Last week brought several updates on economic activity, culminating in Federal Reserve Chairman Kevin Warsh’s speech at the Fed’s Jackson Hole economic symposium in Wyoming. This edition of the Auto Market Weekly Summary also covers personal income and spending, personal consumption expenditures inflation, GDP growth and consumer confidence. Although gas prices remain above $4 per gallon and the 10-year Treasury yield is near 4.7%, automotive sales trends appear steady, with used-vehicle activity strengthening somewhat through mid-August.

Bottom Line Up Front

Newly minted Warsh delivered his first Jackson Hole address on Friday, marking his 100th day in the role, and markets reacted soon afterward. The Fed funds futures probability of a rate hike at the next meeting jumped from 35% to more than 60% by lunchtime. Markets also priced in a 40% chance of two hikes by the December meeting, up from 15% a day earlier. Warsh was unambiguous on inflation, calling the Fed’s 2% target firm and fixed and noting that progress on underlying inflation has been modest despite better-than-expected recent readings.

The speech may also help explain why markets moved. Warsh pointed to private domestic final purchases, rather than GDP, as perhaps a more reliable measure of the economy. By that measure, growth was revised higher to 4.2% in the second quarter, well above the 1.5% headline GDP figure. He added that it would be difficult to characterize financial conditions as restrictive, a combination that leaves more room for tightening than markets had priced in before the speech.

For dealers, the automotive market shows a similar tension. New-vehicle sales held up through mid-August, and used-vehicle activity picked up as Manheim sales conversion rose during the month. But financing costs are moving unevenly. New-vehicle annual percentage rates rose across nearly every credit tier in August, while used-vehicle rates were flat compared with July. That suggests higher rates had not yet passed through to the used market. Consumers, meanwhile, expect more inflation, with the Conference Board’s 12-month measure rising to 5.8% from 5.6% in July, even as July’s income gains provided some near-term relief. Following Friday’s repricing, the financing backdrop heading into fall points to rates remaining higher for longer. Although small rate increases have a limited effect on monthly payments, consumers may react to the higher rates, potentially dampening demand in the coming months.

Personal Income and Spending

Consumers’ personal finances rebounded modestly in July as income growth outpaced spending for the first time since February. Real personal spending, adjusted for inflation, was flat in July after increasing 0.4% in each of the previous two months.

  • Personal income rose 0.4% from June and was 3.7% higher than a year earlier, down from 3.9% year-over-year growth in June.
  • Personal spending growth slowed for the second consecutive month, rising 0.2% from June. That was the slowest growth since January, even as energy prices remained elevated. Year over year, spending was up 5.9%, more than 2 percentage points above income growth.
  • Adjusted for inflation, real personal expenditures were unchanged in July as nominal spending increased in line with prices.
  • The personal savings rate rebounded to 3% in July after falling for the previous three months.
PCE Inflation Trends

The Fed’s preferred inflation gauge rose in July and was slightly higher than forecast. Fuel prices continued to drive inflation, with the index up 25% from a year earlier. In the automotive sector, higher new-vehicle prices contributed modestly to inflation but were offset by lower used-vehicle prices. Transportation services also continued to show higher inflation because of increased maintenance, repair and public transportation costs.

  • PCE inflation rose 0.2% from June, slightly more than expected, after declining 0.1% in June. Year over year, PCE inflation was up 3.7%, unchanged from June but below the readings in April and May.
  • Core PCE inflation, excluding food and energy, rose 0.2% from June, as expected. It was up 3.3% year over year, unchanged from June.
  • Services account for the largest share of PCE because the category includes housing and health care. Both components declined for the second consecutive month.
  • Transportation services inflation, which includes vehicle maintenance and repair costs, vehicle leasing and public transportation, rose 7.1% year over year in July. Airfare increased 17%, mass transit costs rose 7%, and maintenance and repair costs increased nearly 7%.
  • Nondurable goods inflation slowed for the second consecutive month in July. Energy costs remained elevated, but year-over-year growth declined. The gasoline price index was up 25.6% from a year earlier.
  • New-vehicle prices rose 0.6% year over year, while used-vehicle prices declined roughly 2%. Accessories and parts inflation increased 6.6% year over year, the highest reading since March.
GDP Growth

The second estimate of second-quarter GDP, released last week, was unchanged from the advance estimate, but the steady headline figure masked shifts in the underlying composition. Final sales to private domestic purchasers, which Warsh cited as perhaps a better signal of economic activity, were revised higher.

  • Real GDP grew at an annualized rate of 1.5% in the second quarter, in line with the consensus estimate and unchanged from the advance estimate. That was down from 2.1% in the first quarter.
  • Consumer spending was revised to 3.4% from 3.2%, driven by an upward revision to services, primarily health care, that more than offset a downward revision to goods spending.
  • Upward revisions to consumer spending were offset by downward revisions to other categories, primarily an increase in imports.
  • Fixed nonresidential investment was revised up marginally and remained a source of relative strength, driven by investment in artificial intelligence infrastructure.
  • Final sales to private domestic purchasers, a core measure of underlying demand, were revised up to 4.2% from 3.9%.
Consumer Confidence

The Conference Board’s Consumer Confidence Index declined in August as improvements in consumers’ assessment of current conditions were more than offset by pessimism about the future.

  • The Consumer Confidence Index fell 0.8 points to 89.4 in August, marking its second consecutive monthly decline.
  • The Present Situation Index jumped 6.8 points to 121.2, ending three consecutive monthly declines, as consumers’ assessment of current labor market conditions improved.
  • The Expectations Index fell 5.8 points to 68.2, a seven-month low, as consumers grew more pessimistic about future business conditions, the labor market and household income.
  • Twelve-month inflation expectations ticked up to 5.8% from 5.6% in July, coinciding with renewed pressure on gasoline prices.
  • Auto purchase plans declined marginally from July but remained strong compared with a year earlier. Homebuying plans slipped and were down 10% from a year earlier.