- The U.S. economy accelerates with higher consumer spending.
- Jobless claims fall; consumer confidence rises.
- Auto loan rates remain attractive, including for subprime.
The declining trend in new daily COVID-19 cases accelerated this week, but the vaccination pace also slowed. Consumer sentiment improved, and all measures of consumer confidence saw strong gains in April.
Economic activity is continuing to pick up. First-quarter GDP growth accelerated, and spending grew strongly in March to end the quarter, supported by stimulus and a jump in income.
Economic growth accelerates: The first estimate of the first quarter real GDP increase came in at 6.4% on an annualized basis, which was higher than our most recent forecast of 5.5%. Growth accelerated from the 4.3% pace in the fourth quarter.
Personal consumption jumped 10.7% from 2.3% in the prior quarter and was higher than the 10.5% growth expected. Spending on goods jumped 23.6%, while spending on services increased 4.6%. Gross private investment declined 5% from declines in non-residential construction. Government spending increased 6.3% as non-defense spending jumped 45%. With the first-quarter growth, real GDP was up 0.4% year over year. With even stronger growth expected in Q2, real GDP will be fully recovered by mid-year to the prior peak reached in Q4 2019.
Consumers are spending: Consumer spending increased 4.2% in March as personal income jumped 21.1% and disposable income jumped even higher with the American Rescue Plan’s $1,400 payments to many Americans. The increase in personal income was driven by a 508% increase in other government transfer payments, but unemployment benefits and wages also grew 1.1% each.
Spending on durable goods increased 10.3% in March, while spending on nondurable goods increased 5.6%, and spending on services increased 1.7%. Spending on motor vehicles and parts increased 13.6%.
The personal savings rate increased to 27.6%, which was the second-highest level in history, only bested by the 34% rate recorded in April 2020. The Personal Consumption Expenditure Index (PCE), the key gauge of inflation that the Fed follows, increased 0.5% from February. Overall price inflation according to the PCE increased to 2.3% in March from a year earlier to the highest level since July 2018. The Fed’s target is an average inflation level over time of 2%.
Fed holds on rates: Despite improving conditions, the Fed remains steadfastly committed to its existing zero-rate policy and quantitative easing to keep rates low.
The Fed held its third open market committee meeting for the year last week and remained steadfastly committed to zero-rate policy and the quantitative easing program that has been in place for over a year now. With monetary policy unchanged, trends in the economy like declining unemployment and trends in the auto market like record vehicle values are more likely to impact the rates consumers see on auto loans in the near term. [Read some additional commentary.]
Even with bond yields rising in the first quarter from improving economic growth, auto loan rates remain attractive and below last year’s levels. Subprime borrowers are seeing better rates in April than at any time since 2018.
Jobless claims fall: New jobless claims fell again to their lowest level during the pandemic. As of April 17, 3.66 million Americans remain on traditional unemployment benefits, which are limited to at most six months of coverage, but 16.6 million people remain on some form of unemployment benefits, including pandemic unemployment assistance, which provides coverage beyond 6 months. With the American Rescue Plan, pandemic assistance will continue through September with 12.2 million consumers receiving it. Initial claims declined last week to 553,000, which is the lowest weekly level for the pandemic.
Home sales rise: Pending home sales, which are based on new contracts signed, increased 1.9% in March from January, leaving sales up 23.3% compared to the pandemic lockdown period last year. Contracts were up compared to February in every region except the Midwest.
Consumers more confident: Consumer Confidence, according to the Conference Board, increased 11.7% in April and left confidence down only 8% compared to February 2020.
Plans to purchase a vehicle in the next six months jumped in April to a 23-month high. Plans to purchase a home also increased in April to its highest level in the history of the Consumer Confidence data.
The final reading on Consumer Sentiment from the University of Michigan increased 4% in April and left sentiment down 12.6% from February 2020. The index reflected improvement from the original estimate earlier in April. Each of the measures for current conditions and future expectations improved.
The index of consumer sentiment from Morning Consult also improved in April, but that index lost some ground in the middle part of the month. The Morning Consult Index was up 1.2% week to week as of Friday, April 30, and ended up 2.4% for April and down 10.8% since February 29, 2020.
An Auto Market Report video will be published in Smoke on Cars on Tuesday, May 4.