Smoke on Cars
Auto Market Weekly Summary
Monday July 20, 2020
- Growing cases of COVID-19 threaten the economic recovery.
- Strong new, used vehicle demand reduces supply, raises prices.
- Unemployment is stubbornly high.
The growing number of cases of COVID-19, which are setting new daily records, threaten the recovery that created growth in retail sales and new construction in June.
Strong demand in the auto market has reduced supply of new and used vehicles, and that’s leading to record prices. However, the rise in cases is leading to declining activity and consumer sentiment, and the jobs recovery seems to be slowing as well. We could see the economic recovery stall as a result of these trends.
Joblessness high: Continuing unemployment declined in the latest data, but it was the smallest decline in four weeks. We continue to see more than 17 million unemployed.
Initial jobless claims were 1.30 million for the week that ended July 10, which was a meager decline from the prior week’s 1.31 million. Continuing claims, which represent people who previously filed and were approved and remain on unemployment compensation, fell to 17.3 million from 17.8 million. That represents 11.4% of February’s job total. Continuous claims declined by more than 400,000 from the prior week, which was the lowest decline in four weeks.
We need to see bigger declines in order to have unemployment fall before enhanced unemployment compensation expires at the end of July. If we don’t see much lower unemployment and/or an extension of benefits, we’ll see more households experiencing financial distress in August and later months.
Consumer sentiment dips: The initial June reading on Consumer Sentiment from the University of Michigan declined to 73.2 from 78.1 in June. The decline in sentiment was driven by declining views of future expectations as well as current conditions. Consumers also saw declining buying conditions for vehicles but modestly improving buying conditions for homes. The decline in buying conditions for vehicles was driven by more negative views of vehicle prices and interest rates on auto loans.
The decline in the Michigan survey was consistent with the decline in consumer sentiment we have been tracking in the daily measure of consumer sentiment from Morning Consult. That index shows that sentiment declined again over the past week and is down by 23.6% compared to the end of February.
Inflation rises: Headline and core inflation increased in June more than analysts had expected as increases in gasoline and food were assisted by rebounds in car insurance, apparel, travel, and medical service prices. According to the CPI data, used vehicle prices fell, but that’s not what is really happening in either the retail or wholesale used market. Also, of note, rent increases slowed dramatically. While declining now, wage growth still looks stronger than it really is as real wages are boosted by fewer lower paying jobs combined with relatively low inflation.
Housing construction increases: Residential construction increased in June as the housing market continues to show its relative strength in this recovery. Record low mortgage rates are driving up demand as is a rise in focus on single-family homes and second homes.
Retail sales up: Retail sales increased again in June. Auto sales again contributed and slightly outperformed the overall increase in sales. Sales excluding autos increased 7.3%. With the increase in June, retail sales are now up 1.1% year over year.
Manheim Index rises: The Manheim Index increased 4.4% comparing the first 15 days of July to the month of June. This brought the Index to 155.9, which is up 11.0% from July 2019. Recovered wholesale demand combined with lower supply continues to send prices higher.
Check back on Smoke on Cars tomorrow for a video that will include updated data.