Jonathan Smoke, chief economist of Cox Automotive and colleague Mike Brisson join Mark and Cris to discuss what’s going on in the vehicle market. After a rundown on this week’s inflation stats we discuss prospects for vehicle prices, sales, production, and the implications of tighter underwriting and weaker credit quality in the auto loan market. We also take up the tough new emission standards and what they mean for EV adoption.
Jonathan Smoke, chief economist of Cox Automotive and colleague Mike Brisson join Mark and Cris to discuss what’s going on in the vehicle market. After a rundown on this week’s inflation stats we discuss prospects for vehicle prices, sales, production, and the implications of tighter underwriting and weaker credit quality in the auto loan market. We also take up the tough new emission standards and what they mean for EV adoption.
Full episode transcript
For more on Jonathan Smoke, click here.
Follow Mark Zandi @MarkZandi, Cris deRitis @MiddleWayEcon, and Marisa DiNatale on LinkedIn for additional insight.
Mark Zandi: Welcome to Inside Economics. I'm Mark Zandi, the chief economist of Moody's Analytics, and I'm joined by my trusty cohost, Cris deRitis. Hi, Cris.
Cris deRitis: Hi, Mark. Good to see you.
Mark Zandi: It's good to see you as well. We're missing Marissa. What's up? Is she still under the weather?
Cris deRitis: She might be. She might be.
Mark Zandi: I thought she was going to join us today. Well, maybe she'll join us...
Cris deRitis: She may surprise us.
Mark Zandi: She may surprise us. Dip in here at some point.
Cris deRitis: Yeah.
Mark Zandi: Yeah. Now how are you feeling, by the way?
Cris deRitis: I'm on the mend. I'm getting better.
Mark Zandi: You're on the mend? Yeah?
Cris deRitis: Yeah.
Mark Zandi: You don't look any worse for the wear.
Cris deRitis: That's the power of cameras and things here. I got a special filter.
Mark Zandi: They don't help me out, buddy. I don't know. Yeah. Anyway. Well, it's good to have you back up and running. And we've got two guests, one internal, one from outside our little world. Hey, Mike, Mike Brisson, how are you?
Mike Brisson: Good, Mark. How's it going?
Mark Zandi: I'm good, I'm good. I am getting a little older. Yes, you can tell it from my, well, in many ways, but mainly from my hairline. But I went to the gym yesterday. I do go to the gym pretty regularly and I'm sitting there in the gym observing this one fella doing an exercise and I'm thinking, Oh, I should try that. Huge mistake.
Cris deRitis: Oh, no.
Mark Zandi: Huge, huge error. That's why I'm kind of bent over here. I've been taking Advil. Wish me luck on that one. And at my age, injury's a problem, right? Because once you get injured and you're out for a little bit, getting back is really not easy. So a huge-
Mike Brisson: You got to be careful. You're the Cal Ripken of this podcast. You never miss one.
Mark Zandi: Right. Well, you asked how I was doing. I thought I'd actually tell you how I'm doing.
Cris deRitis: Is there a metaphor for the economy there?
Mark Zandi: What did you have in mind?
Cris deRitis: You know, [inaudible 00:02:16], you shouldn't try any new thing, new monetary policy, or try to reset inflation to a higher level or anything like that. Stay the course.
Mark Zandi: Stay the course, baby. Yeah, I think you're probably right. And we have Jonathan Smoke. Jonathan, good to have you back on Inside Economics.
Jonathan Smoke: Oh, I'm happy to be here with you.
Mark Zandi: You're looking particularly dapper. Are you in your office there?
Jonathan Smoke: I am in my office in Atlanta. And it's a brand new renovated digs, so-
Mark Zandi: Oh.
Jonathan Smoke: Hopefully nothing technical breaks today.
Mark Zandi: I thought you guys were remote. No, did I miss that or something? Are you-
Jonathan Smoke: Well, my team has always been kind of hybrid because we've got folks around the country. But no, we've got a pretty large campus in Atlanta and increasingly more people are coming in.
Mark Zandi: Oh, cool. And you're the chief economist of Cox Automotive. I should have said that right up front. Welcome.
Jonathan Smoke: That's right.
Mark Zandi: Yeah, it's good to have you. And we're talking autos, obviously. Mike's our expert on the auto industry. And Jonathan, you're the global expert on the auto industry, so it's good to have you both. We're going to talk a lot about autos, a lot going on there. But before we get to that, maybe this past week, the big economic news was around inflation. We've got the consumer price index, I think that came out on Wednesday, and then the producer price index that came out on Friday. Cris, you want to give us a rundown? What'd the number say to you?
Cris deRitis: Yeah, so CPI, I would say was a good report, but certainly better the consensus, CPIs coming, consumer price index inflation is, it is coming down. Some would say perhaps according to script or right according to script, but we saw some improvement pretty much across the board-
Mark Zandi: Who would say that, Cris? Who would say sticking to the script?
Cris deRitis: I don't know.
Mark Zandi: Anybody you know?
Cris deRitis: It seems so common. I don't know.
Mark Zandi: Seems, okay. All right.
Cris deRitis: I hear it all the time.
Mark Zandi: You hear it all the time. Yeah, fair enough. Sorry, sorry to interrupt.
Cris deRitis: No, not at all. So we had improvement pretty much across the board, right? So overall top line CPI increased 0.1% in the month of March. That's 5% year-over-year. So pretty hefty decline both in terms of month-to-month and year-over-year, especially as we're running the corner here in terms of the increased prices that we experienced a year ago as a function of the Russia, Ukraine war. So we saw substantial decline in energy prices down three point a half percent on the month, 6.4% on the year. So that's certainly beneficial. Food prices, which had been pretty sticky in terms of an increase, were flat this month. So that is improvement. All right, so getting some relief there. And if you look at the sub-components in certain categories, you actually see quite substantial relief, right? Eggs for example. That's the big story.
Egg prices coming down fairly quickly here. So that certainly is a benefit to consumers. The core CPI was, also came down a bit. It's 0.4% on the month, 5.6% year-over-year. So still far from where the Fed wants it, but making some progress slowly, slowly towards the goal. But that I think is at the crux of the debate. Is the progress fast enough for the Fed at this point or will they continue their rate hikes as a result of a still fairly elevated level for the core CPI, excluding food and energy.
I think, well, I'll highlight one part of it and then maybe turn it back to you Housing, right? Is of course very important component here and there we are seeing some signs of the rent growth moderating as we expected. So pretty significant moderation. So not actually turning negative of course, but the month-to-month increase much smaller now than it has been in pre or previous months. So do expect to continue to see some of the market rent declines or at least deceleration that we've seen continue to filter into the CPI. So that should continue to put some downward pressure on the CPI going forward. So I thought that was beneficial. Obviously we can talk about the speed, would be great to see that come down even faster. But given what we know about the markets, I would say that that was right in line with expectations.
Mark Zandi: Obviously inflation's critical to the outlook, the economic outlook. If inflation remains high, persistently high, then the Feds got to raise rates more and ultimately we're going into recession. Some argue that, and I think it might be you, Cris, that we're already going into recession given what's happened so far. But getting inflation down here in a reasonably graceful way is really, really important. And in my mind, this was a reasonably graceful CPI report. It felt pretty good to me. I mean, I'm growing increasingly confident that inflation's going to head back to the Fed's target over the next year or so, in that it'll take about that long get back down to the Fed's target, but we're headed in that direction. And kind of the frame I have is that there are three phases to the slowing and inflation growth. You mentioned one explicitly that's housing and that feels like that's baked, right?
Because we know market rents are flattened down. We know that that takes some time for that to translate through into the cost of housing services as measured by the Bureau of Labor Statistics, the keeper of the CPI data. And it feels like over the next six, maybe nine months, we're going to get, increasingly, it's not going to be a straight line month-to-month obviously, but generally over the next six, nine months, we're going to see a steady deceleration in the cost of housing services. And that's a big chunk of the CPI. I think it's over a third of the CPI, think well over 40% of the core CPI excluding food and energy. And that feels baked. I mean that that's going to happen with high degree of confidence. Second phase is related to the cost of services, and we'll come back to that later in the discussion.
