Monday, June 7, 2010

Impressive strength in the used car market

The Manheim index of used car prices has surged 23% since its year-end 2008 low, and has made yet another all-time high. This provides strong evidence of a resurgent U.S. economy, while at the same time highlighting the fact that there appears to be no shortage of money. As Manheim notes, "Pricing strength in the wholesale used vehicle market remained broad-based as an improved labor market and increased credit availability boosted the demand for the limited supply of wholesale units." Contrast the action in the past year or so to the action in the market for two years following the 2001 recession: back then there was a lot of downward pricing pressure, thanks to very tight monetary policy in prior years. Today that is simply not the case—money is in plentiful supply, which explains why gold is hitting a new all-time high today and the dollar is trading in the lower end of its historical range against other major currencies, and is only about 7% above its all-time lows against a large basket of currencies on an inflation-adjusted basis.

And if nothing else, it's very hard to reconcile the strength in used car prices with all the talk about an imminent double-dip recession.

1 comment:

W.E. Heasley said...

Mr. Grannis:

Within vehicle supply is an item known as “scrap rate”. The scarp rate has been in excess of new car production for + 2years. Hence supply has been shrinking as marginal supply units leave aggregate supply (scrapped) and new replacement units do not get produced and the lack of production creates a future potential demand/supply lag that creates an expectation regarding price.

Demand for used vehicles has shrunk too. Due to the recession marginal buyers have disappeared.

However, cash-for-clunkers artificially accelerated scrap rate. That is, many semi-marginal units, units that had remaining productive lives, were scrapped early.

Cash-for-clunkers accelerated future consumption of new car purchases into the present i.e. the time period of the cash-for-clunkers program. True. However the marginal scrap rate was artificially increased during the same time period.

Hence we have a marginally decreased demand for vehicles with an artificially reduced marginal supply of vehicles with a demand/supply future potential lag creating price expectations. Used vehicle: D-marginal buyers vs. S- (scrap rate > new production rate) + (supply artificially reduced due to CFC) = P increasing.