New vehicle sales rose 11.7% in the first quarter. Inventory building up, but still less than half of 2019. Pent-up demand of 6 million vehicles

With such an increase in demand it will be difficult for a slowdown to gain momentum.

By wolf richter For wolf street,

Sales of new cars, SUVs, vans and pickup trucks rose 11.7% year-over-year in Q1 to 3.68 million vehicles, according to data from the Bureau of Economic Analysis. This was the best quarter since the first quarter of 2021, when the chip shortage began. But still far from normal-ish: Q1 sales were still down 7.6% from Q1 2019:

New vehicle inventory is improving, but is still very low.

Supply chain issues are being resolved step by step, and production has ramped up, and new vehicle inventory has been increasing for months.

Overall, inventories are well below healthy levels, some models are in short supply or out of stock, and customers still face waiting lists and long wait times after placing orders. But other models — including several truck models — are in ample supply.

Inventory of new vehicles on dealer lots and in transit more than double According to statistics, since the low point of 1.80 million vehicles at the end of February in the fall of 2021 Cox Automotive, but it was still less than half Inventory in 2019:

Massive pricing distortions to be worked through,

According to JD Power, dealers and automakers have pushed prices to the absurd, and in addition, automakers have jacked up their models even more over the past two years, to the point where the average transaction price (ATP) in the industry is now around Rs. is $46,000. , up to $13,000 in 2019, which is insane.

Auto manufacturers have worked hard for years to turn the average new vehicle into a luxury product that the average hard-working American can no longer afford. At first, those efforts were supported by artificially low interest rates. Then, as automakers grappled with supply shortages, they prioritized the high-end to protect their dollar sales, given that production and sales of vehicles had fallen. And now the supply is rising, and interest rates are very high.

The way this is tackled is with MSRP cuts – we’ve already seen some price cuts among EV models – and with bigger discounts, incentives and rebates as inventory starts to build up. There will also be a shift in production to lighter and more economical models.

Pent-up demand rises to 6 million new vehicles.

Yes, it’s a thing in the auto industry – always has been. Americans love their motor vehicles, and they’re not just going to drive them into the ground and then switch to riding bicycles or whatever.

Most people can continue to drive what they already have for a year or two or more. And when supply ran short, and when ridiculous pricing games ensued, some consumers decided to wait for supply to arrive and build up to a sufficient level, and end these scarcity-driven pricing games. For. But eventually, people who have been waiting a few years to buy a new vehicle will end up buying one. this is pent up demand

We can estimate this pent-up demand: In the seven quarters since the chip shortage affected vehicle sales (through Q2 2021), automakers sold 24.1 million vehicles. In the seven-quarter period just before the pandemic, automakers sold 30.1 million vehicles. So so far, consumers and fleets (rental fleets!) have bought 6 million fewer vehicles than in the equivalent period before the pandemic.

This piggy bank of pent-up demand of 6 million new vehicles will continue to grow until vehicle sales and supply reach normal-ish pre-pandemic levels.

So if there is a recession, enough consumers with the money or the ability to borrow will be desperate to buy a long-delayed new vehicle when supply is sufficient and the pricing game stops.

Typically, pent-up demand builds up during a recession as consumers who had splurged on vehicles before the recession cut back on spending, which triggered the recession, or made it worse. Inventory piles up as sales decline. So this is supply-overhang. Automakers react by cutting production and laying off people, making the recession worse.

Then, at some point, buyers are coming back to make their recession-delayed purchases. This suppressed demand, manufactured during the recession, Supports sales in the years following a recession – hence the recovery.

So, generally speaking, this supply-constraint is going into a recession. Now this excess demand is turning into a potential recession.

But this would be the first time I can imagine the US economy entering a recession, with increased demand for new vehicles driving sales growth while other parts of the economy slow.

Now we have this pent-up demand for 6 million new vehicles – on top of regular demand. And given how important auto manufacturing, component manufacturing, auto sales and everything surrounding them are to the US economy, this pent-up demand could dampen expectations of a recession.

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