But even there, that feels like we're moving in the right direction. If you look at the core services, X housing and energy, the healthcare, hospitality, personal services, still strong inflation, but that feels like that's coming in as well. And then the third phase, and this is the phase that we're in the middle of right now, is related to goods prices and getting on the other side of the supply chain issues of the pandemic, the labor market issues from the pandemic, the Russian invasion impacts on energy and commodities more broadly.
And the one area where we are still waiting to see some improvement, and I'm expecting it soon, but here we're going to go turn to the auto guys and get their sense of it is weaker new vehicle prices. Used vehicle prices have come in somewhat, although they've shown some strength in recent months, we should talk about that as well. But new vehicle prices, they keep going up, the pretty big increases in new vehicle prices, and we've been waiting for quite some time for that to roll over. And that's also really important to this outlook for the sanguine outlook for inflation going forward. Before I turn to Jonathan and Mike to start digging deeper into the vehicle price part of all the story, does that frame sound about right to you, Cris, in my thinking around how that's playing out?
Cris deRitis: It does. I think the debate is really just about the speed and can you land the plane or do you blow through the bottom is, the trend is downward, but how does that trend play out over time is really the debate. I don't think there's any question about the phases you laid out there.
Mark Zandi: And even on the trends, I mean, we're at 9% CPI consumer price inflation year-over-year at the peak back in June of last year, as of March with this data point we got this week, we're at 5% on the nose and the target is 2.5% On the CPI, I think. Fed has a 2% target on the [inaudible 00:11:08] consumer expenditure deflator. But because of measurement issues, CPI is probably about a half a point higher per annum, so about two and a half. So I think that's our bogie. We went from nine to five and now we got to go from five to two and a half. And clearly nine to five is a lot easier because of a lot of that's energy effects and food effects than going from five to two and a half. But it feels like we're moving in that direction pretty quickly here. No, any argument there?
Cris deRitis: Yeah, no.
Mark Zandi: Yeah.
Cris deRitis: I think we'll get there.
Mark Zandi: Yeah.
Cris deRitis: The question is can we blow through it with the recessions.
Mark Zandi: And you're still think at this point, well, we'll come back to that, but you're still, your instinct is still, we're going to need a recession to get it back in a fast enough way to satisfy the Federal Reserve Board?
Cris deRitis: That we need a recession. I don't know, but that we will have a recession.
Mark Zandi: We will, we'll have a recession.
Cris deRitis: The probability of a recession is high. Let me put it that way, hedge a little bit.
Mark Zandi: Okay. Okay. Let's turn back to the vehicle prices and maybe Michael, turn to you first. You want to characterize what's going on with new and used vehicle prices. It feels really weird what's going on there, at least to my eye.
Mike Brisson: So the new vehicle prices, let's start there. The new vehicle prices, according to BLS, they've been rising dramatically over the past year, year and a half. So we had another positive number this month. And the way I characterize it's a story about MSRPs. And the auto manufacturers can only reprice their vehicles when the new MSRP comes out. So there's an upper bound there on where each yearly increase can go. Whereas used vehicles, it's a dynamic system, so you can go above and beyond that MSRP, whereas the manufacturers are trying to keep their dealerships just at that top upper bound. And so there was a number of dealers that were selling above that, but generally, let's just say there's this upper bound of MSRP, and so as they just see price increases, they happen every year, there's going to be a lagged effect-
Mark Zandi: Just MSRP, manufactured suggested retail price just-
Mike Brisson: Yep.
Mark Zandi: Yep. Okay. Yep. Probably everyone in the world knows that, but just to make sure that everyone knows that.
Jonathan Smoke: Or simply-
Mike Brisson: At least in the US.
Jonathan Smoke: Or simply the sticker.
Mark Zandi: Or simply the sticker price, right? Yeah, everyone knows that. Yeah. Yeah. Okay. Sorry. Sorry, Mike.
Mike Brisson: Yeah, you always wanted to get below the sticker. Now you'll just want to get at the sticker, if you can.
Mark Zandi: Give me the sticker, please.
Mike Brisson: Yes. So you have this lagged effect where the new vehicles being sold, let's say in September, October, where the new 2023 model years come out. There's a big jump in the MSRP from 2022 to 2023. So on the new vehicles sales side, you're going to have the 2023 model years being sold from October through this spring. And if we're not having any incentives come in and you're just at that upper bound of the new 2023 model year, you're going to have year-over-year increases for those new vehicles. So I think this lagged effect from the MSRP being an upper bound is the reason we're continuing to see increases in new vehicle sales. It's my expectation like yours, that these new vehicle prices will come down as we go throughout this year. So I've been saying the second quarter of 2023 is going to be when we first start seeing new vehicle prices coming down as incentives start to increase, and we are seeing incentives increase little by little for new vehicles. And so then we'll see those transaction prices come down throughout the rest of this year.
Mark Zandi: When do you think that happens, Mike? I mean, March-
Mike Brisson: Later.
Mark Zandi: ... didn't happen. Late. Okay. Later.
Mike Brisson: I called it October to you. Then we'd start seeing in second quarter of 2023. So I'm sticking with it.
Mark Zandi: Oh. Oh, you did? Oh, back late in October of last year. You were saying when?
Mike Brisson: October. I said Q2 2023 was when we'd see negative-
Mark Zandi: Okay.
Mike Brisson: ... new vehicle price on BLS.
Mark Zandi: From Bureau of Labor Statistics. Okay. Jonathan, is that kind of a description of what's going on, resonate with you, and do you have a similar perspective?
Jonathan Smoke: Yes, it does. I mean, there's all kinds of interesting dynamics related to the sticker or the MSRP because it fundamentally makes, I would argue, the new vehicle market very inefficient in pricing when you have big swings in demand and supply, and far more dynamic is the used market. And of that, the wholesale market is like the closest thing you get to a stock market, kind of real live bidding that determines real fluctuations and prices. I would add, in addition to the discussion about the sticker that we've actually been seeing in the data that we track from Kelly Blue Book, and it's a part of the vehicle affordability index that we do together, that transaction prices have been down every month so far this year, mainly driven by changing mix of vehicles that increasingly there are more lower priced vehicles. Over the last 18 months prior, basically, manufacturers had prioritized their most expensive vehicles, and within the vehicles they made the most expensive trims and configurations.
So that caused the inflation over the last year in particular to be more significant than it otherwise would because the mix was richer. Well, the BLS controls mix to a degree because they have a fixed basket of vehicles, and whereas ours is moving with whatever the average price looks like. So it's impacted by mix. And I think part of the reason they had prices still going up in March when we're observing that real prices are actually coming down was because of that mix. And I too agree that it's inevitable you're going to see those prices starting to come in future months on the CPI.
Mark Zandi: Oh, okay. So you're saying that the BLS controls for mix and the data you look at does not, the transaction prices that you look at do not.
Jonathan Smoke: That's right.
Mark Zandi: But from trying to measure inflation, you do want to control for mix, right? So the BLS number is more what you want to measure, or is that an epistemological?
Jonathan Smoke: Yeah, I think it's a wonderful philosophical debate that we can have.
Mark Zandi: Okay.
Jonathan Smoke: Because you have this issue that is the BA basket they're using, even reflecting what's available in the marketplace. I think they under measured the actual inflation that occurred last year, for example, that real consumers were experiencing.
Mark Zandi: Oh, interesting. Okay. And this may be way down into the DNA of the data, but when you say fixed weights, do you know fixed to what? 2019 or 2020 or mix?
Jonathan Smoke: So they have a basket that fundamentally was first defined as I understand it in 2002, and then they do modest changes every year in September. That's why there's often an apparent break in pricing because they're addressing when they might need to replace a specific make and model of a vehicle because it's no longer available and that sort of thing in the data. So it's slow moving and they don't reveal the exact details of the basket. So it's impossible for us to really measure just how closely does it relate to the market. But if you think about it, 20 years ago, sedans ruled the world, and sedans are a minority of the vehicles sold today, SUVs and pickup trucks combined rule the world. So there's been a tremendous change in what consumers actually buy. And by the way, what is available to sell, which is a huge part of the affordability challenge for new vehicles in particular.
