During our January 2023 Market Pulse Webinar, "Hidden
Risks & Hidden Opportunities,” we explored how the
automotive industry is using smart data and insights to reach the
right new customers with confidence. Vehicle prices, the current
economy’s impact on the automotive industry, and recession planning
were top of mind during our January 19 question and answer session.
Our webinar presenters and panel of experts answer your questions below.
Where is the demand for auto coming from? (i.e., is the
demand in line with historical trends or has the demand increased
due to demographic, COVID, or other secular reasons.)
Jonathan Smoke: 2020 and 2021 saw
abnormal demand for autos caused by stimulus, record low interest
rates, and a preference shift to personal transportation away from
public or shared transportation. People went from living in dense
urban areas that are less car dependent to more rural areas, which
boosted demand. Now, demand is softer than pre-pandemic levels
primarily in response to affordability and the absence of
stimulus, slowing home sales, and diminishing COVID concerns.
With the domestic suppliers out of the compact/sedan
market, what is the outlook for Japan and Korea to provide the
supply needed for affordable vehicles for consumers with subprime credit?
Jonathan Smoke: The Asia brands are
continuing to produce sedans and more affordable products, but
even there we are seeing less production of lower priced products
due to scarcity of parts and limited capacity. Even if they were
to return to 100% capacity, the industry would not be able to
provide the same volume that existed when North American and
European brands produced high volume entry level sedans.
Why have auto delinquencies risen to pre-pandemic levels
while others have not?
Tom O'Neill: One factor is that auto
delinquency wasn't impacted as greatly as others (e.g. bank cards)
by events like the CARES Act, a sudden drop in consumer spending,
and stimulus checks. Events like that contributed to an environment
where consumers were able to pay down balances and get a footing
with their bank cards and personal loans. which resulted in
delinquency rates in those areas reaching historic lows. Even as
delinquencies have been rising in those markets over the past 12-18
months, they still remain below pre-pandemic levels. Auto, however,
was less impacted by those events and the pandemic-related drop in
delinquency rate was much more subdued. So, even though the
year-over-year rise in delinquency rates for auto may not be as much
as what we've seen recently in other areas, it didn't take as much
for it to catch back up to and pass where rates were in late 2019.
By how much more will electric vehicles further drive down
combustion used car prices over the next 5 years?
Jonathan Smoke: It is not clear that
electric vehicles (EV) will impact prices for internal combustion
engine vehicles (ICE) in the new or used market. Battery electric
vehicles (BEV) still cost more than comparable ICE vehicles because
of the still more expensive battery technology. As a result,
electrification generally contributes to higher new vehicle price
inflation. Used BEVs are less than 1% of the used market, so there
is limited evidence of BEV pricing influencing ICE pricing.
Historically, discontinued vehicles hold value better than
non-discontinued vehicles. The most pressure on ICE vehicles would
come from any forced regulation or limits on sales/driving.
Do you expect a fast decline of used car prices to trigger
higher than expected delinquencies and default?
Jonathan Smoke: It is possible that
continued used price corrections could lead to more defaults.
Especially if more vintages end up with more negative equity than
usual, as there would be less room for lenders to work with
borrowers to find workable payment plans. The reverse causation
could be equally viable-- that more delinquencies and defaults
from deteriorating economic conditions could lead to lower used
car prices, which in turn then limits options for consumers with
existing loans with substantial negative equity.
Will the impact of the infrastructure bill, reshoring, EV
investment, Inflation Reduction Act, CHIPs Act, etc. in the next few
years soften the potential downside risk to investment even with a
Robert Wescott: Yes, there has been $1.2
trillion dollars of spending in the November 2021 Infrastructure and
Investment Jobs Act of 2021 (spread over 5 years), and another $485
billion in the Inflation Reduction Act passed in early 2022, and
another $52 billion in the Chips Act passed this past summer. These
are extremely large sums of spending. They can be expected to soften
the downside in activity if a recession were to hit the U.S. in the
next year, especially in the construction sector and the
For more, download the webinar deck and watch our full
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