- Economic growth recovers as COVID-19 cases fall.
- Jobless claims are declining again.
- Consumer sentiment fell on inflation, stock market and war concerns.
Economic growth recovered in the fourth quarter, as real GDP growth accelerated to 7%, which was the strongest reading for the year, following the disruption from the delta wave of COVID-19 in the third quarter last year. This year started slower with the omicron wave, but activity is now recovering again as COVID cases are down 91% from the peak in omicron in mid-January.
Even with the omicron variant, consumer spending resumed a growth trend in January, but personal income growth slowed. However, wage growth remained strong, and inflation picked up. The savings rate fell to a pandemic low.
The housing market saw differing trends in January as new-home sales declined, but existing home closings gained. However, pending home sales also declined. Weather, COVID, tight supply of existing homes, and rising mortgage all impacted the January sales trends.
Jobless claims are declining again now that COVID cases are subsiding. Sentiment and confidence declined again in February as COVID, inflation, a turbulent stock market, and now war in Europe all weigh on consumer views.
Tax refund season has started slowly this year. Through February 18, only 17% of projected refunds for the year have been issued, when normally 38% to 40% would have been disbursed. However, the average refund is up 13% from a year ago to the highest refund ever recorded at this stage of tax refund season. That bodes well for the strength of the spring used-vehicle market, which will simply be starting later than usual this year.
Economy grows: Fourth quarter real GDP annualized growth was revised up to 7.0% in the second estimate from the originally estimated 6.9% growth. Personal consumption was revised down to 3.1% from the original estimate of 3.3%.
Spending on goods was revised down to an increase of 1.5% from the original estimate of 1.6% while spending on services was revised down to 3.9% from the originally estimated gain of 4.7%. Gross private investment was revised up to a gain of 33.5% from an original estimate of 32%. The government spending decline was lessened to a revised decline of 2.6% from the originally estimated 2.9%. The upward revision caused real GDP growth year to year to increase to 5.6%.
Consumer spending picked back up in January to growth of 2.1% from a downwardly revised decline of 0.8% in December. However, personal income was unchanged in January from December, following an upwardly revised increase of 0.4% in December. The unchanged income performance reflected mixed underlying factors with wages growing 0.5% but government transfer payments down 1.3% as unemployment benefit payments again declined and the childcare tax credit payments ended in December.
Spending on durable goods increased 9.7% in January, and spending on nondurable goods increased 2.6%, and spending on services increased 0.5%. Spending on motor vehicles and parts increased 13.3% in January following a 1.3% decline in December.
The personal savings rate fell to 6.4% with flat income and increased spending. The savings rate averaged 7.5% in the 12 months leading to the pandemic but has averaged 14.7% over the prior 22 months. The Personal Consumption Expenditure (PCE) Index, the key gauge of inflation that the Fed follows, increased 0.6% in January, which was an increase from the upwardly revised 0.5% increase in December. Overall price inflation, according to the PCE, increased to 6.1% year over year in January, which was the highest year-over-year change since January 1982.
Home sales mixed: New-home sales, which are based on new contracts signed on newly constructed homes, declined 4.5% in January, which was a bigger decline than expected, but the decline followed a robust and upwardly revised 12% increase in December.
New-home inventory increased 3.0% from December and was up 34.4% from a year ago. With the increased slower pace of sales, new-home supply increased to 6.1 months, which is considered a normal level of supply. In January, 30% of the new homes sold were on homes not yet started, while 46% were under construction, and 24% were completed, finished units. Even with the decline in January and a tough comparison to 2021, new-home sales were down 19.3% from a year ago but were up 27.5% compared to 2019.
While new-home sales declined, existing home sales improved in January. But since the existing home market is much larger than the new-home market, total home sales were up 5.4%. Pending home sales, which are new contracts signed on existing homes, declined 5.7% in January from December, leaving pending sales down 9.1% year over year.
Employment improves: As of February 12, 1.48 million people were on traditional unemployment benefits. Continuing claims declined by 112,000 in the last week and are down 196,000 over the last four weeks in January from what had been a new low for the pandemic. After the decline, claims are 239,000 lower than the claims level before the pandemic began.
New initial claims also declined in the most recent data. New initial claims for the week ending February 19 declined 17,000 to 232,000. Prior to the omicron surge, weekly initial claims had been lower than the 212,000-weekly average for the first 11 weeks of 2020 leading up to the pandemic.
Consumer sentiment soft: Consumer Confidence, according to the Conference Board, declined 0.5% in February. The underlying measures of present situation and future expectations moved in opposite directions as present situation improved but future expectations declined. Plans to purchase a vehicle in the next six months declined and is now down from a year ago.
The sentiment index from the University of Michigan declined 8.1% in February as current conditions and expectations both declined. The Michigan reading was up from mid-month but the lowest full month reading since August 2011.
The Morning Consult index daily index has also declined in February, as it fell 0.7% in the last week and is down 0.7% so far for the month. The daily index from Morning Consult is at its lowest level since May 2020.
The next Auto Market Report video will be published on Smoke on Cars on Tuesday, March 1.
Save the date: The Q1 2022 Cox Automotive Industry Insights and Sales Forecast Webcast will be held on Monday, March 28, 1 p.m. EDT. RSVP to attend.
Jonathan Smoke is the chief economist at Cox Automotive.