Over the past week, we warned (twice) that plunging used car prices might presage a deflationary spiral in one of America’s twin trillion dollar bubbles.
Specifically, we noted that if used car prices continue to fall (pressured by a surge in off-lease supply), that deflationary impulse could spread quickly to newer model vehicles as the falling price of trade-ins puts pressure on OEMs to incentivize new vehicle purchases. Here’s how Detusche Bank put it:
The biggest fear for investors is that Auto OEMs become incrementally more price aggressive to support New Vehicle sales. Historically, every 1% decline in Used Vehicle prices has corresponded with a 0.2% decline in New Vehicle prices.
Well, consider that warning and then consider the following commentary out today from the very same Deutsche Bank who notes that “individual automakers [are] increasingly engaged in aggressive discounting.”
Via Deutsche Bank
Our mid-month checks suggest that the U.S LV SAAR is tracking ~17.4 MM so far in March, in-line with the run rate observed in recent months. Based on our survey we believe that GM’s U.S. sales are up 9% yoy, Ford is down 8% (entirely due to the March 2016 fleet comparison, which was unusually high in March 2016), and FCA is down 3%. On the surface the mid-17’s SAAR may seem encouraging given developments in the used vehicle business (7.7% yoy price decline) and signs of tightening credit. But we’ve noted individual automakers increasingly engaged in aggressive discounting. GM is suddenly standing out in this regard with incentives up $1,350 per vehicle. This is a very significant increase relative to recent industry increases in the $200-$300 range (and GM incentives were also very high last month). GM’s average transaction prices also appear to be down yoy ($2,800), as mix is no longer offsetting the increased incentives. GM’s inventories are clearly elevated (91 days at the end of Feb); particularly in passenger cars (small car at 122 days; mid-car at 148 days). We believe that GM is making adjustments to production and pricing to correct this glaring problem. Clearly, these metrics are of increased concern… particularly in the context of resurfacing cyclical concerns.