Roller-coaster consumer sentiment rebounded in May as did consumer spending, while the uncertainty around trade intensified.
Economy slows: Economic growth in Q1 was revised down slightly, but most importantly growth is poised to be much weaker in Q2 as much of the gain reported for Q1 will be reversed in Q2.
Consumer spending down: Consumer spending declined in April from much stronger growth in March. Consumers are being more conservative in spending despite strong and recovering consumer sentiment. The personal savings rate is increasing as spending is not keeping pace with income growth. Growth in business investment also was revised down.
Consumer sentiment improves: Consumer sentiment improved again in May to its highest level since November and now higher than last year. Plans to purchase a vehicle in the next 6 months also increased in May to a level that is now higher than at any point since the Great Recession.
But that was before our latest round of tariffs, which are now threatening disruption of trade with Mexico just when it looked like passage of USMCA would happen this summer and reduce some of the uncertainty that has been hanging over the market for more than a year now. If the threat becomes reality, the auto market will suffer by disrupting cross-border activity with our largest and most integrated trading partner.
Trade uncertainty prevails: Trade uncertainty is weighing on business, rattling financial markets, and driving bond yields lower, thus further inverting the yield curve. This is bound to pull down consumer sentiment in June, but it may temporarily boost demand for autos if the threatened tariffs become reality in 10 days.
Looking ahead: This week we’ll get April consumer credit data and May employment data and new-vehicle sales numbers as well as the latest Presidential tweets.