Vehicles and More Vehicles

Episode Summary

Executive Summary: Inside Economics hosted GM chief economist Elaine Buckberg to discuss Omicron’s macro impact, the used/new vehicle price surge, auto production constraints from the chip shortage, and the outlook for EV adoption and autonomous vehicles. The conversation argued that supply chain disruptions—not just demand—are the dominant force behind auto inflation, but that chip supply is improving and vehicle production should recover, while EV adoption accelerates if tax credits and charging infrastructure expand.

Main Topics: Omicron’s impact on labor and activity (Priority: 5/5): The hosts opened with how Omicron is disrupting households, school attendance, testing availability, and work absences. They discussed Census pulse data showing large numbers out sick or caring for others and temporary closures among small restaurants. Vehicle prices and inflation (Priority: 5/5): The discussion centered on extreme increases in used and new vehicle prices, how they feed headline CPI, and the mismatch between constrained supply and strong demand. Chip shortages and auto production bottlenecks (Priority: 5/5): Buckberg explained how semiconductor shortages, compounded by Texas freezes, a Japan fire, and Delta-related shutdowns in Southeast Asia, reduced vehicle output and pushed prices higher. Auto market recovery outlook (Priority: 4/5): The guests discussed improving chip supply, higher plant utilization, weekend overtime, and the expectation that production and sales will move back toward normal levels, though inventory remains very tight. EV adoption and policy incentives (Priority: 5/5): Buckberg argued that electric vehicle demand is rising quickly, helped by more models, better range, and a potentially transformative long-duration tax credit and charging buildout. Autonomous vehicles and GM strategy (Priority: 2/5): The conversation briefly covered Cruise’s driverless testing and the timing for level-4 autonomy in urban markets like Philadelphia.

Key Arguments: Omicron is materially suppressing activity through illness, caregiving, and temporary business closures, and these effects will likely weigh on January employment. The auto inflation story is primarily a supply story: production constraints, especially semiconductor shortages, have created shortages that lifted both new and used vehicle prices. Strong auto demand is real and has been amplified by stimulus, savings, low inventories, suburban migration, and a preference for private transportation. Chip supply problems were intensified by multiple shocks, but the situation is improving and automakers are redesigning supply chains to reduce future risk. Vehicle production is moving closer to normal, but low inventories mean sales will remain constrained by throughput rather than end-demand until supply fully normalizes. EV demand is accelerating because battery costs are falling, ranges are improving, and new products better match consumer preferences across segments. A durable EV tax credit and public charging infrastructure would substantially increase EV adoption by shrinking the price gap versus ICE vehicles and reducing charging anxiety. Autonomous ride-hailing should arrive first in dense urban areas where utilization economics are best, with driverless deployment already occurring in San Francisco through Cruise.

Data Points: Back to Normal Index: 91.2 - Daily activity index fell from roughly 96-98 before Thanksgiving, indicating Omicron-related slowdown. CPI inflation (December, year over year): 7% - Used and new vehicle prices were cited as major contributors to headline inflation. Used vehicle prices (CPI, Dec/Dec): 37.3% - Used car prices in CPI increased sharply over the prior year. Mannheim used vehicle index: about 47%-49% year over year - Auction prices for used vehicles were running ahead of CPI used car prices. Used vehicle price relative to new vehicle price: 21% higher - Quality-controlled relative price of used versus new vehicles was well above historical parity. Households not working due to sickness/caregiving/fear (pulse survey): 12 million - Census pulse data through January 10 showed a surge in nonworking people linked to Omicron. Peak comparable pulse survey figure during Delta: 8 million - Used as comparison for current illness-related labor disruption. Small businesses/restaurants temporarily closed: 9% - Highest since January of the prior year, based on pulse survey data. Housing starts in pipeline: 1.52 million - Units under construction, reflecting bottlenecks in completion and housing supply pressure. U.S. auto production loss in 2020: 24% of production days - Lockdowns reduced auto production days, contributing to low inventories going into 2021. Auto demand decline in 2020: 15% - Demand fell, but less than production, tightening inventories. Current U.S. auto inventory level: about 1.1-1.2 million - Dealer lots were described as very low/near empty during the tightest period. Estimated pent-up demand: about 4 million units - Buckberg said demand carryover into the year was roughly four million vehicles. Pre-pandemic global/new light vehicle market norm: 17 million units - Used as the benchmark for a normal sales/production pace. Recent December production pace: 12.4 million units - Illustrated the scale of the supply-driven collapse from normal levels. EV share of sales in 2020: under 2% - Baseline for the acceleration in EV adoption. Expected EV share of sales in 2021: about 3.5% - Buckberg’s estimate of how the year likely finished. Current EV tax credit: up to $7,500, but limited after 250k vehicles per automaker - Existing policy was described as expiring for successful automakers. Proposed EV tax credit: $7,500 base + $500 U.S.-made battery + $4,500 U.S./union-made - Described as a game changer lasting through the end of 2031. Public charging funds in bipartisan infrastructure package: $7.5 billion - Cited as catalytic for highway and community charging. Consumer readiness to consider EVs: about one-third - Consumer Reports/Ipsos survey figure for next purchase consideration. Consumers expecting to consider EVs eventually: 70% - Survey figure showing broad future acceptance. Transportation cost norm for dealer markup over cost: about 1% historically; latest about 9% - Illustrated how tight supply and competitive conditions have boosted dealer pricing. ATP to MSRP historical norm: 85% - Implied a 15% discount off MSRP before the pandemic. ATP to MSRP current: 100.1% - Shows transaction prices slightly above MSRP at the time of discussion. GM unique microcontroller reduction: 95% fewer unique microcontrollers - Part of GM’s effort to standardize chips and de-risk supply chains. Current personal transportation preference ratio: 75% of new car buyers have owned home with dedicated parking - Used to explain why home charging is easier for many buyers.

Pivotal Quotes: "“I think it’s all about resolving supply chain issues and that you can bring down in large parts of the economy that have particularly contributed to inflation, especially goods.”" — Elaine Buckberg: Her broad inflation framework: supply constraints dominate goods inflation, including autos. "“So, the prices are going up because vehicle manufacturers like GM can't produce enough cars.”" — Mark Zandi: A concise summary of why auto prices are rising and feeding inflation. "“The EV tax credit ... is a game changer and out through the end of 2031.”" — Elaine Buckberg: Her strongest policy claim on what could materially accelerate EV adoption.

Implications: Auto inflation should ease as chip supply and production normalize, but price pressures may persist while inventories remain low. EV adoption is poised to accelerate if credits and charging buildout expand. Omicron likely depresses near-term labor and output, especially in services and retail.