Mark Zandi: It's funny, anytime you dig deep into any kind of data, maybe this applies to everything that you dig deep into, you go, oh, boy, this is not as clear cut as I thought. This is a mess.
Jonathan Smoke: Yes.
Mark Zandi: This is a mess.
Jonathan Smoke: So you have to exist on two planes. I was actually a double major in economics and religion and-
Mark Zandi: Oh my gosh, that is cool.
Jonathan Smoke: There's an element of both that sometimes you can't allow yourself to doubt the fundamental truth that you believe in.
Mark Zandi: Yeah.
Jonathan Smoke: Even though the evidence may be pointing to the contrary.
Mark Zandi: Or the data, maybe evidence is too strong a word, the data is pointing in a different direction.
Jonathan Smoke: That's right.
Mark Zandi: Yeah. Oh, that's interesting. I thought you guys though were going to, maybe you had to peel the onion back another layer to get here. I thought you guys were going to talk about global supply of new vehicles and that production in Japan of new vehicles, production in Germany of new vehicles. And these are obvious, those two countries are obviously critical to global production levels are still well below pre-pandemic, and they're having a hard time getting that production up, therefore, you have just fewer-
Jonathan Smoke: Yes.
Mark Zandi: ... new vehicles out there. And of course here in the US we buy a lot of those Japanese, German vehicles. So if there's not enough of them, that means higher prices. And that fundamentally is what at the root of the higher new vehicle prices and why the dealers can get the MSRP, why they can get the sticker price because of that fundamental dynamic. Am I wrong?
Jonathan Smoke: No, we are still supply constrained. The current new vehicle inventory is less than half of what it was in 2019, but we've come a long way from the tightest supply conditions, which were a year ago. We're up 70% compared to a year ago. So to frame that at the lowest point, and for many months, almost 12 months in a row, we only had about 1.1 million units of inventory sitting on dealer lots or in process of arriving at dealer locations to be sold, and we're up to 1.8 million now. But back in 2019, in the older days, it was usually over 3 million at any given time sitting on dealer lots. So it's still supply constrained, as Mike was describing, that produced the condition that with the MSRP being a governor, that we had 20 straight months until March that the average transaction price was actually above the average sticker because dealers had more pricing power given the really tight conditions.
But one by one, segment by segment, manufacturer by manufacturer that has started to shift with the improving inventory. But when you dive into the data, yes, there's huge variation. We see Asia and especially Japan furthest behind in terms of being able to catch up. So good luck if you're trying to buy a Toyota, Subaru, Mazda vehicle. Those are going to be the hardest to find and closest to sticker or above sticker. The other end of the spectrum, North America is closest to being fully back, and if it weren't for labor would be completely back. But labor is another dynamic because we've got UAW contracts and potential strike coming up in September. So that creates behaviors that are not typical, historically. You would see I think more incentives with manufacturers that are further along in recovery and getting closer to normal in supply, but they're still being fairly disciplined to keep pricing high. And so far that's influencing not seeing bigger declines in the prices we're observing.
Mike Brisson: Oh-
Mark Zandi: Hey, Mike. Oh, go ahead.
Mike Brisson: Let me jump in here. Take the labor's side of the argument. My dad was a union steward in the electrician's union, so I'll take labor side on this one. So it is, is it management or is it labor's side? So management's, throttling production on the US side of things because of the contract negotiations coming up. Are they purposely limiting the number of vehicles being produced? We're seeing the lowest level of US production now in February since mid 2022. So we're not rising in production, we're decreasing in production in North America over the past few months. And is it because of the upcoming negotiations this summer that maybe we don't need that many employees? We can negotiate the two-tier wage scales, so it might be a negotiating ploy as well, and they're able to make sure they don't have oversupply for any possible economic downturn. And at the same time, they want to make sure that they're maintaining pricing power in those profit margins that they've become accustomed to over the past couple of years.
Mark Zandi: So just to make this clear, Japanese production is way down below pre-pandemic? No question. Supply chain issues, probably.
Mike Brisson: Yeah.
Mark Zandi: German production is well below pre-pandemic, probably.
Mike Brisson: But they're covering, they're doing better.
Mark Zandi: They're doing better. Okay.
Mike Brisson: Yeah.
Mark Zandi: But still some, they're not there yet. They still haven't gotten production back. Here in North America, US, we got production back up to pre-pandemic, but now in recent months it's started to slide a bit. And you're saying not quite clear what's going on, but it could be that the manufacturers are actually restraining production. One, because there may be fearful of demand because of a recession and or they are focused on these contract negotiations that are coming up. And if they cut production in jobs, they might have some negotiating power with the unions as this contracting process unfolds. That's what you're saying?
Jonathan Smoke: Yes. And put another way, if you've got this very contentious negotiation period coming up then, because historically that has been the case and often led to complete shutdowns and disruption of production, then why would you aggressively push now when you're worried about what the economy and demand might look like in a few months? Why would you aggressively go to three shifts in every factory when the key impediment is actually having the labor numbers to be able to do that. So better to stay at this pace of sub 15 million until you get through that uncertainty.
Mark Zandi: Okay. Sub 15 million, meaning sales?
Jonathan Smoke: Sales.
Mark Zandi: 15 million. Yeah. Production in North America is more like 10 or something. Right? I mean, okay. Okay. Interesting. So going Mike to the forecast that new vehicle prices are going to roll over here in this quarter, second quarter is now, we're in April, that you're making some, I guess, assumption around the negotiations with the UAW and getting to the other side of that in a reasonably graceful way. Is that what you're assuming? Yeah. Okay.
Mike Brisson: Yes.
Mark Zandi: Because that doesn't go well and production is shut down for any length of time. Prices coming-
Mike Brisson: That will happen in September when the contracts are up.
Mark Zandi: Oh, okay. So this is not a Q2 event, this is more a, in Q3 event?
Mike Brisson: Either Q3 or Q4 will be the impact. Yes.
Mark Zandi: Q4, all right. Okay. Okay. Okay, very good. So we should see new vehicle prices come in. Now just to kind of round things out in terms of pricing, used vehicle prices, at least the transaction prices that we measure, they've been rising in recent months. First question, what's going on there? Second question, if I look at the BLS, Bureau of Labor Statistics consumer price index for used vehicle prices that keeps declining. So what's going on there? Again, going back to the theme here, this is pretty weird what's going on here in the auto market? Mike, do you want to take a crack at that?
Mike Brisson: Sure. So there's a couple of things going on. The first get to the BLS versus our wholesale indexes. So we have the Moody's Analytics index and there's the Manheim, which Jonathan and Cox produce. And so our wholesale indexes differ from the BLS methodology.
Mark Zandi: Can I ask who? Who's his better? I'm just curious.
Mike Brisson: I of course would say Moody's, but Jonathan has his own.
Jonathan Smoke: We've got 25 years of loyal followers.
Mark Zandi: That says it all.
Mike Brisson: We weren't asked whose is used more.
Mark Zandi: Yeah, so sorry, I didn't mean to interject. Yeah, I did mean to, but go ahead. Yeah.
Mike Brisson: So the first thing is the wholesale versus retail and the numbers that the BLS is looking at, they're more of a retail with some discounting for utility in the basket. So they're looking at kind of different things first. So there's a retail prices in the wholesale prices, whereas the, our wholesale indexes have seen a jump up in prices. Part of that, the majority of the jump came in January and February from the Moody's Index. And a lot of that was pushed forward seasonality.
So we had the better weather earlier in the year. We've had strong consumer demand. We had the 1.6 trillion in excess savings, so that that's pushing up consumer demand early in the year. We saw it in retail sales in January. So there's a demand side of things. You also had the slowdown in production in the US that we had just talked about. These are the drivers that are kind of pushing up those wholesale prices as dealerships see the lack of production coming down the pike. I do think it's an anomaly though. Going forward, we are still projecting weakness and prices throughout this year and next year. Jonathan, do you have a different take on what's going on?
Jonathan Smoke: Yeah, I would just add to the discussion that we are very supply constrained. The used market is a product of what was sold new in, especially in recent years. And so the big decline in global production and new vehicle sales for three plus years now means that the used car market is smaller. Or take a step back, if you look at the size of the carpark, the number of vehicles that are just out there owned title and theoretically and available that somebody could sell them, it effectively has not changed in almost four years. When normally we would've seen growth of about a net addition of 4 million vehicles per year. So you've shrunk the possible pool of what's available to sell. And that's especially true in what fuels the wholesale market and the used retail market like sales that were leases or sales into fleets like with rental car companies and commercial companies.
