Used Car Inflation Peaking, Gas Demand Rising

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Used Car Inflation Peaking, Gas Demand Rising

Two points to discuss with you today:

#1: US used car prices look to have finally topped out. We rely on the Manheim Used Vehicle Value Index as a leading indicator here. Manheim specializes in dealer-to-dealer auctions of late model used cars and light trucks. These are near substitutes for new vehicles since they are often of similar specifications. Because of the surge in vehicle demand due to the suburbanization of America and short supply of new vehicles due to chip availability, used car prices in June 2021 are up 37 percent versus 2020.

But here’s Manheim’s take on the most recent data, for the first 15 days of June: “prices continue to increase but at a decelerating rate”. The chart below shows this trend, with the 2 most recent observations roughly equal to each other:

Moreover, Manheim notes that rental car auction prices were down 3 percent in June versus May. These are the marginal units that flow through the system, typically with higher mileage (87,000 miles on average just now) and therefore less desirable than off-lease or more lightly used trade-in vehicles. To us, that confirms that dealers are getting pickier about what they offer on their used car lots and the days of “buy all the things” are drawing to a close.

This is important, because used vehicle inflation was 0.9 points of May 2021’s 5.0 percent headline inflation (18 pct of total) and 1.1 points of last month’s 3.8 percent core Consumer Price Inflation reading (29 pct). Exclude used vehicle inflation, and core CPI was 2.7 percent last month, hardly the sort of number that supports concerns over structural inflation.

One aside: used vehicle inflation has been very helpful to the fundamentals of publicly owned car dealerships since the used lot is a big profit generator for such businesses. We’d therefore be very careful around names like CarMax (KMX), Carvana (CVNA), AutoNation (AN), Penske Auto (PAG), Sonic (SAH), Asbury (ABG) and Group 1 Auto (GPI).

Takeaway: used car inflation should be less of an issue in the second half of 2021, lowering the chance of big upside surprises in upcoming CPI reports.

#2: US gasoline demand stalled early this summer but is showing signs of life right now. The following chart from the US Energy Information Agency shows trailing 4-week consumption rates for 2020 – 2021 in blue and lines those up to comparable weeks for 2019 – 2020 in brown.

Note that the last 5 observations in the blue line (current consumption) are flat at just over 9 million barrels/day (9.1 mm barrels/day is the most recent dot). While that’s better than any point last summer (blue line, left side of chart), it still is 6 percent below 2019’s levels (brown line, left side).

Now, the good news is that the most recent week’s consumption was 9.44 million. We’re edging closer to the 2019 highs and could even equal them in July/August. That’s “peak driving” in the US because of summer vacations.

Takeaway: not to sound like a broken record, but the recent uptick in US gasoline demand supports our bullish call on Energy stocks. Keep in mind that gas consumption faces a headwind from less commuting due to work-from-home trends. Offsetting that at present is vacation travel, and the same suburbanization trends we noted in the used car point above should help long-run gasoline demand come in the Fall and beyond.

Sources:

Manheim Data: https://publish.manheim.com/en/services/consulting/used-vehicle-value-index.html

EIA Gas Consumption Data (last chart on the page): https://www.eia.gov/petroleum/weekly/gasoline.php