New Year Forecast

Jan 1, 2023 | Industry

By Jim Henry

Unless there’s an unexpectedly severe recession, analysts predict 2023 should be a less extreme version of 2022 for auto sales.

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Less extreme, in the sense that new vehicles should be a little more plentiful in 2023, as automakers get better access to scarce computer chips.

Likewise, intense customer demand for new vehicles should become less intense, between higher interest rates, and better selection at dealerships – but nobody expects a sudden return to bloated inventories in 2023.

And finally, new and used prices should decline from recent historic highs, but remain elevated, analysts said.

“Overall, we expect the new-vehicle market to finish a little bit better next year than we’re doing this year, but there’s certainly a wide range of outcomes that could happen,” said Charlie Chesbrough, senior economist, Cox Automotive, in a webinar hosted by the American International Automobile Dealers Association in December.

The state of the overall U.S. economy is the biggest question mark for 2023. Specifically, the question is whether there’s a recession next year and, if so, whether it’s severe enough to strongly affect demand for new and used cars and trucks.

TAKEAWAYS

Looking back at 2022 and ahead at 2023, here are some takeaways from interviews and recent presentations from Chesbrough and other analysts. More details follow:

• New-vehicle sales are expected to increase slightly in 2023 vs. 2022, as new- vehicle production increases and manufacturers get a better handle on supply-chain problems, notably the computer chip shortage. New-vehicle incentives could even make a modest comeback.

• Demand for newer used cars should remain high among prime-risk consumers who want affordable alternatives to expensive new vehicles. At the same time, “nearly- new” used cars, three years old or newer, continue to be scarce. That’s due to production cuts early in the pandemic, and a very steep decline in off-lease and off-rental returns.

• Older used cars should also remain in short supply and high demand. Short supply reflects low production just before, during and after the Great Recession, which hit bottom in 2009. More recently, demand for older used cars, as well as aftermarket service and parts, is rising because buyers with subprime credit are being priced out of new and nearly-new used vehicles.

NEW VEHICLE SALES

Cox Automotive forecasts new-vehicle sales of about 13.9 million cars and light trucks in 2022, down 8% vs. 15.1 million in 2021. Separately, J.D. Power and LMC Automotive said in a joint forecast that 2022 U.S. light-vehicle sales would be around 13.7 million.

“In what started as a year with a supply problem, 2022 is ending with a demand problem,” Cox Automotive said in the forecast for 2022.

For 2023, the Cox Automotive forecast is for U.S. light-vehicle sales of around 14 million, Chesbrough said, in the webinar. That’s Cox’s middle-of-the-road forecast.

Its optimistic forecast is around 14.5 million, assuming new-vehicle supply continues to improve, and assuming automakers increase incentives.

Its pessimistic scenario is as low as around 12.3 million, if higher interest rates and a potential recession drive sales lower. “If we had a full-blown recession and very, very high unemployment rates, we could see a much weaker market,” Chesbrough said.

Separately, LMC Automotive said its 2023 U.S. new, light-vehicle forecast was 14.9 million, including about 500,000 units it considers “at risk,” over concerns about the U.S. economy.

In another forecast, Edmunds said it expects U.S. new, light-vehicle sales in 2023 of about 14.8 million.

USED VEHICLES

On the used-vehicle side, high prices, higher interest rates, fewer trade-ins, and no stimulus checks in 2022 led to lower estimated U.S. used-vehicle sales in 2022 vs. 2021, and a further decline predicted for 2023, according to Cox Automotive.

In 2022, Cox Automotive expects U.S. used-vehicle sales of 36.2 million, down about 11% vs. 2021. In 2023, the Cox Automotive forecast is for U.S. used-vehicle sales of 35.6 million. Those numbers include private-party sales.

In 2022, “We’re expecting the used-vehicle market to finish a little bit north of 36 million, but it’s down substantially from what we had done just last year, a substantially stronger year that was supported by a lot of stimulus checks,” Chesbrough said in December.

The U.S. used-vehicle market in 2023 will be feeling some dramatic effects that originated in the early days of the COVID-19 pandemic, he said. In particular, he said the used market is going to be “starved” for three-year-old used cars and trucks.

That’s because quarantining shut down factories and new-car showrooms three years ago, in early 2020, followed by the chip shortage that’s still going on. It’s also because leasing dropped.

“We’re still not done with COVID yet. Those impacts are going to be coming to the used market. We’re going to start feeling it in 2023,” Chesbrough said.

Because of the drop in lease originations starting in early 2020, Cox Automotive expects lease maturities to fall by total of 2.5 million units over the next three years, vs. the previous three years.

SWEET SPOT

For somewhat older used vehicles, Experian Automotive tracks what it calls the “sweet spot” for ROE® and aftermarket service and parts, defined as used vehicles six to 12 model years old. That population is growing, according to Marty Miller, director, product data and implementation.

In a phone interview, Miller says that’s a “sweet” age range for ROE® and aftermarket service and parts providers, because most vehicles in that range have aged out of original equipment manufacturer warranties. They’re also likely to need significant parts replacement and repair. In addition, they still retain enough value to be worth fixing.

There are around 99.3 million used vehicles in the “sweet spot” range as of the third quarter of 2022, up 6.2% vs. 2021, and up 18.8% vs. 2018, Miller says. That growth reflects vehicles built in model years 2011 through 2017, when U.S. new-vehicle production was rebounding from the Great Recession.

“We expect the [ROE® and] aftermarket-sweet spot to continue increasing in volume and share over the next few years, until it peaks around 2026,” Miller said. He considers used vehicles 13 model years old or older, to be post-sweet spot.

OLDER USED VEHICLES

For older used vehicles, the scrappage rate is another metric Miller watches. As of the third quarter of 2022, 12.3 million vehicles went out of operation in the previous 12 months. For the third quarter of 2019, before the pandemic, that same figure was 12.9 million.

It’s likely owners have been fixing up used vehicles they might have scrapped in earlier years, when older used vehicles weren’t in such demand, analysts said.

Also, when used-vehicle values were lower, before the pandemic, the cost of repairs was more likely to exceed the value of the vehicle – the point at which an insurance company declares a damaged vehicle a total loss. When used-vehicle values are high, the value is more likely to exceed the cost of repairs.

Ivan Drury, Edmunds’ director of insights, said in a phone interview the scrappage rate could pick up, if used-vehicle prices fall, but the effect could be small, since he doesn’t expect used-vehicle prices to fall dramatically.

Drury said, “With prices coming down a bit, we’ll definitely see more vehicles will be scrapped.”

Jim Henry is a New Jersey-based, veteran freelance reporter covering the U.S. auto industry, writing for trade magazines Automotive News and WardsAuto, plus Forbes and others. Concentrations include U.S. light-vehicle sales, dealership Fixed Operations and Finance & Insurance, mergers and acquisitions, publicly traded dealer groups, OEM financial results, and Connected, Autonomous, Shared, Electric Vehicles. He is also the former department manager, corporate strategy and market research for Mercedes-Benz USA, and a former president of the International Motor Press Association. He is a graduate of the University of North Carolina-Chapel Hill, where he was a Morehead Scholar, now the Morehead-Cain scholarship.

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