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ATLANTA — While Tom Webb began his quarterly conference call by noting the Manheim Used Vehicle Value Index recorded a first for 2010, the economist went into a long discussion about new vehicles — and how current inventory conditions bode well for used-vehicle operations.

According to Webb, new-vehicle inventories in June slipped even further below the 2-million mark, a figure he first spotted in May. He declared the new-vehicle inventory level is now at the lowest level in more than 35 years of record keeping.

"This reduction in inventory levels is an important factor in the rise of wholesale used-vehicle prices and the overall health of the used-vehicle market from a gross margin and profit perspective," Webb highlighted during Thursday's conference call.

"Low new-vehicle inventory means the dealer can achieve a higher average transaction price," he continued. "They can continue to focus on selling used vehicles not just new ones. There's nothing that can take a dealer's focus away from used vehicles more than having 100 days of supply of new vehicles on the lot.

"A low new-vehicle inventory also frees up working capital that otherwise would have been tied up with that new-vehicle inventory," Webb added.

The discussion moved on to how weak retail demand has kept new-vehicle sales in check. 

Webb pointed out that new-vehicle sales in June equated to a seasonally adjusted annual rate (SAAR) of 11.1 million units, a mark lower than the May SAAR of 11.6 million.

"The recovery in auto sales has shown no upward momentum. Indeed, even including the Cash for Clunkers boost, the SAAR has averaged less than 11.2 million over the past 12 months," he noted.

Webb believes fleet purchases are what have kept the SAAR at that range. He indicated the share of total new-vehicle sales accounted for by fleets — rental, commercial and government — was 21 percent in the first half of 2010 versus 17.4 percent in the year-ago period.

"Blame the rising share on low retail sales, not high fleet sales," Webb emphasized.

"Manufacturers are not forcing units onto fleet buyers at heavily-discounted prices. In fact, the current level of fleet purchases is consistent with legitimate business needs relative to fleet size and aging," he added.

With that in mind, Webb doesn't expect an astounding turnaround in new-vehicle sales any time soon.

"The retail credit markets have improved quite substantially, but the labor market remains weak as does the overall economy. As a result, I suspect we will remain below trends for a considerable period of time," Webb explained.

"There will be a continued shift away from new toward used from the dealer perspective of margins and profits. You couple that with the inevitable reduction in wholesale supply, overall wholesale used vehicle pricing should be very strong," he continued.

Update on the Used Vehicle Value Index

For the first time this year, the Manheim Used Vehicle Value Index slid down slightly from the previous month. The June reading came in at 120.2, down from May's index value of 121.0. Still the June mark represented a 5.3-percent increase from a year ago.

The last time the index budged downward at all was October of last year when the reading moved to 117.4 from the September index of 118.5. The index hasn't had two consecutive months of downward movement since November and December 2008.

Webb indicated wholesale used-vehicle prices — on a mix, mileage and seasonally adjusted basis — slipped 0.7 percent in June. Before the seasonal adjustment, prices declined by 1.5 percent.

"The sustained and very strong upward movement in wholesale prices, which began at the start of 2009, appears to have come to a natural end," Webb explained.

"This was a result of the inevitable, but rather flexible, ceiling imposed by new-vehicle prices and the leveling off of retail demand amidst an anemic labor market and increased concern as to the recovery's strength and longevity," Webb continued.

"In June, the biggest weakening in demand was for vehicles in the $7,000 to $9,000 price range," he added.

Webb elaborated further about why vehicles within this price range demonstrated the greatest pullback in June.

"That was after a strong spring," Webb cautioned. "Given that retail credit availability (a key driver of this segment) continues to improve, we suspect the softening of demand was related to the weak labor market and the passing of several temporary factors that stimulated the economy."

More About Used-Vehicle Sales

Webb based his assessment on CNW Research data that revealed total used vehicles retailed in the first half of this year rose by 3.6 percent. A deeper breakdown revealed sales by dealers climbed by 4.4 percent, while private party transactions increased 1.8 percent.

"Frankly, we had expected a better showing for retail used-vehicle sales in the first half of 2010," Webb surmised.

"The used-vehicle churn — used-vehicle sales divided by vehicles in operation — fell to a cyclical low of 14 percent in 2009," he continued. "Although the churn rate has shown a long-term downward trend, we had expected it to rise to a more normal 16 percent relatively quickly, but, it appears, that the ratio will remain under 15 percent in 2010."

Year-Over-Year Price Analysis

Webb then turned the discussion on to how pricing for large and small vehicles outperformed the overall market. His data indicated an industry-wide rise of 5.3 percent, but compact cars, SUVs, CUVs and van all topped the figure.

Vans led the way in Manheim's calculations at a gain of 10.9 percent, followed by SUVs and CUVs at 8.5 percent and compact cars at 6.3 percent.

Webb indicated that three segments lagged behind the industry beginning with trucks, emphasizing compact pickups. Overall trucks had a gain of just 4.5 percent, but Webb found midsize cars (3.5 percent) and luxury cars (3.3 percent) each performing at lower levels, as well.

Review of Rental Units

Webb determined prices for end-of-service rental risk units were little changed on both a sequential and year-over-year basis in June. He also said average mileage for these units slipped for the fifth consecutive month to a point where it's now below the year-ago level.

"Average auction prices for rental repurchase units hit a record high in June. This was reflective of significantly lower volumes, a richer mix of units and lower average mileage," Webb explained.

Finally, Webb noted that prices for end-service fleet units finally eased after a record spring.

Manheim spotted the average auction price for an end-of-service midsize fleet vehicle (mileage and seasonally adjusted) declined in June after reaching consecutive record highs in March, April and May.

"Auction volume for these units was up in June, which was reflective of the higher level of new vehicle sales into fleets," Webb concluded.