CCC Intelligent Solutions, Inc., recently took a look at the factors that had the biggest impact on the collision repair industry in 2022, many of which were financial.
Inflation
Inflation---perhaps one of the words that best defines 2022. At the close of 2021, many were hoping we had seen the worst of rising inflation as supply chain issues were getting better, whether it was the lower cost of shipping goods or automakers predicting improved supplies of semiconductor chips. But then Russia invaded Ukraine and the cost of oil and other raw materials shot up.
Overall inflation hit a forty-year high at midyear, and the 6.6% increase in September in the core Consumer Price Index (CPI), which excludes energy and food prices, was the biggest increase since August 1982.
People cooped up at home for nearly two full years splurged on travel, shifting their spending from big goods like furniture and home improvement to trips abroad and dining out. This left many businesses with too much of the wrong inventory and other businesses with not enough employees.
The “great resignation” and “quiet quitting” emerged alongside soaring wages. Incomes for many workers improved substantially---leaving industries like the collision repair industry further strapped for new entrants. Other industries that experienced increases in early retirements in CY 2020 found themselves unable to backfill those positions when workloads returned to pre-pandemic levels.
Wages across all industries have been growing at much faster rate than in many years, and while wage growth in the trade and transportation industry outpaces growth across all industries, it still trails inflation overall.
Good news? Overall inflation has started to fall slightly, as some widely purchased goods like clothes, vehicles and appliances have seen their prices fall. Unfortunately, these types of goods account for only one quarter of the CPI. Inflation in services, food and energy continues to rise, and non-energy services makes up more than half of the CPI.
So, what might we expect moving forward? All things related to owning a vehicle in 2023 will continue to cost more.
Shifting Consumer Behavior Around Vehicle Purchases
According to the NADA, the average new vehicle retail selling price was $45,646 for the first half of 2022---up nearly 14%---while the average used vehicle retail selling price increased nearly 26%.
Higher interest rates and a more expensive vehicle mix have also led to larger and longer new and used vehicle loans payments and terms. Higher cost vehicles, limited inventory and fears of a recession have kept more people out of the market---Cox Automotive predicts new and used vehicle sales will fall in 2022 to 13.7 million and 36.3 million respectively.
Should the U.S. experience a recession in late 2022 to early 2023, vehicle sales will likely decline or stay flat, and new and used vehicle prices may soften further.
However, supplies of new and used vehicles remain below pre-pandemic levels, so declining demand will likely have only marginal impact on pricing. For example, U.S. dealers had only 32 days’ supply of new vehicle inventory Sept. 30, 2022, versus 66 days on Sept. 30, 2019. And while Cox Automotive data shows wholesale days’ supply have improved, overall wholesale used vehicle volumes will drop to 9 million in 2023 versus 13.1 million in 2019, keeping future supply constrained.
The average new vehicle retail selling price dropped 1.6% during the last Great Recession in 2007 to 2008, while wholesale used vehicle values fell more than 6% and the BLS CPI used car and truck index fell more than 5%.
During that period, the industry also had a healthy supply of both new and used vehicles. Subsequently, even if vehicle prices were to fall in a similar manner from a recession in 2023, they would remain well above pre-pandemic levels. In fact, Manheim reports its wholesale used vehicle value index rose 46.7% by December 2021 versus the prior year, and forecasts it will fall nearly 14% by December 2022, and decline less than 1% by December 2023.
So while used vehicle prices and subsequently total loss costs may trend lower in 2023, it’s likely they could remain as much as 20% higher than pre-pandemic.
At the same time, those consumers buying new vehicles are buying more expensive vehicles like light trucks and electric vehicles. Through Q3 2022, sales of EV’s in the U.S. were nearly 600,000, up 70% from the same period in 2021, accounting for nearly 6% of all new vehicle sales.
With automakers all racing to get more EV models into production, demand for the raw materials needed in the manufacture of EV batteries has surged, driving up their costs. Higher raw material prices mean EVs are costing more.
Looking to keep the U.S. competitive as it electrifies its fleet and to make it less reliant on other countries, the Bipartisan Infrastructure Law, CHIPS & Science Act, and Inflation Reduction Act combined will invest more than $135 billion to build on the growing demand for EVs, including critical minerals sourcing and processing and battery manufacturing in the U.S.
Abby Andrews