In light of the ever-moving dynamics in the economy, ALG has found that shifts in fuel cost and used-vehicle supply forecasts have led to residual value projections sliding over the past couple of months, the company said in its July/August edition released late last week.

More specifically, ALG indicated that residuals value projections have dropped an average of 2 percentage points compared to where they were in the May/June edition.

By segment, full-size vans and entry premium CUVs (each down 3.5 percent) showed the heaviest decline, while midsize SUVs (down 0.4 percent) had the most moderate decline.

Other segments to show less than 2 percent declines were compact pickups (down 1.5 percent), premium full-size SUVs (down 1.7 percent) and entry luxury units (down 1.8 percent).

Fourteen segments had declines anywhere from 2 percent to 3 percent, while compact SUVs and CUVs fell 3.1 percent.

Fuel-Cost Impact

Moving along, ALG also delved into how rising gas prices, in particular, affected specific segments.

Based on ALG’s analysis, full-size pickups, full-size SUVs and premium full-size SUVs were hit the hardest by gas-price increases. On average, these three segments incurred about a 2.2-percentage-point hit from gas prices, ALG indicated.

Premium midsize SUVs (pushed down 2 percentage points) and midsize SUVs (1.7 percentage points) were also on the list of models most affected by higher fuel costs.

Conversely, the entry compact segment benefited the most from gas prices, which pushed its residual forecast up 1.2 percentage points. Mid compacts up 1.1 percentage points) weren’t far behind, with the midsize segment pushed up 0.9 percentage points.

Rounding out the top five were sporty vehicles (pushed up 0.6 percentage points) and entry luxury vehicles (up 0.4 percentage points).

“As evidenced in the gas spike of 2008, fuel cost has an immediate and significant impact on the pricing of and demand for used vehicles at the segment level,” analysts shared. “Simply put, fuel-efficient vehicles and segments are in higher demand and command a greater price as fuel costs rise and vice versa.

“Luxury passenger cars and midsize and compact SUVs are marginally impacted by swings in fuel costs. CUVs are more fuel-efficient than traditional SUVs, so also may experience increases in demand as full-size CUV and SUV owners downsize,” they added. “The luxury buyer demographic is by nature more insulated from gas-price volatility.”

Delving into how used supply is expected to affect residuals, ALG updated its used supply forecast to account for what is likely to be stronger-than-previously-expected 2011 new-vehicle sales.

With a full-year sales projections being ramped up and leasing expected to climb, used-vehicle supply over the next two to four years should see “a significant increase,” ALG explained.

“The limited availability of late-model cars in the current used market and continued declines in overall used supply in the near future are key drivers of the all-time highs existing in the current used market,” officials noted.

“As used-vehicle supply starts to increase and demand shifts from used to new cars due to a stronger economy and more confident consumer sentiment, used values are expected to retreat from these historical levels,” they added.

As far as the disasters in Japan earlier this year, ALG has not yet seen the seasonally adjusted annualized rate for new-vehicles thrown off course from where it was in March and April, when it stood at 13 million units. While acknowledging that some variation may exist, ALG indicated that two- to four-year-old vehicles are projected to experience most negative pressure on residuals, “based on higher used-market supply on average.”

“ALG has implemented a more aggressive (approximate) 1.5-percentage-point negative adjustment on 36-month residuals on average,” the company stated. “Entry compact, midsize and entry premium CUV segments are forecasted to experience the largest increases in used supply.”

So, ultimately, which vehicle segments saw the most negative impact from supply shifts?

The company suggested that entry premium CUVs took the heaviest hit, as used supply shifts had a 2.5-percentage-point negative impact on the segment’s residuals for the July/August edition compared to the May/June edition. 

This segment was followed by the entry compact (seeing a 2.3-percentage-point impact) and the midsize categories (2-percentage-point impact).

On the opposite end of the spectrum, compact pickups benefited 0.7 percentage points from lower used supply, with near luxury (0.6 percentage points), premium CUVs and entry luxury vehicles (0.4 percentage points) not far behind.

Additional Residual Influencers

While fuel costs and used-supply dyanmics have been the main catalysts in the residual value shifts, ALG explained that moderate housing price and wage growth outlook changes counteracted each other.

The company also pointed out that several automakers had higher prices on their vehicles because of “current or expected” inventory cuts from the Japanese disasters, higher material expenses or strategic reasons.

ALG believes that the upward impact the Japanese disasters have had on transaction prices will be short-lived. What is more likely to happen, ALG said, is higher incentives.

“The sum of total sales goals across all auto manufacturers currently outpaces even the most optimistic sales forecast,” ALG indicated.

“Inevitably, some OEMs must concede either sales targets or pricing power in the market. Incentive spending has been trending down since 2009 when OEMs realigned sales goals in response to the global recession and many OEMs were able to restructure manufacturing obligations and reduce production capacity,” the company continued.

“While automotive manufacturers have recently witnessed the negative repercussions of heavy incentive strategies on brand value and used-vehicle retention, incentive spending wars can quickly escalate and erode the recent gains in transaction prices,” ALG concluded.