The fragile state or our economy was exposed in May with virtually all indicators showing signs of weakness.  Housing prices according to the S&P/Case-Shiller index dropped 4.2 percent during the first quarter. Consumer confidence dropped, retail sales did not live up to expectations and gasoline prices remain very high.  All these factors contributed to a cautious, if not negative situation for demand, and the new vehicle sales pace suggested some hesitation in consumers for purchasing automobiles with the SAAR tracking under 12M for the first time since September of last year.  The automotive industry had its own challenges with new vehicle inventory remaining very lean, which prompted many manufacturers to pull back on incentives, which raised the prices on new vehicles.

There was another significant release in the news today in the employment numbers.  Non-farm employment increased only 54,000, which actually moves the recovery backward.  Employment needs to increase by ~125,000 in a given month to keep up with the growth in the labor force.  Ignoring that fact for a moment, 54,000 means we need more than 9 years to recoup the 6 million jobs still unrecovered.  The unemployment rate stands at 9.1%.  The most significant impact however is not due to the lost income from those jobs that were not created; it is from the connection between these jobs numbers and the general expectation of economic recovery.  Expect more articles asking "Is the recovery stalling?" or "Are we going to have a double dip recession?”

During the past 4 months we have witnessed dramatic shifts in consumer confidence which suggests that there is still a lot of uncertainty in regards to our economy.  For example, during March, consumer confidence dropped dramatically from a high point in February.  In March, consumers were reacting to geopolitical factors stemming from the unrest in the oil producing nations which drove up gas prices dramatically.  In April, we saw a slight recovery but we pulled back even farther in May with consumer confidence hitting a 6 month low point.  Many analysts, including the analysts here at NADA, believe consumer confidence is a key driver in predicting automotive sales so these figures portend to a slowdown in the strong demand we have enjoyed for vehicles since the fourth quarter of 2010.  We will likely see volatile behavior in consumer confidence since we haven’t really witnessed any fundamental changes in our economic structure and policy, nor can we be confident that gas prices will follow traditional pricing patterns related to supply and demand fundamentals.  The result will be skittish consumer behavior which will continue to create volatile numbers in regards to consumer spending.

The fundamentals for the automotive industry however remain strong, especially on the used side.  The month of May’s new vehicle sales were expected to be well below the recent pace as prices increased due to the pullback in incentives (a 19% reduction according to Autodata).  This was accompanied with news that inventory was tight, which dissuaded consumers from making vehicle purchases.  Even in light of this news Memorial Day offered a glimmer of hope with Toyota netting about 25% of its monthly sales total during the Memorial Day weekend when high discounts were announced.  GM, Ford, Hyundai and Kia all posted impressive sales figures on their small and midsize cars. Used vehicles also continued to show positive signs from both a price and sales standpoint. 

Overall the result should be a softening of demand for new vehicles through June, both as a result of the employment announcement, and as a result of the underlying economic situation.  With SAAR below 12 million in May, expect significant upward movement on incentives.  This should help new vehicle sales and mitigate the slide in demand but will cause some downward movement in used vehicle prices especially on cars which are currently at historical highs.  In addition, Japanese manufacturers are promising to get new vehicle production back online during June which will alleviate some of the inventory problems that we will experience during the next 30 days.

Counter to new vehicle demand used demand should remain strong.  According to the Conference Board, the intent to buy a used vehicle within the next 6 months hit a high point during May.  The fundamentals for the used market from both a supply and demand standpoint look strong.  NADA continues to expect June to be a strong month for used vehicle prices due to these factors, but as we move into July, expect used vehicle prices to experience moderate depreciation as consumers begin to shift to the new market from the allure of large discounts.

Are you panicking yet?!