Submitted by Nicholas Colas of DataTrek Research
Regular readers know that we consider used car prices an important, if overlooked, indicator of the true state of the US economy. More Americans buy used vehicles than new ones, making them a deeper measure of consumer sentiment. And since the supply of used cars and trucks is essentially fixed – you can’t “make” one – prices are exceptionally twitchy and move noticeably on both dealer (and therefore small business) sentiment and underlying retail demand.
The Manheim Used Vehicle Index is one widely watched measure, and it just made a new all time high for data from July 2018 auction results.
The numbers and some historical perspective:
- Wholesale (the index tracks dealer-only auction results) prices for used cars/trucks were +1.5% from June to July 2018 and +5.1% versus July 2017.
- More affordable vehicles saw the largest price increases, with compact and midsized cars outperforming the overall market. This is unusual; for the last several years it has been hotter-selling SUVs and pickup trucks that have led used vehicle prices higher.
- Cox Automotive (which owns the Manheim auction business) notes that the overall used vehicle market (both dealer and private sales) is currently robust, with a July 2018 selling rate of 39.2 million vehicles, +3% over last year and at +5 year highs. For comparison, July 2018 new vehicle sales were flat versus last year.
As for what is causing recent strength in used vehicle demand and therefore prices, Manheim notes three factors:
- Continued strength in the US economy.
- Growing affordability issues in the new car market. A quick Internet search on our part shows that a new Honda Civic is $19,000, but a 3-year-old used version will run you about $11,000. With US wage growth still slow, the latter is obviously a more compelling option for many consumers, even if it rises another 10% in price over the next 12-18 months.
- Worries about import tariffs, which pushes dealers to stock up on used vehicles in anticipation of rising new vehicle prices.
While it would be tempting to pin the surge in used vehicle prices on tariff worries, a look at the data since 2010 shows a different story entirely. Used car prices were remarkably stable from the start of the decade through 2016. The breakout to new historical highs was in mid-2017 (i.e. long before recent tariff announcements) and current year prices look similar to those levels. So yes, tariff fear-related buying clearly plays a role but the overall picture has been good for longer than that factor can explain.
The upshot here: strength in used car prices is more a function of good consumer demand than temporary factors like tariffs concerns. On the plus side, that’s a promising sign about the state of the US economy. On the downside, it says much about the lack of affordability of new cars and trucks; automakers face a real challenge there. On balance, we take it as positive news with only a small asterisk beside it.