Automotive sales, both used and new, typically follow a seasonal sales pattern. The first sales spike of the year occurs in March and is fueled by a combination of factors, including economic tailwinds (tax refunds and annual bonus payments) and increased OEM spend on incentives as brands close the fiscal year or react to the competition. CarGurus US used lead submission data has always followed a similar seasonality path.
However, it should come as no surprise that COVID-19 has completely changed seasonality in the markets. This year, lead submissions fell off a cliff at the end of March, with nearly every state hitting a low between March 27 and April 11. During that time period, jobless claims climbed to all-time highs, consumer sentiment fell 17.3 points to 71.8, and other economic indicators saw major disruption. Additionally, companies completed first rounds of layoffs, and businesses like dealerships shut down in many places due to state restrictions. All of this uncertainty and turmoil, plus the risk of contracting the virus, contributed to the steep decline in leads and sales.
But it’s not all doom and gloom. The data shows that most states rebounded quickly after reaching their trough with lead submissions beginning to recover mid-April and continuing until the middle of June. However, state-by-state recovery has been as unique as each state’s handling of COVID-19.
A deep dive into Michigan’s and Pennsylvania’s rebound
Michigan and Pennsylvania both deemed vehicle sales non-essential for a period of time. This forced consumers to put their car purchases on hold and created pent-up demand in the market. Despite dealerships in both states being ordered to close their showrooms, the percentage change from peak to trough and trough to peak differed.
Lead submissions in Michigan declined roughly 80% peak to trough, then increased 330% trough to peak. Pennsylvania declined roughly 70% from its peak before increasing 248% from its trough.
So, what drove the percentage differences between two states that both deemed dealership sales non-essential? Likely the employment rate. Pennsylvania’s peak unemployment rate was far below Michigan’s. The poor job market in Michigan likely led to a greater decline in consumer confidence as people waited to see what would happen next. However, as showrooms reopened and Michigan eased some of its state guidance, the unemployment rate also improved at a faster pace compared to Pennsylvania’s.
The larger the decline, the more dramatic the rebound
When I looked at CarGurus data for other states, the rebound in states with the largest declines in lead volume was most notable. Those states saw far larger trough to peak increases. For most states though, pent-up demand, stimulus checks, and tax returns played a role in supporting the overcorrection from trough to peak.
What’s needed for the auto sector’s recovery
If you think you missed out on the initial surge in leads from April through June, don’t worry. We haven’t seen a true recovery yet—just the first wave of consumers returning to the market—and we can’t read too much into May and June numbers. As pent-up and pull-ahead demand fades away, dealers need to be prepared for tougher months ahead due to several factors:
- Wholesale prices will continue to rise until the auctions are fully functional.
- Credit will remain slightly tighter until banks see growth in the economy and adjust their risk formula.
- Days’ supply of some new vehicles will remain low until production and parts are available again, leading to higher prices low incentives from OEMs.
A true recovery for the industry hinges on a vaccine, cure, or herd immunity. Stimulus checks and supplements to unemployment benefits alone will not lead us out of the current recession. They’ll hopefully give Americans enough money to cover their bills and rent, which would avoid a wave of repossessions and evictions that could stall the economic recovery, but they won’t create the structure needed to rebuild the economy.
Peak to trough to peak to…stability?
What I’m looking for as the next step in the auto sector’s recovery is stabilization. As the market starts to pull back slightly now that initial pent-up demand and economic tailwinds are behind us, it should begin to stabilize. Though there will likely be lower demand levels compared to the summer of 2019, stability must happen in order for a true recovery to occur.