That's where the industry has really starved those outlets. And so as a result, we're very constrained on both the wholesale and the retail side. So we started the year, January had the least amount of used inventory in at least 10 years. And our supply data on a daily and weekly basis only goes back that far. But I'm fairly confident, especially adjusted for population or something like that. It was probably the tightest January ever for used vehicles being available.
So any modest uptick in sales, like caused by a better January weather-wise was immediately causing dealers to have to restock their inventory, forcing them to go to auction. And then we saw what was a run of 11 straight weeks of wholesale prices actually going up rather than declining. And then there's a disconnect because wholesale prices lead retail, we observe, especially over the last couple of years, about a two-month lag between wholesale and retail. So by the time we got to March, we started seeing retail prices going up and wholesale in the second half of March was actually losing momentum pretty rapidly. And I think April could very likely be down in wholesale, but retail, because it's lagged behind those big moves in January and February is still moving higher and is likely to be even higher in April.
Mark Zandi: Okay. So would you agree with Mike though that if you look into the latter part of the, so second, later this year, that with this improvement in new vehicle supply that we're anticipating, that should also take some pressure off the used market-
Jonathan Smoke: It should. Yes.
Mark Zandi: And also the economy feels like it might be in demand, might be a bit softer.
Jonathan Smoke: There's no question.
Mark Zandi: So the combination, would be-
Jonathan Smoke: Yeah.
Mark Zandi: Okay.
Jonathan Smoke: We're already seeing it in credit, which we're going to get into is also influencing so that there is definitely declining momentum in used, but improving momentum and new. So no question that that's going to put pressure. Our assumption is the peak of prices is over for this year, and we're more likely to see downward pressure on the used side.
Mark Zandi: Okay. So you're both, you guys are in agreement that both new vehicle prices and used vehicle prices likely are going to be headed south here for the remainder of the year, certainly in the second half of this year. Does that sound right to you?
Jonathan Smoke: That is right.
Mike Brisson: One distinction-
Jonathan Smoke: However, remember we're supply constraint, so the likelihood of a major decline is very limited.
Mike Brisson: Yeah.
Jonathan Smoke: It's very similar to the housing market Mark.
Mark Zandi: Yeah, the same dynamic. Yeah. And you were chief economist of a what's where you, were also, you're a housing too?
Jonathan Smoke: realtor.com before-
Mark Zandi: Realtor.com. Oh, yeah. So you you know what of speak on the housing side. Yeah, absolutely. Mike always does this to me. He's got one caveat. Okay. Is it a big caveat, Mike?
Mike Brisson: Just a little caveat.
Mark Zandi: Okay.
Mike Brisson: Well, we might see some uptick in those BLS numbers though. So we're talking full sale numbers, Jonathan and I just make that distinction. So BLS is looking at those retail numbers. So we're going to see, likely see another uptick in the second quarter for used vehicle sales in comparison where they are now month-over-month-
Mark Zandi: Prices.
Mike Brisson: Yep.
Mark Zandi: Used vehicle prices, yeah.
Mike Brisson: Yep.
Mark Zandi: Right. Okay. So in Q2, new vehicle prices that feels like that might be already heading south, but new according to the BLS, we might see an uptick as of this lag between retail, wholesale and retail. But by the second half of the year, we should see both new and used vehicle prices kind of moving south. Not in a big way because of this underlying supply dynamic. And you're right, the housing market has the same dynamic, but in a, but still, when you take it back to the inflation story, it's a positive dynamic here going to play out over the next-
Mike Brisson: Yeah.
Mark Zandi: Six, nine months or something. Okay. For me, that's what I'm really focused on because again, that we're going back to inflation, we're going back to monetary policy, interest rates, and ultimately what it means for the economy and recession. And that does feel well feel good. Okay. Let's talk a little bit about vehicle demand and then we're going to play the game, the statistics game, and then we'll come back and talk about some other things that are going on in the auto industry. There's a lot of stuff going on in the auto industry, these EPA standards around the tailpipe emissions of very interesting EVs. Just want to get your take on that. Well, I wanted to also talk about auto credit and what's going on in the auto credit market. You brought that up and maybe we'll do that now in the context of demand. And then we'll wrap it up with a broader discussion about the economy and prospects we typically do. With that on demand, let me just frame it this way. I've been wrong. So.
Cris deRitis: What?
Mark Zandi: Yes, I've been way too optimistic. This is self-preservation because if I didn't say that, Mike would've been, he'd be all over me if I didn't say that. I took the sword before he, he put it right through my liver if I didn't say it. So I've been wrong. I've been wrong. I admit it. I expected demand to come back more strongly than it has. It hasn't. I mean, just give me, you'll know the numbers a bit better than me, but I think new vehicle sales are probably running somewhere between 14 and 14.5 million units annualized before the pandemic. It was a rock solid 17 million units annualized. So my thinking was, my thought, that's kind of underlying demand and we'll get there as the economy improves, but we haven't, in part because of the supply issues and pricing and lots of other factors. But I am still expecting a slow, steady improvement in new vehicle sales here.
And that's key to going back to the economy and growth and avoiding recession because there is some, what I would call pent-up demand for vehicles out there that have built up, not as much as I thought because to Mike's, Mike made this point early on, and I didn't digest it fully, appropriately enough, we just drove so much, so much less during the pandemic that we just don't need as many new vehicles. Because our new vehicles, our cars weren't being used as much during the pandemic. But I do expect us to kind of steadily ramp back up to 17 million units plus by mid-decade. Okay, that's the frame, that's the baseline forecast. Let me turn to you, Jonathan. What do you think of that?
Jonathan Smoke: So I'm probably, I'm on Mike's side in the discussion and there's a lot of banter about [inaudible 00:37:25]-
Mark Zandi: See that, he took a knife, he decided not to go for the liver. Not to go for the liver, though. He didn't go for the liver. He's waiting for Mike to do that. He kind of went a little to the right of the liver. Okay, go ahead.
Jonathan Smoke: I'm privileged to have views of supply and details that says yes, but to the equation. There's still lingering supply issues that mean that at best we're probably looking at 15 this year and there's more of a gradual build. I would agree that we could get back to 17, but in our view, that's probably more of a five-year ramp. But I would argue on the demand side, the most crucial part is affordability. And I think in theory, we could be selling 16.5 million or more this year if we had 2019 prices, interest rates and incentives, and none of that is true. Something has to give. Now as the industry comes back and we get inevitably to an oversupply situation because it's a high fixed capital, fixed cost business that is prone to an oversupply situation, given the number of players with disparate kind of strategic objectives in mind, there's always one or two players who's going after market share gains, things that are irrational from a end profit motive for the overall industry.
So it's inevitable we get to some level that is persistently oversupplied and more cyclically driven. But in the near term, we're dealing with the most expensive vehicles, tighter credit, much higher interest rates, and all of those things factor into what's possible. And we've got an enormous percentage of the population that just can't afford an, certainly a new vehicle, but increasingly even a used vehicle.
Mark Zandi: So sales are limited by supply, but you're saying the binding constraint here in terms of sales may actually be demand. Is that right?
Jonathan Smoke: Yes.
Mark Zandi: In the near term.
Jonathan Smoke: Once we solve the supply situation, we've yet to see that evident in the supply data, we're not seeing a buildup suddenly of new vehicle inventory waiting to be sold. But I think we're close to that inflection point if we continue to see production recover.
Mark Zandi: Okay. Mike, does that resonate with you too, that kind of thinking?
Mike Brisson: Affordability is a major concern and getting into the credit side, do the banks will even want to give out the credit that if people do want a loan at these type of rates and rates are at multi-year highs, so do you want to go get a 8% loan on a vehicle when you're used to getting 0% interest rate with incentives when your last vehicle you bought four years ago? So I do think that there is some demand concerns and there are significant demand concerns going forward as I expect the economy to slow and we're all expecting the economy to slow here over the next year. So I did want to pull out the knife a little bit though.
