Decrease in new vehicle sales in Q3 v. Q3 2019 down 19%: I attribute unfulfilled demand piggyback to the slowdown

Very different from the previous recession when the industry was caught up with huge inventories and large production.

By wolf richter For wolf street,

New cars and trucks sales totaled 3.48 million new vehicles in the third quarter, up about 2.8% from the third quarter last year, according to data from the Bureau of Economic Analysis. But last year’s third quarter was terrible: It was the quarter when dealers ran out of inventory because automakers had been cutting production for months because they couldn’t get the components they needed to assemble their vehicles. , because the component manufacturers were hit by the chip. The decrease is starting in late 2020 and early 2021. Although chip shortages are improving, the industry continues to decline.

But now it has additional wrinkles, triggered by spike fuel prices: A change From full-size trucks and SUVs to fuel economy vehicles and EVs, And supply chains, which are long and complex and spread all over the world, cannot react fast enough to sudden changes in purchasing patterns.

Therefore, compared to Q3 2019, new vehicle sales declined by 19%. Compared to three years ago, the quarterly decline has been in the 17% to 25% range for the last five consecutive quarters. But sales were also down in the years before the pandemic. Compared to Q3 2016, sales were down by 22%. And sales of 3.48 million vehicles were right where they were in the 1970s.

Over the past four decades, the industry has essentially been stuck in stagnation punctuated by steep declines and recoveries. The troughs prior to 2021 were related to declines in demand: the double dip recession of the early 1980s; the recession of 1990–1991; and the financial crisis when GM, Chrysler and a vast majority of component manufacturers filed for bankruptcy.

But in 2021 and beyond, the trough was caused by a lack of supply – not a drop in demand.

Estimating the piggy bank of unfulfilled demand.

There hasn’t been enough supply to meet demand since the spring of 2021. There are long waiting lists for the various models people have ordered because there was nothing in stock. And demand has shifted towards somewhat fuel efficient vehicles. And there is still a long waiting list for them. Now reports of the 2023 model-year production run have already sold out, as for the Ford Maverik hybrid pickup.

New vehicle inventories remain near record lows. At the end of August, new vehicle inventories on dealer lots and in transit stood at 1.23 million vehicles, down 65% from August 2019 – although there are huge differences between brands: Kia, Toyota and Honda dealers are essentially out, but Ram, Dodge, Jeep, Buick and Chrysler dealers have as many or too many,

Most people can continue to drive what they already have for a year or two or more. So most people can wait for supplies to arrive. But eventually, they will need and want to buy a vehicle.

Devastating flooding from a hurricane like Ian could remove a few million vehicles from the national fleet that need to be replaced quickly. (Watch out for when buying a used vehicle with a clear title that was flooded, that can cause mega-problems, and they’ll soon be showing up in faraway states to sell to people who don’t.) .

So now there are a lot of potential buyers out there who haven’t bought a vehicle because they couldn’t get one. And this group of potential buyers grows with each quarter that production cannot keep up with the demand.

This includes fleets, such as rental fleets, but also commercial and government fleets that have had trouble filling their orders since spring 2021, and that are keeping vehicles in service longer than they would otherwise.

Higher interest rates will sideline some retail buyers, and they may switch to older vehicles.

We can estimate how much unfulfilled demand is being created. If actual demand averages out to be in the 4.2-million-vehicle range per quarter, while supply has been in the 3.4-million range for the last five quarters, then each quarter, 800,000 vehicles are added to the unmet demand pile, which now totals nearly 4 million. There are vehicles.

So even in times of recession, this unmet demand for vehicles will hang on the market, and will convert into sales as vehicles arrive. As supply increases during a recession, sales may actually increase from today’s extremely low levels.

This is very different from past recessions, where industry was overstocked with large amounts of inventory and mass production moves to supply more inventory when demand suddenly drops.

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