Adam Smith’s teachings from a Wealth of Nations continue to provide a basis for determining the price of goods. The father of economics believed that suppliers and demanders, acting in their own self-interest, ultimately determine the price of a good to be sold on the market. Smith coined the result of these free-will actions the “invisible hand to promote an end which was no part of his intentions”, or the equilibrium price of goods. His theory can still be seen throughout many markets and industries today, and most recently the used-car market.
Fall in Used-Car Prices
Today’s market has seen a fall in used-car prices that could continue over the foreseeable future. Tom Kontos, chief economist at ADESA, believes that an increasing stream of off-lease vehicles (a rightward shift of the supply curve) combined with the growth in new-vehicle incentives (leftward shift of the demand curve) will push used-car prices even lower. J.D. Power and Associates estimate that by 2018 the total used-vehicle supply in the market will reach 14.5 million used vehicles that are up to five years old. Much of the growth in used-cars entering the market are due to the increase in demand for leased vehicles that began several years ago and continues today.
New vehicle prices were reaching record highs during 2015. In order to keep monthly payments as low as possible, record levels of consumers chose to lease their vehicles. Payments were about $100 cheaper to lease rather than to purchase the vehicle. Good news for car owners in the market for a new (used) vehicle means prices will be declining. However, if looking to purchase a new vehicle, buyers will be looking to sell their current car and use proceeds to contribute toward financing. In 2017, JD Power expects depreciation rates in to sedans increase from 20 to 21% while truck depreciation rates in trucks will rise from 14 to 18%.
Car Sales Market
According to Steven Szakaly, chief economist of the National Automobile Dealers Association, leasing penetration increases in 2017 would not be the same as we have seen over the past several years. Car sales were also expected to stay above 17 million for the third consecutive year. However, passenger car sales have fallen now for the third consecutive month according to Tom Krisher from Associated Press. Despite the passenger vehicle sales market taking a hit through its first few months of 2017, surprisingly truck sales have been increasing.
Many dealers have experienced an increase in their inventories due to shifts in consumer demand. Mark Scarpell, owner of Chevrolet, Kia, and Fiat Chrystler dealerships north of Chicago maintains that increases in inventories are regular this time of year and are part of the business cycle. Dealers often have higher inventories during the winter months in order to prepare for higher sales projections during spring and summer. Some dealership owners may not feel concerned yet, but car sales depend heavily on consumer demand.
The above exhibit displays total United States car sales beginning in January 1976 until February 2017. Car sales appear to be stagnating according to reports by the Chicago Tribune. If car sales are stagnating, Smith’s invisible hand theory may become further proven by shifts in supply and demand of the automotive industry.
Although we never see how rapidly Smith’s invisible hand is at work pushing supply and demand curves, we can see the final effect in the price of goods. As the prices of used-cars continue to fall to an acceptable level from an increased supply, eventually consumers have a higher quantity demanded for used-cars. The invisible hand predicts that consumers will purchase used-cars at an increased rate until the used-car supply will dwindle thus raising the prices again. We won’t know when price increases will happen, but currently there is a used-car market in favor of the buyers.