Mark Zandi: Okay. I'm all for that.
Mike Brisson: Talk about those new vehicle sales numbers. I remember back in episode 11 of this podcast, you had bet me that-
Mark Zandi: No, geez.
Mike Brisson: ... new vehicle sales would be averaging 17 million over the next five years. I did the quick math on that. I think we have to average 18.5 million vehicles over the next two and a half years from that point. So I don't know if you want to pay up now or do you want to-
Mark Zandi: No, no, no, no way. No, no, no. I take this down to the bitter end. Cris knows that.
Cris deRitis: I'm still waiting for our housing starts.
Mark Zandi: Yeah, yeah. I think I owe-
Cris deRitis: Payoff, what's that [inaudible 00:41:15]?
Mark Zandi: I got to stop making these dollar bets. I always lose these dollar bets. Okay. But we're, just to get you on the record, we're say, am I right? We're at 14, 14.5 million annualized?
Mike Brisson: No, right now. Well, we have 14.8 last month. It's 15.2 I think we average in the first quarter-
Mark Zandi: Do you think we're higher than that? You think we're closer to 15 million years?
Mike Brisson: Yeah. And we're forecasting 15.3 for the year.
Mark Zandi: Yeah. Okay.
Mike Brisson: I think that's a about right.
Mark Zandi: About right.
Mike Brisson: Yeah.
Mark Zandi: Okay. Jonathan, you feel comfortable with that too in the 15 million range?
Jonathan Smoke: We are under 15, 14.6 to 14.9, but it's because we're expecting a much rougher third and fourth quarter. So the pace kind of falls off.
Mark Zandi: For the economy broadly you're saying?
Jonathan Smoke: Because by the way, we've never had a situation in US new vehicle market when a recession did not result in production declining. Manufacturers would rather sell 14 million as profitably as they did last year than sell 17 million with excess incentives that essentially, I mean they don't make profit on those units.
Mark Zandi: Right. That makes sense. And then next year, where are we, Mike? I can't remember. Are we 16, 16.5, something like that?
Mike Brisson: Just under 16.
Mark Zandi: Just under 16. Does that sound right to you, Jonathan?
Jonathan Smoke: Yeah. Again, we're a little bit-
Mark Zandi: A little lower-
Jonathan Smoke: ... lower than you, but we're moving in that direction. And so by five years, we're right at 17.
Mark Zandi: Back to 17 million. Okay. All right. Okay. Very good. Let's talk about credit, because you all, everyone's bringing this up. So obviously this is in the context of the banking crisis, but even before the banking crisis, auto credit quality was eroding, underwriting standards were being tightened, and the banking crisis just exacerbated all that. How big a deal is this, Jonathan? How big a deal is this development in terms of the availability and cost of an auto loan?
Jonathan Smoke: Oh, credit, credit is huge. When you look at total transactions in the US, close to 60% of vehicle sales are financed. Within new, it's north of 80% are dependent on financing and used a little over half are dependent on financing. So if credit's not available or if it's very expensive, it's the payment that matters to most consumers. And that's where we've seen even more substantial change than we've seen on the pricing side because it's the combination of the rise in interest rates and auto has along with prices that we just talked about. And auto has experienced more of a sticky increase in interest rates than what we're seeing in other types of rates like mortgage rates. And some of that is because if you look at the lending in auto, it's a serve all kind of world. Every credit tier is represented because everyone needs access to transportation.
And we've got an incredibly sophisticated and large set of lenders who cater to certain parts of the market and a lot of very strong underwriting that knows how to deal with a higher percentage chance of lower credit tier consumers defaulting and having to repossess a vehicle. But also dealing with the fundamental aspect, unlike housing, that vehicles are naturally a depreciating asset. So there's quite a sophisticated kind of credit world that exists and I think is appropriately adjusting for risk that they're observing in delinquencies, in defaults that we're deteriorating last year and have, we're leading to tightening. And one of the variables that has changed the most in the last year in credit is yield spreads. For a while, especially in 2021, we had by historical standards, the narrowest yield spreads we'd ever seen. So on top of very low interest rates, because of it predating the Feds starting to increase, it meant consumers were seeing the lowest rates ever.
Mark Zandi: Yield spread, meaning the rate that a consumer would see if they got a loan-
Jonathan Smoke: Actually see-
Mark Zandi: ... relative to the risk-free treasury yield?
Jonathan Smoke: That's right. Yeah.
Mark Zandi: Okay.
Jonathan Smoke: And especially with the banking crisis in March, we observe yield spreads widening quite a bit, and they really reflect the momentum that we were talking about, that new has positive momentum and used has negative momentum. Well, new has the manufacturers intentionally putting incentive money in their captive finance companies or in their strategic banking partners that keep the rates sometimes lower than the market rate otherwise would be, but the used market doesn't have that kind of player that's willing to compensate for an increase in risk. And so we saw used rates on average go up by almost 90 basis points in March.
Mark Zandi: Almost a percentage point.
Jonathan Smoke: Yeah, almost a percentage point. So that was kind of evidence of people who were thinking that the tightening credit conditions would be equivalent to the Fed having increased 75 basis points instead of a quarter.
Mark Zandi: Right, right. It's interesting that despite the very strong vehicle prices that we're seeing, these credit issues, I mean, I guess use used vehicle prices have come in a little bit, but they're still very elevated from where they were pre-pandemic. And despite that people are defaulting on their autos?
Jonathan Smoke: Well, they're not defaulting it historical levels.
Mark Zandi: Okay.
Jonathan Smoke: They're just falling behind 30 and 60 days.
Mark Zandi: I see. That makes sense.
Jonathan Smoke: Yeah. So I think it's evidence of stress. I think it's absolutely correlated with inflation. It's more severe with subprime than it is in other credit tiers and it's the higher vehicle prices. And as a result, more people than not have more positive equity in their vehicle than they would at this point in their loan. It gives them options and makes the lender more willing to work with them if they do run into payment difficulties. So we haven't seen delinquencies turn into similar level of default, but the delinquency level is unprecedented from a rate perspective.
Mark Zandi: Yeah, you observed that as well, right, Mike from the Equifax data? And Jonathan, I guess you look at that Equifax data too, don't you? Yeah, right.
Jonathan Smoke: Yes.
Mark Zandi: The bureau data. Yeah.
Mike Brisson: Yes. So yeah, I think this March is if we seasonally adjusted, it's the highest level since 2010 for all autos, highest level for auto, so we break it out. Auto finance, auto bank, the banks are people that take deposits, the finance are going to be the captives that don't take deposits. And the niche subprime lenders that also don't take deposits, but they lend to lower credit worthy individuals. So on the auto finance side, it's really, delinquencies are sky-high, the highest they've been since the financial crisis. One interesting thing that I wanted to point out was the highest increase from 2019 until today by credit score band are those between 680 and 740. If you're looking just 2019 average delinquency rates, total loans to right now.
And so I think that's this evidence of credit score inflation, and these people that are in that 680 to 720 range now were people that were 600 to 680 four years ago. And so as these people had their student loans deferred, their mortgages deferred for a little bit, all of the fiscal stimulus that took place over the pandemic, they've been able to shift up the credit score spectrum. And now they may be worse borrowers than banks had expected going into making those loans to people that are just above subprime.
Mark Zandi: Hey, Cris, you watch this data carefully as well. Anything you want to add? I mean, that's a lot of detail, but just to be complete, is there anything that you'd mention?
Cris deRitis: I guess, yeah, I would second all the observations here. So I've been sounding an arm on the credit score inflation for a while, so it's not surprising. I think it's consistent. I would say that the defaults may be low still, but in part because we've gotten a little bit of a lifeline from the higher vehicle prices. So if someone's in trouble, they can potentially sell their vehicle and get out of the loan. But if indeed things turn at those prices soften, that's when you'll see the defaults really ramping up losses piling up. So be a little cautious. We might be in this period where things look okay, but-
Mark Zandi: Yeah, they get-
Cris deRitis: Risk out.
Mark Zandi: Get bad pretty quickly. Prices start to decline.
Jonathan Smoke: And thankfully, in the short term, we're in tax refund season. So we saw in March the usual seasonal pattern that delinquencies came down and defaults came down. So we've got a couple of months of reprieve simply because of $300 billion flowing through consumer pocket books.
