Prolonged Coronavirus Epidemic In U.S. Could Send Auto Industry Into 14% Downturn, ALG Says

Could the worst of the coronavirus epidemic scare be behind the United States by May 1? Or will we see a prolonged epidemic that will last far longer? According to projections just released by TrueCar subsidiary ALG, the company that establishes benchmarks of the future vehicle resale values, the fate of the American car industry hinges on the answers to those two questions.

In a quick recovery scenario in which the economy and auto industry return to sales levels prior to the COVID-19 disruption by the end of April, ALG projects that new vehicle sales for calendar year 2020 will reach 16.4 million. That’s down 500,000 vehicles or 3.8% from 2019 sales and down 2.9% from ALG’s initial 2020 forecast.

While a drop of that magnitude from 2019 sales would be a blow to the industry, automakers were already preparing for a dip in sales this year, so some of the effects would be muted. But a prolonged epidemic would present another, much more dire face to the car industry.

In a scenario where COVID-19 infections are prolonged combined with a longer-term economic slowdown, ALG forecast that new light-vehicle sales will tumble to 14.5 million this year, down 2.4 million units or 14.9% from 2019 sales and down 14.2% from ALG’s initial 2020 forecast.

So which scenario do the experts at ALG consider more likely, a relatively minor blip or a deep downturn?

“Somewhere in between,” Eric Lyman, chief industry analyst for ALG, told forbes.com. “Without knowing the full scale and implementation of the stimulus plan, it’s hard to believe a full recovery is possible by April with so much still unknown about the reach and duration of COVID-19. While economic forecasts are changing day to day, our current likely scenario has new vehicle sales for 2020 landing in the mid-15 million unit range.”

ALG experts noted that the coronavirus epidemic will have impacts on both vehicle inventory availability and consumer confidence, affecting supply on one side and demand and the other. It will also have an immediate short-term impact on vehicle sales due to reduced consumer income and reduced commerce in general. In an extreme epidemic, fear of coronavirus could also severely curtail vehicle sales for a number of other reasons, including the potential shutdowns of auction houses and transportation companies.

In light of the COVID-19 epidemic, ALG has also reduced residual values in its latest Residual Value Book. The update is based on current third-party economic outlooks regarding coronavirus impact and other key factors such as the declines in the stock market and oil futures.

“Short-term market volatility does not necessarily translate into long-term changes,” said Morgan Hansen, VP of data science at ALG. “While ALG expects a short-term drop of roughly two percentage points of MSRP in wholesale used-car market values, our benchmark 36-month forecast only expects a decline of 0.7 percentage points of MSRP. These values are based on current expert third-party macro-economic forecasts that put the probability of prolonged economic downturn risk at 50%.”

Previous economic downturns have often spurred consumers to switch from a new-car purchase to a used car. Would a potential lengthy downturn spurred by the coronavirus situation actually help the used-car side of the market in volume?

“From a vehicle price point of view, a downturn in the economy does make a used car an affordable substitute compared to new, but we expect used market pricing to be impacted negatively by an economic slowdown,” Hansen told us.