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Smoke on Cars

Auto Market Weekly Summary

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Article Highlights

  1. March new- and used-vehicle sales started strong, then plummeted.
  2. Lower tax refunds used for expenses other than buying used vehicles.
  3. Hope exists for some second-half recovery.

The auto industry is anxiously awaiting reports of March vehicle sales, which automakers will start reporting on Wednesday, April 1. Undoubtedly, vehicle sales, which started the month strong, have plummeted as COVID-19 spread across the country, prompting an increasing number of states to issue shelter-at-home orders that shut down dealership showrooms.

As a preview, Cox Automotive estimates show new retail vehicle sales were down 55% comparing last Friday’s sales with the same date a year ago. Used sales were down 40% on that day compared with a year ago. The sales declines will continue as March closes and beyond.

Economic contraction: As the number and pace of new COVID-19 cases increases, related state shutdowns will lead to a substantial economic contraction in March and the second quarter. The rest of the year could see some recovery, but it is too early to call.

Jobless claims soar: Initial claims for jobless benefits jumped to 3.28 million for the week ending March 21. This was more than four times the prior record in 1982. Similar numbers are likely to be reported in the weeks ahead.

Consumer sentiment falls: The final reading of March consumer sentiment from The University of Michigan declined 11.8% from the final reading in February. Both measures of current conditions and future expectations declined, but it was future expectations that declined the most, at 13.5%. As a frame of reference, consumer sentiment fell 18.1% in the month following the collapse of Lehman Brothers in 2008.  A newer and daily measure of consumer sentiment from Morning Consult shows consumer confidence as of Friday, March 27, having declined 22.1% since the end of February.

Tax refunds down: Updated data from the IRS through Friday, March 20, show that tax refund volumes and amounts continue to be down compared with last year. The shutdowns related to the virus now seem to be slowing processing as well. Total refunds are down 1.1% in number and down 0.4% in dollar amount. The average refund is up by 0.7% year over year. We estimate that more than 60% of the refunds have been disbursed. The spring bounce is over. The refunds initially boosted used-vehicle sales as they traditionally do, but the refunds now are providing needed cash to households impacted by job loss or income disruption.

Fed takes action: Last Monday the Fed announced unlimited quantitative easing and expanded asset purchases to ensure liquidity in financial markets and support the U.S. economy. Two emergency lending programs were launched that could help the auto market in the near term.

The Term Asset-Backed Securities Loan Facility (TALF) will enable the Fed to purchase bonds backed by auto loans and other forms of consumer collateral. The Primary Dealer Credit Facility will support lending from banks to businesses and households. These moves should help ensure liquidity and should also help push longer-term rates down.

The 10-year U.S. Treasury, which influences rates on longer-term consumer loans like auto loans, moved down at the end of the week and is now closer to where it was when the Fed cut rate policy to zero. Mortgage rates moved down this week but remain about 15 basis points higher than last month. We saw some movement in average auto rates last week from day to day, but by last Friday rates were unchanged from the previous Friday.

Home sales: New home sales declined 4% in February, but the decline was a result of a large revision of 60,000 more sales added to the January sales SAAR, which was revised up to 800,000. January’s revised pace of sales was the strongest in almost 13 years. Mild weather, a strong economy, and low mortgage rates made January and February strong for all home sales.

Income, spending data: Personal spending in February – before the spread of COVID-19 – remained limited with an increase of 0.2% on a seasonally adjusted basis. Personal income increased by 0.6%, which equaled January and was the strongest two-month increase in income in more than two years.

The combination of lower spending and higher income had caused the personal savings rate to increase to the highest level since March 2019. Year-over-year income growth remained 4.0% in February but was still below the 4.4% average monthly increase in 2019 and the much more robust 5.6% average increase in 2018. The slowing spending data pointed to less of a contribution to economic growth from the consumer even before the COVID-19 crisis began.

Check back tomorrow for a video that will include updated data.

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