Mark Zandi: It is interesting you guys though, despite the pretty dark perspective on what's going on with auto lending, you're still sticking to demand hanging in there and actually improving the next year compared to this. No, right? I mean, despite all that.
Jonathan Smoke: Well, I'm characterizing our more conservative outlook for sales this year to be driven by the industry is replacing a supply problem with a demand problem.
Mark Zandi: Oh, okay. So we're at 14.6, 14.9 this year. It's weak. It's still weak. Well below you're, the way you frame it is we're still weak, and the reason is not now it's less supply. Well supply's an issue, but it's more now about demand and-
Jonathan Smoke: Yeah.
Mark Zandi: The weighing on demand is the tightening and underwriting because of what's going on in the auto credited market.
Jonathan Smoke: So one way to look at it, the industry is a serve every kind of customer. So subprime has a place in both new and the used market. Prior to the pandemic, about 15% of new vehicle loans was consistently subprime. And that is less than they are in the population, roughly 20%. Which makes sense given the price of new vehicles. Well, last year we fell to 5%, so effectively 10% of the potential market is no longer there, and it can cannot make it work with today's rates because the average subprime new vehicle loan rate is about 20%.
Mark Zandi: Right. Okay. Just one quick point, and then we're going to play the game. Is that we are, even though sales vehicle sales are still low by pre-pandemic standards, nobody is seeing a decline in new vehicle sales, which would be completely unprecedented, wouldn't it? If we had a recession? I mean, I know these things are simultaneous and causality is a little difficult to determine, but hard to get to a recession unless you actually see some pretty sizable declines of vehicle sales. No?
Jonathan Smoke: Well, it's a great question and we follow your scenarios very closely. And so in our baseline, the answer is yes, we do not see a decline in vehicle sales. But in our recession scenario, which we follow very closely to your main recession scenario, the S7, I believe we-
Mark Zandi: Ooh, careful consumer. Yeah.
Jonathan Smoke: We do anticipate there would be a decline in new vehicle sales close to 10%.
Mark Zandi: Let me put it this way though. Okay. Prior to every other recession, and I might be exaggerating because I don't know the data as well as you do, correct me if I'm wrong. We have what I would call spent-up demand, a lot of incentives, people pulled forward their purchases because easy credit, they could buy, and they bought ahead of their demographic need, spent-up demand. So when you got into the weak economy that was a weight on sales and it added to, contributed to the downturn, made it worse. Vehicle sales, vehicle production, vehicle employment, everything just craters. This go around, very different situation. We've got pent-up demand. We can debate how much, but we're all saying pent-up. Pent up, not spent-up demand. So that puts a kind of a floor under things or feels like it puts a floor under things.
Jonathan Smoke: Yes.
Mark Zandi: And it makes it less likely the vehicle industry is going to contribute to any economic downturn that we might suffer, therefore it makes it less likely we're going to have an economic recession. Does that resonate?
Jonathan Smoke: Yes. I think you could characterize it as more of a postponement of the recovery than you would a typical downturn.
Mark Zandi: Right. Okay. Mike, does that sound right to you?
Cris deRitis: It's a little tail wagging the dog, but-
Mark Zandi: Okay. Because it's hard to distinguish who's the tail, who's the dog here.
Cris deRitis: I think the economy's the dog and the vehicle sales of the tail.
Mark Zandi: Okay. Okay. All right. Very good. Okay, let's play the game. Let's play the statistics game. Jonathan, you're going to play this game?
Jonathan Smoke: Oh yeah.
Mark Zandi: Absolutely. Okay, very good. The game, just to reiterate, is we all put forward a statistic. The rest of the gang tries to figure that out through key questions, clues, deductive reasoning. The best statistics are ones that are not so easy, we get it immediately, not so hard, we never get it. And if it's apropo to the topic at hand, inflation, autos, vehicles, recent data, that, all the better. Okay. Cris, I'm going to go with you first just so everyone gets the hang of it. So what's your statistic?
Cris deRitis: Sure. In honor of, Marissa, who usually goes first.
Mark Zandi: Yeah, she usually goes first. What happens? She's gone. She's when awol.
Cris deRitis: Yeah, she emailed us. She can't-
Mark Zandi: She can't join.
Cris deRitis: ... join today.
Mark Zandi: Okay.
Cris deRitis: My number is related to the topic at hand.
Mark Zandi: Vehicles?
Cris deRitis: Vehicles and inflation.
Mark Zandi: Ooh, okay.
Cris deRitis: 17.4%.
Mike Brisson: I know it.
Mark Zandi: Oh. Oh, whoa. Should we, the rest of us know it, Mike, or is this a very-
Mike Brisson: No.
Mark Zandi: This is in the weed kind of thing. I think I know it too. I'm going to just because I really don't know it, but I-
Cris deRitis: And 15%.
Mark Zandi: Oh, and 15%.
Mike Brisson: I don't have that one.
Mark Zandi: Could it be because Mike, I know you know it. Jonathan, do you have any idea?
Jonathan Smoke: No, not yet.
Mark Zandi: Can I just throw out a, just-
Cris deRitis: Go for it. Go for it.
Mark Zandi: Yeah. It's vehicle insurance.
Cris deRitis: That is 15%.
Mark Zandi: Yeah, there you go. Jonathan, now-
Cris deRitis: That wasn't the-
Mark Zandi: Jonathan-
Cris deRitis: That wasn't the original number.
Mark Zandi: Jonathan, what do you think about what just happened there? Is that impressive or not?
Jonathan Smoke: That is impressive.
Mark Zandi: Okay. That's what I'm saying. Mike, did you hear that? He's impressed with-
Cris deRitis: What's 17.4% though?
Mark Zandi: Mike? Oh, go ahead, Mike. What is it?
Mike Brisson: The CPI for motor vehicle repair.
Cris deRitis: Very good. Very good. Year-over-year.
Mark Zandi: Good. Yeah.
Mike Brisson: Year-over-year.
Mark Zandi: Very good. Yeah. Excellent.
Cris deRitis: Yep.
Mark Zandi: Yeah. Well, there's no way I would've gotten that if you didn't give us the clue up front about inflation and-
Cris deRitis: Yeah. Yeah.
Mark Zandi: But that was good. Well explain that, I mean that, these are huge. I just got my auto insurance bill and it was up.
Cris deRitis: It was a shock.
Mark Zandi: 15, 20%. I mean, what's going on? Talk about affordability. I'm thinking about giving back one of my cars because that's like crazy.
Jonathan Smoke: Yeah. Those two are very related to one another. It's the expense of the parts and the repairs and the capacity is down in the service business as well. So there's strong pricing power there. We actually have a software platform that many franchise dealers use to run their service department. And what we have consistently seen is that we've yet to see a recovery in the number of people taking their car in, but the average service ticket has been up double digits because when they do, they're doing more work. Plus you have the inflation on parts and labor leading to, in many cases, double-digit increases in revenue related to service.
Mark Zandi: Well, how long does this continue? I mean, here too, I mean, should we, I mean, it can't keep going up 15, 20% can it?
Jonathan Smoke: Well, you got a cyclical effect of pricing people out of the new vehicle market. Their alternative is to hold onto their existing vehicle longer, which makes them more inclined to take care of the vehicle and address needed investments. So I think you've got a long way to run on this.
Mark Zandi: Interesting.
Jonathan Smoke: For that part of the market to be more expensive.
Mark Zandi: I'll tell you though, just this, just a Zandi anecdote. I've got a lot of kids and they all had a car. They've gone to school and I've kind of just parked a couple of them in the driveway in the garage. And I'm thinking to myself, and it's obviously just convenience when they come home, they've got their car and they can go do what they want to do. But that seems like a pretty luxurious convenience, doesn't it? In the context of these insurance increases. So I'm thinking, well, I'm just going to sell one of these cars. If I'm thinking this way, other people got to be thinking of this way. No? Okay.
Jonathan Smoke: Yeah. But if we couldn't get you to do that when prices were at their peak.
Mark Zandi: Yeah, good point. Yeah.
