New car sales forecast to plummet 20.9% in May, as supply remains low

Washington, DC(CNN) Retail sales of new cars are forecast to fall 20.9% this month compared to the same time last year, amid vehicle shortages and sky-high prices, according to the automotive research firms J.D. Power and LMC Automotive.

The forecast is in part due to ongoing supply chain disruption and the resulting tight inventories. It is yet another pressure on US consumers. The Commerce Department said Tuesday that new home sales fell 26.9% in April when compared to a year prior. The S&P 500 Index has fallen 17.5% this year amid record inflation, rising interest rates and supply chain shortages.

New vehicle inventory remains extremely tight, with retail inventory below a million vehicles for the twelfth consecutive month.

"The industry sales pace is being dictated by how many units are delivered to retailers during the month, and demand far exceeds supply," Thomas King, president of the data and analytics division at J.D. Power, said in a statement. "Record transaction prices are the result."

New vehicle prices have reached near-record highs. The average transaction cost of a new vehicle in May is expected to reach $44,832, the third highest level on record, and a 15.7% increase from last year. The record high of $45,247 was set in December 2021.

High prices have been a boon for car dealers, who have enjoyed unprecedented profit margins. Usually, new car sales have thin margins for dealers, but that's changed as there's been a shortage of available vehicles since the covid-19 pandemic. Profit gains from increased vehicle costs have more than offset the lower sales volume, according to J.D. Power and LMC Automotive.

Buyers are still expected to spend $45.4 billion on new cars and trucks, an $8.3 billion decrease from May 2021. Fleet sales are forecast to increase 3.8% in May 2021.

Although production is expected to increase in the latter half of 2022, vehicle prices are unlikely to decline, according to King.

While factors like an increase in vehicle supply and higher interest rates will likely lead to a slowing of vehicle price increases, they are "unlikely to lead to declines," he said.