High profits, low inventory, and recovery headwinds in the U.S.

While new vehicle retail sales for July 2022 are expected to decline around 14.1% from July 2021 (taking into account there is one less selling day this year), the low sales numbers belie the profits being made in the first half of this year, according to a joint forecast from J.D. Power and LMC Automotive. Sales are low: the seasonally adjusted annualized rate (SAAR) for total new-vehicle sales is expected to be 13.7 million units, down 0.9 million units from 2021. Cox Automotive’s new inventory forecast isn’t much sunnier, with supply woes expected to cloud the market well into 2023, the company said in their new report.

“July is yet another month where supply constraints keep vehicle sales artificially low but deliver record transaction prices and dealer profitability,” said Thomas King, president of the data and analytics division at J.D. Power. “July 2022 is on track to be the ninth consecutive month that retail inventory closes below 900,000 units as anticipated improvements in vehicle production volumes fail to materialize. The industry sales pace is simply a function of the number of vehicles being delivered to dealers each month, with a large portion of those vehicles being sold before they arrive at the dealership.”

According to the report, this month, 55 per cent of vehicles will be sold within 10 days of arriving at a dealership, while the average number of days a new vehicle is in a dealer’s possession before being sold is on pace to be 19 days—down from 29 days a year ago. 

“For July, new-vehicle prices continue to hover near record levels, with the average transaction price expected to reach $45,869—a 12.3% increase from a year ago—the second highest on record,” said King. 

This lack of inventory is leading to much smaller discounts from manufacturers. The average incentive spend per vehicle is tracking toward $894, a decrease of 54.7% from a year ago. This will mark the third consecutive month under $1,000 and the first time under $900. 

For consumers, higher prices and smaller discounts, coupled with rising interest rates, mean monthly loan payments on new vehicles have reached an all-time high, breaking the $700 level for the first time, says the report. Slightly mitigating these costs is ongoing strength of used-vehicle values, which increase the amount of trade-in equity new-vehicle buyers are bringing to their next purchase. 

“Total retailer profit per unit—inclusive of grosses and finance and insurance income—is on pace to reach a monthly record of $5,023, an increase of $815 from a year ago. Nine of the past 10 months have seen retailer profit per unit at or above $5,000. This elevated per-unit profit level is more than offsetting the drop in sales volume as total aggregate retailer profits from new-vehicle sales for the month of July is projected to be up 2.5% from July 2021, reaching $5.0 billion, the best July ever and the fourth-highest amount of any month on record.” 

The forecast concludes on a breezy note for the near future. “The significant levels of pent-up demand for new vehicles mean the industry is generally well positioned to continue delivering strong financial results, despite the fact economic conditions and rising interest rates will cause some potential buyers to defer new-vehicle purchases,” said King. 

The Cox Automotive forecast was slightly less optimistic. “As we move into the second half of 2022, there are plenty of headwinds pushing against a notable recovery in sales volumes,” said Cox Automotive Senior Economist Charlie Chesbrough. “Rising interest rates and low consumer sentiment are keeping many potential buyers out of the market. At the same time, higher prices for both gasoline and vehicles are making affordability an even greater challenge. Tight supply, however, continues to be the biggest obstacle over the near term, and there is little evidence of supply returning to normal.”

Most industry forecasters, including Cox Automotive, expect the chip shortage and other supply chain problems to improve throughout the second half of this year. Still, the pace of that recovery will be varied and volatile. Notes Chesbrough, “Industry observers are likely going to have to wait until the fall for any of these issues to show improvement.”

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