Jonathan Smoke: But that's actually let in the government data, we see an expansion in households with multiple vehicles, that has actually grown when a lot of people had projected that we would see a decline in vehicle ownership. The opposite is true, and it's principally multi-vehicle families and households that are responsible for that uptick.
Mark Zandi: Interesting. Okay. That was a great statistic.
Cris deRitis: Yeah.
Mark Zandi: Jonathan?
Cris deRitis: Why I chose it, my fear is that this increase in repair costs is going to lead to a credit event with folks facing a higher expense with a used car. Right? These cars are getting older, they're going to face some type of repair. Can they afford to actually repair the car or did they give up and turn the keys back in at that point?
Mark Zandi: That's interesting.
Cris deRitis: That's something to watch, right? Particularly at that lower end where people are really stretched already. They're trying to get into that used vehicle. And on top of that, they're going to face some very expensive repair.
Jonathan Smoke: Yes. And in order to get a payment that works for them, they've had to consider an older vehicle three to four years older than they would have previously. And they've pushed terms to the longest that have ever existed in the used vehicle side.
Mark Zandi: Yeah, that's very interesting. So Cris, you think there's some real credit issues on for auto loans coming up here? Not only because prices are going to come, if prices are coming in, but as you point out these-
Cris deRitis: Yeah.
Mark Zandi: ... very high repair costs. Yeah. Yeah. Good point. Okay. Jonathan, what's your statistic?
Jonathan Smoke: All right. This is very timely. 4.6%.
Mark Zandi: Is it related to the vehicle industry?
Jonathan Smoke: To surprise you all and throw you off. No. I mean it is indirectly, but-
Mark Zandi: Yeah. Well, everything is indirectly.
Jonathan Smoke: Yeah.
Mark Zandi: Is it in the CPI report?
Jonathan Smoke: No.
Cris deRitis: Did it come out this week?
Jonathan Smoke: Yes.
Cris deRitis: Okay.
Mark Zandi: Oh, it's a statistic, a government statistic that came out this week?
Jonathan Smoke: Not government.
Mark Zandi: Oh, okay.
Cris deRitis: Oh, boy. All right.
Mark Zandi: Yeah, so a trade group. It's not anything related to small business, is it?
Jonathan Smoke: No.
Mark Zandi: No. What else is it?
Cris deRitis: Oh, today, wasn't that the inflation expectations?
Jonathan Smoke: Bingo. [inaudible 01:01:54].
Cris deRitis: Michigan.
Mark Zandi: Oh, really?
Jonathan Smoke: That's the one-year inflation expected, median expected inflation jumped a full percentage point.
Mark Zandi: That's weird.
Jonathan Smoke: In the April, Michigan preliminary.
Mark Zandi: I don't believe that. Do you believe that?
Jonathan Smoke: I was surprised by it too, but that's a substantial change.
Mark Zandi: I don't believe that, that doesn't make any sense whatsoever. I know the gas prices up a little bit, but not a lot.
Jonathan Smoke: And gas prices are rising and there's been a lot of media coverage of the OPEC kind of implications. So maybe.
Mark Zandi: I don't know. Back to your point about data, what was that comment you made about data?
Jonathan Smoke: I don't remember.
Mark Zandi: Yeah, I don't know. That feels weird. Cris, does that feel weird to you? I don't know.
Cris deRitis: A point feels like a lot. I can see that it ticked up, certainly.
Mark Zandi: Yeah. I can see it tick up with a gasoline price, but it's-
Cris deRitis: That's pretty aggressive.
Mark Zandi: Yeah. Interesting though. That's a good one. That's a really good one. Scary one. Hopefully it's wrong.
Cris deRitis: Yeah.
Mark Zandi: Okay. Mike, you want to go?
Mike Brisson: Sure. Minus 8.9%.
Mark Zandi: Is it in the CPI numbers?
Mike Brisson: Yes.
Mark Zandi: So it is a year-over-year price decline?
Mike Brisson: Yes.
Mark Zandi: For some product or good or service.
Mike Brisson: Correct.
Mark Zandi: Got it.
Cris deRitis: Is it auto related?
Mike Brisson: Yes.
Mark Zandi: Oh gosh.
Cris deRitis: Oh, is it a gas or energy?
Mike Brisson: Not energy.
Mark Zandi: Okay. So we did repair, we did insurance. We did the actual prices. What's left?
Cris deRitis: Oh, rentals. Car rentals.
Mike Brisson: Yep. Ding ding ding.
Mark Zandi: Oh, car rentals. Car rentals. Yeah. That's deductive reasoning right there. Yeah. Car rentals, they're down 8.9%?
Mike Brisson: Year-over-year. Yes.
Mark Zandi: Okay, now that's, how do you explain that?
Cris deRitis: They're falling [inaudible 01:03:46]. They go up, they go down, they go all around. Right.
Mark Zandi: I'm surprised at that. Why, Mike? Do you know?
Mike Brisson: Well, the lower costs for the vehicles themselves. Lower demand. Everyone was coming out of the pandemic and they started traveling more, and then that's come down a bit. So the supply side, it's easier supply and a little bit less demand. So they're getting positives on both sides. Lower prices.
Mark Zandi: Oh, interesting. Well, do you think that continues here?
Mike Brisson: Depends on how used vehicle prices go. If our forecasts-
Mark Zandi: Yep.
Mike Brisson: ... sticks to script and new vehicle prices come down and use vehicle prices come down, then you can see more weakness in the rental space too.
Mark Zandi: Yeah. Interesting.
Cris deRitis: Are fleet sales still up still?
Jonathan Smoke: They're growing substantially where the true pint up demand is coming through loud and clear. So those rental car companies are finally being able to replace, and actually improves their performance because the cost of maintenance when you're principally using older and previously driven used vehicles, was much worse for them. So it could be that yes, you have sustainable declines in rental and it's still positive for the rental car companies.
Mark Zandi: Well, I'm going to skip my number just because we're running out of time and I do want to get to one... Really, you're disappointed?
Cris deRitis: Oh, come on.
Mark Zandi: Okay. All right. Okay. You asked for it.
Cris deRitis: This is not a good one. It's a-
Mark Zandi: A good one.
Cris deRitis: You're embarrassed?
Mark Zandi: It just takes us a little off the script, but I'll do it. Go ahead. Oh, you guys are ready. I'll do it.
Cris deRitis: All right.
Mark Zandi: It goes to my inherent optimism, glass half full inflation coming in. Those are all good clues. I'm going to give you three numbers. They're all the same, related to the same thing. 0.3, 3.8, 5.6. This is a little hard.
Cris deRitis: So CPI?
Mark Zandi: CPI related it a well, I don't know, I don't let you ask another question or two before I give you another clue. It's on the service side of the economy. It's related to-
Cris deRitis: Oh, was it the super core?
Mark Zandi: Super core. Okay. So what's the 0.3?
Cris deRitis: Well, that wasn't that month-to-month.
Mark Zandi: Month-to-month. Month-to-month super core inflation. Super core is services excluding housing. So it's the part of the CPI that the Federal Reserve is most focused on, least ostensibly. And it's been the most persistent sticky source of inflation. So 0.3 is month-to-month. What's the 3.8?
Cris deRitis: The last one's year-over-year right?
Mark Zandi: Last one's the year-over-year. 5.6 is year-over-year.
Cris deRitis: Is that some type of moving average three month-
Mark Zandi: Six month. Six months.
Cris deRitis: Six month. Okay.
Mark Zandi: Which six month is generally what I consider to be near term trend. Near term trend. Okay. 0.3, 3.6, excuse me. 3.8 and 5.6. That's super core for the month, six month and one year. And I bring that up because it is definitively coming down. The sixth month, which I again is I think kind of underlying trend of 3.8, that's within spitting distance of where it was pre-pandemic. Pre-pandemic, it was around 3. So we're coming in here pretty quickly and I take a lot of solace in that. So going back to the beginning of the conversation around the inflation, it's three phases. Phase one is what we were talking about related to the pandemic supply chains and vehicle prices are kind of front and center for that phase one. Phase two is the cost of housing services. Talked about that. Phase three is core services and all three phases of the slowdown in inflation are now working together and feels like inflation's coming in reasonably gracefully. So reason to be optimistic.
