Economist: Blame the IRS for Slow Used Car Sales

A big reason used car sales slowed in March was because the IRS has been late in getting tax refunds to households, a Cox Automotive economist said Thursday.

Jonathan Smoke, Cox Automotive’s chief economist, said tax refunds usually make March the biggest month of the year for used car sales. By the end of March, the IRS had sent out 45% of refunds, compared with 71% at the end of the 12th week of 2019.

But while the refunds are about four weeks late, Smoke said they will arrive and cause April to be the best month for used car sales. It won’t hurt that refunds are running about 12% higher than in 2019.

“The spring bounce is underway,” he said during the Q1 2022 Manheim Used Vehicle Value Index Call.

That should be good for credit unions. They generated 25.9% of used car financing in the fourth quarter, compared with 13.7% of new car loans and leases, according to Experian.

Smoke said he didn’t bother comparing this year’s first quarter with the first quarter of 2021 when households had been receiving pandemic relief checks from the federal government since 2020, including a final $1,400 per person check in March 2021.

Last year, Smoke said tax refunds were like “a light dessert after a five-course meal. This year they’re the only game in town.”

Sales at a seasonally adjusted annual rate have been falling month-after-month since January.

Cox Automotive started the year expecting new car sales to be 16 million this year, up 6% from 2021. On March 28, it revised it down to 15.3 million vehicles, a 2% bump.

Its forecast has held for used car sales, falling 3% to 39.3 million this year. One reason for the confidence is that demand is shifting to used cars from the supply-constrained new vehicle market.

New car sales in March came in at a seasonally adjusted annual rate of 13.3 million vehicles. That was bit better than the 13.1 million Cox Automotive forecast on March 28, but 24% lower than March 2021’s 17.6 million and down 5% from February’s 15.0 million pace.

Using same-store data from Dealertrack, Cox Automotive estimated used retail sales rose 37% in March from February. That sounds like a lot, but usually the gain is much bigger. From March 2021 to March 2022, sales fell 15%.

The chip shortage is still crimping the supply of new cars. New inventory is down 71% from 2019 and down 57% from 2020. The supply of used cars also fell in March.

While COVID-19 might be fading as a factor in the United States, it is still disrupting the supply chain as outbreaks hurt production in China and other areas where vaccines are not widely available, Smoke said.

Its Manheim Used Vehicle Value Index for used car wholesale prices fell 3.3% from February and rose 24.8% from a year earlier after adjusting for mix, mileage and seasonal factors. The non-seasonally adjusted index for March rose 0.6% from February, which it said indicated a strengthening wholesale market.

“Once we get through the spring, we expect demand to wane somewhat and should see closer to normal price depreciation patterns for the rest of the year,” Smoke said. “That said, we think our call for not expecting a price crash in 2022 — just depreciation — is still very likely given continued challenges with supply conditions.”

Cox Automotive analysts looked at prices and sales patterns for sedans versus larger gas-guzzling vehicles but did not find any conclusive evidence that buyers were shifting their habits to buy smaller vehicles because of higher gasoline prices.

In the happy talk category, Smoke said he doesn’t anticipate consumer demand for autos will collapse this year “because that would require a recession.” Smoke doesn’t think a recession is likely this year, but he said some economists are talking about the possibility of one in 2023.

“Slow growth? Yes. A recession? No,” he said.

And even if there is a recession, he said there is a bright side: “The used vehicle market performs quite well in a recession. It’s the new vehicle market that suffers.”