New vehicle sales seasonality has always been rather predictable. The end of the fiscal year, the model year changeover, Labor Day, and the end of the year have always led to stronger months in March, May, August/September, and December.
However, during recessions, seasonality trends break from their normal patterns—and this year is no exception. While we know the patterns will be different due to COVID-19, the variation is difficult to predict. That’s because the prolonged impact of the pandemic, which has led to stay-at-home orders, record jobless claims, declining consumer confidence, delayed tax returns, usage of stimulus checks, and increased OEM incentive spend is still relatively unknown. This makes 2020 unlike any other.
Several factors disrupting typical seasonality trends
Historically, March is the first seasonal spike of the year. It coincides with incentives from automotive brands who are closing their fiscal year, and it’s when consumers have extra money from their tax returns to put towards the purchase or lease of a vehicle. From 2010 to 2018, March represented 9.3% of yearly new vehicle sales, and April represented an additional 8.4%.
This year, March and April sales were severely impacted by the spread of COVID-19 across the U.S. Store closures, high unemployment rates, and the start of a recession—all in Q1—have pushed consumers to the sidelines of the new vehicle market. New vehicle sales were down an estimated 38% in March and 46% in April according to Motor Intelligence.
Declining consumer confidence also factored into March and April auto sales. Layoffs, furloughs, and pay cuts left many consumers wary of making large purchases. Even those still fully employed have been left wondering what might happen in the coming months. According to the CarGurus COVID-19 Sentiment Study, 79% of respondents who had been planning to buy a car now expect to purchase later than they initially planned. Those who buy in the current market conditions are likely only buying out of necessity.
Bright spots on the horizon could lead to later seasonality spike
The good news: once the economy stabilizes and the labor market improves, consumer confidence will return. In the meantime, demand is building up, which could result in higher sales in Q4, compared to historical seasonality norms. Plus, the same factors that influence the usual March seasonality spike, such as tax refunds and OEM incentives, will still play a role in sales, just a bit later than normal.
For example, because the tax filing deadline was extended—and might be again—at both the national and state levels due to COVID-19, the number of tax returns filed as of April 24, 2020 was down 12.5%, and the number of returns processed was down 17.1%. A delayed tax filing simply means delayed money in hand for consumers to use toward the purchase or lease of a vehicle. Dealers should rest assured that there’s still an opportunity to benefit from tax returns this summer.
Similarly, as sales volume remains low, OEMs will use incentives to drive consumers back into the showroom. Headed into 2020, OEMs were offering deals like 0% financing for 72 months. Now, as COVID-19 has led to decreased demand, many OEMs have started offering 0% financing on 84-month loan terms. These low APRs paired with high levels of incentive spend and coverage of up to three monthly payments may continue through the summer as OEMs clear 2020 model year vehicles to prepare for 2021.
Finally, stimulus checks will also provide a boost for many consumers. According to a poll conducted on cargurus.com, 28% of consumers plan to use their stimulus check toward the purchase of a vehicle. Stimulus checks will continue to be delivered to people in the coming weeks, and dealers can expect these payments to potentially boost new vehicle sales later in the year.
These factors, plus pent-up demand could lead to delayed seasonality spikes in late Q3, Q4, or possibly Q1 of 2021. Only time will tell when sales will ramp up again.
Auto sales are lagging, but not lost
While we don’t know exactly when those sales will return, we know that they will. Unlike vacations and dining out, which are often the first purchases consumers cut during a recession, vehicle purchases will merely be delayed rather than canceled. More than two-thirds (68%) of those planning to buy a vehicle this year said their purchase was essential, according to our survey.
It’s important for dealers to remember vehicles are necessities and sales will return. Even if some consumers leave the new vehicle market for an ownership cycle, pent-up demand paired with delayed tax returns, OEM incentives, and stimulus checks will eventually drive consumers back to dealership lots. It just won’t be on the usual seasonal cycle.