The biggest story of 2021 revolves around how the semiconductor chip shortage has impacted vehicle production across the globe, reported Patrick Manzi, chief economist for the National Automobile Dealers Association (NADA) in the association’s “Third Quarter Economic Update.” 

Manzi shares the shortage has limited vehicle production, which has tightened dealership inventories, which has driven down sales. Worse, the end is nowhere near in sight, he adds.

“At the end of the third quarter inventory in the U.S. was just under one million units (or approximately a 24-day supply). And that represents a decline of 65% compared to the previous year when inventory at the end of the third quarter sat at 2.7 million units or a 50-day supply. Suppressed inventories are unlikely to change too much before the year’s end and will continue to impact sales in the fourth quarter of 2021,” he noted in the NADA podcast. 

The third quarter saw a SAAR of 13.3 million units after light-vehicle sales in September fell for the fifth straight month to a SAAR of 12.2 million units. The September SAAR was just 100,000 units over May 2020, but Manzi reminds that in “May 2020, we were still under lockdowns in parts of the country.”

Manzi cautioned that low inventory levels are restricting sales and will continue to do so throughout the end of the year. Auto Forecast Solutions reports the microchip shortage has cost the global industry over 9 million units of production, with a loss of 1.2 million more than expected. North American vehicle production fell over 2.9 million vehicles with a drop of 300,000 units more than expected. 

“Because of inventory constraints and demand-sales limitations, we have reduced our sales forecast from 16.5 million units to 15 million for 2021,” he said.

Skyrocketing Prices

Limited new vehicle inventory also continues to impact the used vehicle market, according to Manzi. 

“Many consumers had to turn to the used market,” he said in the podcast, noting this scenario pushed “record-setting wholesale option and retail prices over the summer.”

Auction prices, he noted, cooled in late summer but began heating up again in September. Kayla Reynolds, economic and industry insights manager for Cox Automotive, reported in a conference call that wholesale used vehicle prices on a mix, mileage and seasonally adjusted basis increased by 5.3% in September over August. As a result, she reported the Manheim Used Vehicle Value Index rose to a record high of 204.8, a 27.1% increase from September 2020.

As of September, the J.D. Power Used Vehicle Price Index also was up 35% over the same nine-month period of 2020. The index was 11.2 points higher than in August, showing that used-vehicle prices continue to buck traditional seasonality. 

While seasonality traditionally impact vehicle prices, industry analysts predict higher than normal prices at auction will continue if the inventory situation persists. 

New vehicles also are selling at all-time highs. In fact, J.D. Power finds average transaction prices hit $42,800 in September—an all-time high and the fourth consecutive month with transaction prices exceeding $40,000. Average incentive pricing per unit hit a record low of $1,775 down from $2,037 in 2020. This is because the average time a vehicle sits on a dealership lot dropped to 23 days in September versus 54 days in September 2020, reported J.D. Power. 

“Until inventory levels return closer to their previous levels, [prices will stay high],” Manzi stressed. “It's unlikely that we're going to see inventory levels anywhere close to where they were pre-COVID by year’s end. We're going to be dealing with this GDP impact to production and other supply chain disruptions through 2022.”

Where inventory will fall at the end of 2022 remains unclear, according to Manzi. 

“We expect to see a slight increase of 100,000 units or so before year’s end. Then, if all goes according to the forecasts I've seen, we may be closer to 2 billion units by the end of 2022,” he noted in the podcast. 

Job Gains Pick Up Speed

NADA also tracks job gains. August’s lower than expected job gains of 235,000 jobs also will impact the industry, Manzi predicted. 

However, Manzi says glimmers of hope exist, noting he expects job gains in September and beyond. “We’re about 3.5 million jobs below where we were before the pandemic hit, but we are seeing some strong indicators that the labor market continues to recover,” he said. “There are now over 10 million job openings and over 1.25 job openings for every unemployed person.” 

At the height of the pandemic, there were five unemployed people per job. However, the U.S. labor market has some distance to catch up to pre-pandemic levels. The labor market employs 5 million fewer people than before the pandemic began, reported the U.S. Bureau of Labor Statistics.

Though employment remains steady at new-car dealerships, Manzi reports some dealerships struggle to fill vacancies because of strong labor demand nationwide. 

Shaky Consumer Sentiment

The September results from the University of Michigan Surveys of Consumers show consumer sentiment edged upward in September following back-to-back declines in July and August. The report found growing fears of another COVID surge because of the Delta Variant sparked a plunge in consumer confidence in August, but noted consumer sentiment rallied in September.  

“September’s reading turned positive and headed in the right direction,” Manzi said. “But again, consumers were a little less concerned about the Delta variant given a downward trend in cases.”

Whether this continues remains to be seen as concerns rise over inflationary pressures. Consumers have seen inflated prices for appliances, lumber and even food. “That has caused many consumers to hold off on purchases until they believe price increases have slowed,” he said.

Inflation readers now fall at 4%-5% depending on the metric. “That is a good bit higher than the Fed’s preferred target of around 2%,” he said. “It’s likely that inflation will remain elevated as long as we deal with supply chain shortages.”

Manzi predicted price increases will eventually slow down and return to normal levels. “We expect prices to cool by the second quarter of 2022,” he said. “But again, COVID is still in the driver’s seat, and we may see further supply chain disruptions.”

Electric Vehicle Sales Heat Up

As the Biden Administration pushes Americans to drive cleaner vehicles, electric vehicle sales are growing in kind, according to Manzi.

The year’s first nine months of battery-powered electric vehicle sales represented 2.6% of all new vehicles sold, up about 110 basis points in terms of market share over the same nine-month period in 2020. Battery electric vehicle sales totaled 300,635 in the first nine months of the year, an increase of 91.3% over the same period in 2020. 

Franchise dealers also hit a milestone. “From 2012 to the third quarter of 2021, franchise dealers have sold over a half million battery-powered electric vehicles,” he said. “There are all kinds of new models coming to dealers’ showrooms within the next 18 months. We expect franchise dealers to capture a bigger share of the EV market going forward. Many new products are in very hot segments of consumer demand.” 

Franchise dealers, he said, are undertaking massive investments to ready their stores to sell and service EVs. “NADA estimates franchise dealers will invest between $2 and $3 billion to sell these products,” he said.

The auto industry continues to reel from COVID-19 impacts but will eventually stabilize into a new normal, but when that will occur remains a guessing game.

Ronnie Wendt is the founder of In Good Company Communications and an editor for F&I and Showroom.