Study Predicts Prolonged COVID-19 Pandemic Could Sharply Reduce Vehicle Sales

The COVID-19 crisis could cause U.S. new vehicle sales to fall by as many as 2.4 million units from 2019 according to research released Monday by ALG, a subsidiary of TrueCar. 

In what ALG terms a “quick recovery scenario” where the economy and auto industry bounce back by the end of April to levels they were at before the pandemic hit, the company predicts new vehicle sales would reach 16.4 million, down 2.9%, or about 500-thousand units from its initial 2020 forecast and off 3.8% from 2019 sales.

In the event of the situation lasting much longer, the effects would likely be much more severe. 

“A prolonged slow down through the end of the year would result in a nearly 15% year-over-year sales decline in 2020,” said Eric Lyman, Chief Industry Analyst at ALG, in a statement. “While forecasts are changing day to day, our current likely scenario has new vehicle sales for 2020 landing in the mid 15M unit range.”

That’s a sharp drop from the 17.1 million new vehicles sold in the U.S. in 2019, the fifth straight year sales topped 17 million. A January forecast by Edmunds.com predicted sales would match that level this year, citing a strong economy and “stable finance rates,” with the caveat that rising transaction prices could send some shoppers to the sidelines or to used vehicle lots. 

In January, the COVID-19 situation had not yet grown to a pandemic, leading to severe restrictions on travel, large public gatherings and the practice of social distancing which encourages individuals to mainly avoid contact with other people outside the home. 

It all means reduced foot traffic into dealerships, which is likely to result in fewer sales. Even before the crisis was designated a pandemic, dealers already had a negative view of the market, according to a quarterly dealer sentiment survey by Cox Automotive released on March 6. That survey was taken in January and early February during the U.S. Senate impeachment trial of Pres. Donald Trump. The next quarterly survey will likely better reflect dealer sentiment in light of the COVID-19 situation. 

Meanwhile, ALG is predicting the crisis will certainly effect vehicle residual values and has already lowered them in its Residual Values Book.

“Short term market volatility does not necessarily translate into long term changes,” said Morgan Hansen, VP of Data Science at ALG, in a statement. “While ALG expects a short term drop of roughly 2 percentage points of MSRP in wholesale used market values, our benchmark 36 month forecast only expects a decline of 0.7 ppts of MSRP. These values are based on current expert third party macro-economic forecasts that put the probability of prolonged economic downturn risk at 50%.”

Along with COVID-19, ALG cites stock market performance and drops in oil futures prices as “key impacts” on residual prices with the following predicted effects, as laid out in its release:

• COVID-19 will have impacts on both vehicle inventory availability and consumer confidence, affecting supply and demand.
• COVID-19 will have immediate short term impacts due to reduced income and reduced commerce in general.
• In the extreme case, COVID-19 could also halt sales in the short term if auction houses and transportation companies have temporary shutdowns, but this is not reflected in the current ALG longer term outlooks.
• Long term, COVID-19 and poor quarterly results will most likely result in higher unemployment rates through 2020 and into 2021. Prolonged bear markets generally lead to more layoffs.
• Low oil prices have traditionally been good for the economy, but increases in domestic oil production and extremely low prices are detrimental to the US economy in the short term.
• Government intervention strategies and election results will impact the US economy throughout 2020 regardless of how quickly COVID-19 recedes.