Economists Report Good News at IARA Event

By Jeffrey Bellant March 19, 2021
Stimulus payments will also boost the spring market, with inventory being the only impediment to a stronger season. Stimulus payments will also boost the spring market, with inventory being the only impediment to a stronger season.

Economists from the two largest wholesale auction chains offered good news in an online discussion during the International Automotive Remarketers Alliance 2021 Virtual Conference this month.

“That light at the end of the tunnel is not an oncoming train,” said Manheim Chief Economist Jonathan Smoke. “It definitely looks like we can start to talk about things returning to normal.”

Smoke joined KAR Global Chief Economist Tom Kontos during the panel reporting on key trends in the industry.

Consumers are more positive in recent surveys, Smoke said.

He tracks a “Back to Normal Index” that’s put out regularly  by Moody’s Analytics and CNN business. The index showed that while there was a good recovery last summer from the initial lockdown phase, while activity declined at the end of last year.

“The last week in February and the first two weeks of March have seen solid improvement in activity,” Smoke said, “and I think we are going to see that progressively improving as many places in the country start to roll back restrictions” 

Add to that herd immunity and the index will be able to get back to where it was pre-pandemic, he said.

Consumer sentiment has seen “enormous improvement,” returning to the highest level since March of 2020, Smoke added.

“We are definitely moving in the right direction,” he said.

Kontos boils down today’s market to low supply, high demand and high prices.

He said the market expected more repo volumes, but those didn’t come. Lease volumes are also down as people are buying their cars at the end of the term because of their equity position. Kontos added that 50 percent or higher of vehicle are being purchased upstream.

Prices have been in double-digit year-over-year increases, he said.

“I believe dealers – with the lean inventories that are out there – are probably going a little farther and wider to buy vehicles,” Kontos said. “They are looking for a good gross profit opportunity and they are savvier than ever before.”

Many dealers that are online are probably the same ones who were online before COVID and they are “maybe dominating that space.” That online activity is an additional boost to prices, Kontos said.

KAR Global Chief Economist Tom Kontos

Repossessions have been a rare commodity.

“I’ve looked at the accounts that sell repos entirely,” Kontos said, “and when I look at those sales in 2020, those sales were down by at least 30 percent or more.”

Even though repos are seeing a bit of an uptick, it won’t come until the latter half of 2021, he said.

At any rate, it’s a seller’s market in the first half of the year and likely the second half as well, Kontos said..

Both Kontos and Smoke attribute dips in repossessions last year due to a pause of repos during the pandemic’s early months and then due to stimulus checks which may have helped customers catch up.

Smoke added that loan accommodations in place as of the end of February amount to about 1.2 million auto loans. He said he doesn’t believe this year’s default rate will even match 2019 because of additional federal unemployment relief combined with the stimulus checks that people received.. 

Stimulus payments will also boost the spring market, with inventory being the only impediment to a stronger season. 

Inventories are down dramatically, including new inventory down 27 percent year-over-year and used inventory down 13 percent at the end of February.

“We estimate that wholesale auction inventory is down about 30 percent,” Smoke said.

In the second week of March, retail new-car sales were up year-over-year by more than 9 percent, while used sales were “only modestly down 3 percent, he added.

Smoke blames the weaker sales from used cars on the timing of tax refund season being off a few weeks.

The spring wholesale market has started early, with the Manheim Market Index up almost 4 percent February and by mid-March trending similarly – toward the strongest March in history, Smoke said.

By April, pricing could rise as much as 40 percent over last year.

“We think we’re going to see record in the Manheim index in March, April, May and probably June as well,” Smoke said.

He expects depreciation to be higher than normal in the back half of the year but stopped short of calling it a correction.

Kontos said despite the good news, the economy still lost about 9 1/2 million jobs and unemployment weekly claims still remain relatively high, though down from peak pandemic highs. The job losses fall more into the leisure, travel and entertainment categories.

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Last modified on Friday, 19 March 2021 17:45