Cris deRitis: But is that enough to pause or?
Mark Zandi: In and in my view, absolutely. Yeah. I mean, I don't get it right. You've got inflation coming in. I just articulated the logic for that. Job growth is slowing, wage growth is rolled over. It's moderating very quickly. And you have the banking crisis in that situation and how that's unfolding. Why in the world wouldn't you just pause at this point and take a look around? I'm not forecasting that's what they'll do. It feels like they want to raise rates one more quarter point. But why? Why do that? I don't understand it. Anyway, let's end the conversation. I'm going to be respectful of time with a little bit of a longer term look in this big decision, seemingly big decision by the administration and the EPA to really tighten down on emission standards and in an effort to significantly increase electric vehicles here going forward. I can't remember what the forecast is, but they're saying 10 years from now what EV is going to be what proportion of the sales?
Jonathan Smoke: 67% of light vehicles and half of some of the commercial vehicles.
Mark Zandi: Yeah. So what do you think, Jonathan? Is this, what do you think of this move?
Jonathan Smoke: It wasn't a surprise. It was widely understood that something like this would be coming. It clearly is I think a aggressive, it is not necessarily substantially out of the range of what's possible, but we look at a lot of production forecasts that I would say are more supply driven. And if the production capacity and what manufacturers have plan doesn't seem capable of lining up with that number, then it makes it less likely. Because we've yet to get to the point with electric vehicles where consumer adoption is the issue.
We're selling every one because there's willing takers when you're selling a million or less. But when we have to sell 6 million, 12 million, that's an entirely different proposition that requires middle America to purchase. And the reality is, if we named affordability as the top issue, electric vehicles are much more expensive and still are than the average vehicle that we're selling. And so I think we've got a lot of things that are going to have to go both on the supply chain and production side and on the infrastructure charging network for further consumer subsidies. There's going to have to be real consumer adoption for this to take place.
Mark Zandi: I suppose it's one of those things, well, even if you don't get two-thirds, but it got a half, it's still victory, isn't it? That's still, and maybe the two-thirds comes in 15 years or something like that, still.
Jonathan Smoke: Yeah. And I definitely think on the light vehicles. Half in 10 years is entirely possible now based on what's already planned and in the pipeline. But vehicles take on average about five years for a new model to be planned and introduced. And it really, to try to go from 50 to 67% in the same timeframe really means a lot of action has to take place in the next couple of years for that to even come to fruition.
Mark Zandi: Mike, what do you think about this move?
Mike Brisson: I agree with the 50% number. The move, you're basically making it impossible for companies to reach these new standards without bringing electric vehicles. So that's why they did it this way. Instead of putting in those mandates, it's a lot more politically palatable to say, oh, these are these new mandates, but these mandates aren't possible with current technology. So basically putting a mandate in for electric vehicle adoption, just being a little back door with it. So we do need to get there. This is a good way to get it through without all the backlash.
In terms of the affordability, our forecasts looks for price parity out into 2025. So I don't think that, even this is sticker price, not even lifetime costs. Sticker price, if we are able to return to pre-pandemic battery cost depreciation or decrease in costs because of increases in scale and technology, if we get back to those pre-pandemic trends, we can get at price parity in the next few years. And once we can get at price parity at sticker, I think 50% easy in terms of demand. The other 50% in terms of the infrastructure, I know I'm thinking in my own house, I don't want to be driving down to Florida and stop for an hour and a half with three kids in the back of the car to charge a vehicle. I want a car where I can fill up in 10 minutes. And have-
Mark Zandi: You actually done that drive, Mike? Have you actually done that from Syracuse?
Mike Brisson: Once a year? Yep.
Mark Zandi: Yeah. How that's like, that'd be like 20 hour, 22 hours or something?
Mike Brisson: Depends, talking state line or are you going all the way to Vero?
Mark Zandi: Oh, good point. Good point. Yeah, good point. Because that's another four hours, five hours. Yeah.
Mike Brisson: Yeah.
Mark Zandi: Yeah. Okay. So that's interesting because you do a lot of work forecasting prices for electric vehicles and you're saying by 2025 you said that EV prices are going to be on par with the IC prices?
Mike Brisson: What would our projection was before the pandemic. There's been a lot of supply chain issues in terms of lithium and graphite, cobalt, all the things that go into the batteries that may have thrown that off, but that was our prediction before the pandemic.
Cris deRitis: Is that with government subsidies or?
Mark Zandi: Yeah, I was going to ask.
Mike Brisson: Without government subsidies.
Cris deRitis: Oh wow.
Mark Zandi: Oh, okay. Interesting. Yeah.
Cris deRitis: I just need to hold out for two more years or something. All right. I can do it.
Mark Zandi: Yeah. Does that sound right to you, Jonathan, about the price parity?
Jonathan Smoke: I agree. We will get to a point at some point. I think there's a lot of complications though with even some of the moves that we have with incentives and the like that create more challenges with China that dominates and controls a lot of the battery magnets and critical inputs on the mineral side that still, you can't get to the number of volumes with today's sources and inputs. There's a lot of moves that are going to have to be done that we can't account for. And I would say similar issue is true if you think about the demand side for the cost of electricity, the grid capability to handle the volume load. There's a lot of movement that has to be made on that side too.
Now I live in Georgia where we have plenty of capacity and it's not going to be an issue, but there are already states that are at their limit on what they can deliver in the near term without this adding to it as well. So lots of things are going to have to move in concert in the right direction to make that 50% possible. And so I think it's going to be an interesting next 10 years.
Mark Zandi: And the automakers, are they on board with this or are they resistant to it? How do they view all this? A good thing, bad thing, or they're just this is the reality of the thing and they're going to execute?
Jonathan Smoke: I think it's more the latter and all of them have stated goals and objectives, and some are more aggressive than others. Everybody sees this as the inevitable direction of where the technology and the industry is going. I think what they want to do, and it's part of what Mike was alluding to, the way the rules were written, they want flexibility so that they can have slightly different strategies in terms of how it's delivered. And I think technically the rule is written that way, that if you come up with a fuel cell alternative, you're delivering the same results. So I don't think you're going to have the manufacturers largely contending with this.
Mark Zandi: And I guess, once you go down this path, it's going to be more difficult for future administrations, even if they were opposed to this to roll it back because so much investment will have been made. So many sunk costs have been incurred, that rolling it back would be pretty disruptive. Is that fair to say? Because you would think that politically, this is kind of the hot potato a bit and some future administration might-
Jonathan Smoke: I think the rollback risk is probably just the next election. And once you get-
Mark Zandi: Just the next election-
Jonathan Smoke: [inaudible 01:16:46] you're absolutely right.
Mark Zandi: Yeah.
Jonathan Smoke: But by the way, when you look at electric vehicle adoption, there's two Americas. We have counties with electric vehicles and we have far more counties with no electric vehicles.
Mark Zandi: Yeah, good point.
Jonathan Smoke: So there is quite a divide.
Mark Zandi: Yeah, I guess it's urban rural too, to some degree, right? Yeah.
Jonathan Smoke: Absolutely.
Mark Zandi: Yeah, for good, for sure. Okay. I think we're at time. Just a quick open-ended question. Anything big on the vehicle radar screen I missed? Entirely possible or we covered it pretty well? We covered pretty well. You want to go get lunch. I can feel it.
Jonathan Smoke: Yeah, we hit all the right topics.
Mark Zandi: We hit all the right topics. Okay, great. Well, very good. Jonathan, always a pleasure having you on. I do generally take guests down and dirty into the data, but I never take them into the complete bowels of the data. And you did that. You went all the way into the bowels of the data. I think you actually have a spreadsheet where you can actually calculate what the BLS is going to say on these things. But that's very impressive.
Jonathan Smoke: We try.
Mark Zandi: Yeah, very impressive. And you've got a kindred spirit in Brisson over here. Brisson will go down into the bowels as well with you. Cris, not so much. He's more of a 5,000 foot kind of guy.
Cris deRitis: Yeah.
Mark Zandi: Anyway, it was a pleasure. I want to thank everybody for listening in. I do want to remind you if you've got any questions for us fire away, we're going to take some listener questions in the next podcast or two, and we'll talk to you next week. Take care now. Bye-bye.