Chart-catching - Hire or Lower?

The price of US used cars, the health of their makers and confidence of their drivers

Having been flat for several years, US used car values are now falling.  The move is significant enough to be more than the usual ebb and flow.  Whilst we hope that it will be short lived, historically this phenomenon has been a precursor to some significant pain for the car companies.  As always there are reasons why it might be different this time but in the past weak car prices have been a sign of a more cautious consumer.

The price of used cars in the US, the world’s largest developed market, is important.  If that price is going up, it suggests that pricing of new cars might start to improve thus transforming carmakers profitability.  If consumers are confident, they will be happy to pay more for cars and are likely to spend more on local consumption and invest in assets, having a positive ripple effect through the economy.

NADA Used Vehicle Price Index Graph

Source: J D Power & NADA – 15.01.97 to 15.02.17 (Seasonally adjusted)

The opposite of course is also true.  Falling prices suggests falling confidence or oversupply of cars.  Either is bad for the car business.  The chart above shows the seasonally adjusted price growth which slowed through 2014, turned negative in 2015 and has recently got worse.  The series is seasonally adjusted as certain months are a lot more popular for buying a car than others.  February is one of those months as many Americans prepare for what is merrily known as the driving season.  In fact pricing is almost never negative in February and has been positive in each of the last 20 years.  Until 2017.

Feb Used Car MoM Price Change Graph

Source: J D Power & NADA data from 15.01.97 to 15.02.17

There are reasons for this of course.  Manufacturers of new cars are using more and more incentives (discounts to the list price or freebies, to you and me) to keep volumes at a record high plateau and therefore reducing demand for used cars.  These buyers largely sell their old car to part finance the new one which increases supply.  Tax changes have probably exacerbated the effect this month but these conditions aren’t healthy for the new or used car market in the long run.

Many car hire companies make their money from buying cars at such a large discount to list prices that they basically use them for free until they sell them.  That doesn’t work when second hand values collapse.  It’s no surprise that the share price of one of the leaders has fallen almost 90% since summer ’14.  Ouch.  That Hertz.

By George Palmer

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