Savings Returns for Some Consumers, A Long-term Virtue that Slows New Car Sales Currently. Economy Avoids Double Dip Recession
Households continue to save part of their income this spring. Nominal personal income increased 0.4 percent in May, or by double the 0.2 percentage rate increase of spending (nominal personal consumption expenditures (PCE)). Real (inflation adjusted) personal consumption expenditures increased 0.3 percent. The measure of core nominal expenditures increased 0.2 percent in May and 1.3 percent during the
last 12 months.
No Pent-Up Real Estate Demand in the Current Recovery
While savings is a long-term virtue, it slows an economic recovery already lacking the typical real estate activity usually associated with recovery from recessions. So it is no surprise that real gross domestic product (or output) growth was revised back to a more modest 2.7 percent for the first quarter of the year in the third estimate of the Bureau of Economic Analysis. Typically, a normal recovery with "catch-up" real estate activity would feature real GDP growth well above 5 percent.
The Case-Shiller 20-city index of home prices, which includes the homes well above one million dollars, registered almost 4 percent year over growth in April. The House Price Index of the U.S. government, which reflects conforming loans, backtracked slightly in the first quarter as a result of snow storms. The index of the average homes (under about $750,000 in value) where buyers of typical nonluxury new cars live, will show strength in home prices in the summer of 2010.
Car purchases will be supported by stable or slowly rising home prices in 35 of the states in the second half of the year. That will be a welcome development.
Concerns earlier in the year regarding inflation are muted currently by a consumer price index that actually declined during May. The CPI fell 0.2 percent in May, the second month of decline. The cause of the May decrease was a 2.9 percent fall in the energy index. Food prices were essentially flat, and the core measure of inflation that excludes both food and (falling) energy prices increased a modest 0.1 percent. Private nonfarm payroll employment increased by 13,000 during June compared to May (seasonally adjusted) in the measure contained in the ADP National Employment Report.
Concerns earlier in the year regarding inflation are muted currently by a consumer price index that actually declined during May. The CPI fell 0.2 percent in May, the second month of decline.
Consumer Confidence Took Temporary Dip in June
Consumers have reacted to negative stories about the outlook for economic growth and the continuing pollution of the Gulf of Mexico with lower Consumer Confidence in June measured at an index of 52.9. That measure is down from measures above 60 in recent months.
News stories are suggesting a "double dip" in the economy may be on the way. NADA estimates that chance at no more than 15 percent, versus the 85 percent probability that economic recovery continues at a modest pace. News on home prices stabilizing for the second quarter will help underpin car sales, since most households have most of their net assets represented by home equity.
Unemployment remains high, despite new jobs created, because people are streaming back into the labor force. That optimism on the jobs front is a positive sign for longterm economic growth. Inflation will remain low during the coming several months.
Car sales turned the corner in May, with all of the categories plotted in the Graphic (see below) displaying a positive growth in light vehicle sales versus May of 2009.
The new normal for new car sales is the old normal. Crossover Utility Vehicles and midsized sedans are the sweet spot for light vehicle sales growth. Year to date through May those sales have increased by 31 percent and midsized sedans up by 20.4 percent. With the correction in the stock market, luxury good sales are up by just 9 percent year to date.
With consumer confidence lackluster, and the broad industry stock markets indexes reflecting correction mode, June sales will likely be stronger than in June 2009, but not quite up to the surge of new vehicle sales during May. As confidence improves and the staying power of economic growth becomes more evident during July, expect to see strong monthly new light vehicle sales from July through the end of the year.
New car dealers can find inspiration in the legislative efforts by NADA that kept car loans out of the new regulatory mechanism being created by the U.S. Congress. Existing regulation of dealers will allow customers to continue have choices and save dealer considerable compliance costs compared to being treated like banks, which they are not.
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