CARY, N.C. -

When someone doesn’t pour beer correctly, a lot of “froth” could form, limiting how much of the cold beverage ends up in your glass.

ALG used “froth” as part of their imagery to summarize its updated residual value forecast after going through the four ingredients analysts used to form it.

For its fourth quarter forecast sent to Auto Remarketing, ALG indicated there were “significant” updates related to vehicle production that directly influence used supply and expected level of incentive spending. Analysts touched on those two elements, along with demand outside factors such as the economy, housing and hurricanes, to create the current ALG outlook through 2024 as it relates to retained value of original MSRP for 3-year-old vehicles.

Let’s take those ingredients one at a time.

• Used supply and production

ALG said the combined shortage of vehicles in the new and used market will continue to have the largest effect on values during the next few years, with a combined lift of 8.6 percentage points of value in 2022.

“While supply chain disruption (predominantly due to the chip shortage) has contributed to significant pullbacks in production, the shift away from rental fleet sales will limit availability of 1- to 2-year-old late model vehicles while the drop in consumer leasing will have a long tail effect of limiting supply of 3-year-old vehicles well into 2025,” analysts said.

• Incentive spending

Historically, ALG pointed out, the industry always rebounded from production and sales pullbacks to return to double digit levels of incentives — when overall spend is represented as a percent of original MSRP.

“Mid- to long-term supply chain disruptions combined with industry profitability across nearly all sectors has led to a reckoning across the industry around production and retail stocking strategy, fleet and incentive strategy and even the shopping experience,” analysts said. “While ALG does believe that dealer inventories will return and incentives will grow, both will exist at fraction of pre-pandemic levels.

“As a sidenote, this makes retail ordering and incentive planning critical components to lure shoppers who are unlikely to amend their impulsive acquisition behavior of the past,” analysts added.

• Demand

ALG indicated that vehicle demand will remain robust until the middle part of the decade, a position that is bolstered by its analysis into the concept of “natural demand” among the U.S. population.

“Specifically, the demand adjustment addresses pent-up demand from the sales declines experienced in 2020, plus the higher savings accrued by consumers during the pullback in discretionary spending during the past 18 months,” analysts said.

• Economy, housing and hurricanes

ALG added that these three factors will have minimal long-term effect on used-vehicle values but certainly played a role in the elevated values seen in 2021.

“The consensus on the macro economy suggests that much of the recovery was accelerated in 2021 with the pace of recovery slowing during the next few years. Disruptions from hurricanes and other natural disasters will be transient but were still enough to influence values in 2021,” analysts said.

So, what are all those ingredients cooking up in ALG’s residual value expectations? Again, analysts used that cold beverage imagery.

“By 2024, ALG expects much of the ‘froth’ in the current market to be settled as the industry and consumers come to terms with a new normal,” analysts said.

ALG is projecting 3-year-old vehicle values to increase a full 4.0 percentage points when compared to pre-pandemic levels.

“Just as the volatility of the last couple years starts to settle down the industry will have to reconcile with new pricing, production and leasing strategies within the framework of long term higher used-vehicle values, continued imbalances of car park supply with consumer demand and a change to the retail sales experience in an age of digitation and production discipline,” analysts said.