment and the number of people employed part-time for economic reasons rose, the stability of the labor market, as represented by a low level of involuntary layoffs and a high level of job openings per job seeker, suggests that consumers will be willing to take on more used vehicle loans and that lenders will be willing to lend.
Rental risk prices remain off four percent from a year ago. In January, rental risk prices (adjusted for broad shifts in mix and mileage) were flat relative to December and remained down four percent year-over-year. In January, small and midsize crossovers accounted for 26.4 percent of all rental risk units sold at auction, up from 21.5 percent a year ago. Meanwhile, small and midsize cars accounted for 45.9 percent of rental risk auction sales this year versus 51.7 percent last year.
New vehicle sales into rental declined by approximately seven percent in January relative to last year’s heavily front-loaded purchasing pattern. Strong auction volumes in January thus suggest that rental fleet sizes were reduced.
The used retail market remains supportive to wholesale pricing. Total used vehicle sales for January have yet to be released, but channel checks suggest a small single-digit increase, year-over-year. CPO sales rose a modest 0.8 percent as a result of declining CPO car sales by domestic brands, with weak potential margins the likely headwind. Nevertheless, CPO sales continued to rise faster than new vehicle sales, just as they have done for a little over four years now.
Based on CarMax results for the September to November 2016 period, and both AutoNation and Group 1 results for the fourth quarter, it is likely that the seven publicly traded dealership groups will achieve a gain in same-store used retail unit sales for the 29th time out of the past thirty quarters. For some players, gross margins showed signs of stabilizing and turn rates remained good even with a lower wholesaling percentage. That backdrop suggests a continuing healthy appetite for the growing number of units coming off lease.
New vehicle sales: a mixed message. New cars and light-duty trucks sold at a seasonally adjusted annual rate (SAAR) of 17.5 million in January. This compares to a pace of eighteen million in the fourth quarter of 2016 and a full-year total of 17.5 million for last year. After such a strong December, most analysts had expected a larger pullback in January. Incentives, however, continued to play an outsized role (up fifteen percent year-over-year, according to Autodata). Somewhat offsetting that were reduced fleet sales and higher transaction prices as a result of both model mix shifts and higher trim levels.
The coming impact of new vehicle inventory overhang is also less than clear. The topline days’ supply numbers were scary, but less so after accounting for seasonal issues, model shifts, temporary factors, and reduced fleet volumes. Still, production cuts seem warranted.
Pricing trends by market class. On a year-over-year basis, 2017 started the same as all of 2016 – trucks and crossovers up, cars down. In January alone, however, compact cars eked out a small gain.
A cursory look at wholesale pricing by price tier and market segment suggests only a modest impact on the delayed flow of tax refunds this year. That stands in contrast to the many electronic and furniture retailers who reported that late-January sales were negatively affected by the reduced monies.
Tom Webb is chief economist for Cox Automotive. Contact him at Tom.Webb@coxautoinc.com or follow him on Twitter at @TomWebb_Manheim.
