Used car prices cool down following highs driven by tariff fears

The Manheim Used Vehicle Value Index indicates a 1.4% decrease in used car prices in May compared to April, but prices remain 4% higher year-over-year, while used vehicle inventory declined 10% nationally. This follows April's peak in used car prices, potentially driven by anticipation of tariff-related price increases in new vehicles, as previously forecast by Goldman Sachs. Concurrently, there's a concerning rise in Americans struggling with car payments, reaching a multi-decade high.

Analysis

The U.S. used car market exhibited mixed signals in May, with wholesale prices declining 1.4% month-over-month according to Cox Automotive’s Manheim Used Vehicle Value Index, yet remaining 4% higher compared to the previous year. This price moderation occurred amidst a significant contraction in used vehicle inventory, which fell 10% to 2.8 million units, suggesting cautious consumer behavior as individuals opt to retain their existing vehicles in a post-pandemic economic environment. The April peak in used vehicle prices, the highest since October 2023, may have been partially driven by anticipation of new vehicle price increases stemming from potential tariffs on steel and aluminum, as forecast by Goldman Sachs ($2,000-$4,000 price rise for new cars). While used car prices have retreated nearly 20% from their all-time high in January 2022, a concerning macroeconomic indicator has emerged: the number of Americans struggling with car payments has reached a multi-decade high. This development signals potential stress in consumer finances and could have broader implications for economic stability and credit markets.

Key Decisions for Investors

• Monitor auto dealership stocks and auto manufacturers for potential margin pressure from fluctuating used car values and constrained new car supply, especially if tariffs on steel and aluminum are implemented.
• Exercise caution with investments in auto lenders and subprime credit markets due to the multi-decade high in consumers struggling with car payments, which could signal rising default rates.
• Factor in the observed consumer cautiousness and financial stress as potential headwinds for broader consumer discretionary spending and overall economic growth.
• Evaluate the downstream effects of potential steel and aluminum tariffs not only on auto prices but also on other sectors reliant on these commodities, considering the broader inflationary pressures.