- June inflation was at its highest level in more than a decade.
- The Fed is staying the course, making interest rates attractive for vehicle buying.
- Consumers’ plans to purchase a vehicle in the next six months improved to the highest level in 18 months.
The growth trend in new daily COVID-19 cases continued last week. Consumer sentiment declined in July, but measures of consumer attitudes in July showed conflicting trends.
Consumer spending improved in June even as government transfer payments declined. Inflation in June was at the highest level in more than a decade. The savings rate declined but remains elevated.
New and pending home sales declined again in June, as housing growth slows with record prices and material shortages hurting construction.
The Fed is maintaining its zero-lower-bound rate policy and bond-buying program until more progress is made on job recovery. Rates are likely to remain attractive for vehicle buying.
New jobless claims fell in the latest week of data.
GDP increased: The first estimate of the second quarter real GDP increase came in at 6.5% (annualized), which was lower than expected because of inventory drawdowns and weak exports. Growth only slightly increased from the downwardly revised 6.3% pace in the first quarter.
Personal consumption increased 11.8% from 11.4% in the prior quarter and was higher than the 10.5% growth expected. Spending on goods increased 11.6%, while spending on services increased 12.0%. Gross private investment declined 3.5% from declines in non-residential structures. Government spending declined 1.5% as nondefense spending fell 10.4%. With the growth in Q2, real GDP was up 12.2% from a year ago and was at a new peak, having finally recovered from the prior peak in Q4 2019.
Consumer spending rose: Consumer spending increased 1.0% in June from May as personal income grew only 0.1%. Government transfer payments continued to decline. Unemployment benefits declined 11% while wages increased by 0.8%.
Spending on durable goods declined 1.5% in June, while spending on nondurable goods increased 1.8%, and spending on services increased 1.2%. Spending on motor vehicles and parts declined 4.6%.
The personal savings rate declined to 9.4% from 10.3% in May but remains higher than the savings rate average of 7.5% in the 12 months leading to the pandemic. The Personal Consumption Expenditure (PCE) Index, the key gauge of inflation that the Fed follows, increased 0.5% from May. Overall price inflation according to the PCE increased to 4.0% from a year ago in June to the highest level since July 2008. The Fed’s target is an average inflation level over time of 2%.
Home sales drop: New home sales, which are based on new contracts signed, declined a worse-than-expected 6.6% in June. Prior sales were also revised down. New home inventory was up 7.0% compared to May and up 17.3% from a year ago. The new-home supply increased to 6.3 months, which is a more normal level.
In June, 34% of the new homes sold were on units not yet started, while 43% were under construction, and only 23% were completed, finished homes. With the decline in June, new home sales were down 19% from a year ago and down 4.9% compared to 2019. Pending home sales, which are new contracts signed on existing homes, declined 1.9% in June from May, leaving sales down 3.3% from last year.
Fed holds the line: The Fed held its fifth open market committee meeting for the year last week and remained committed to its zero-rate policy and the quantitative easing program. While acknowledging some progress on employment and inflation targets, the Fed was not yet ready to set plans for tapering its bond-buying programs. Tapering would precede any rate hikes. Consumer rates are likely to remain attractive this summer. Average auto loan rates have fallen so far in July, so average rates for all credit tiers continue to be lower than a year ago.
Consumer confidence mixed: Consumer Confidence, according to the Conference Board, increased 0.2% in July and left confidence down just 3% compared to February 2020. Plans to purchase a vehicle in the next six months improved to the highest level in 18 months. Plans to purchase a home also improved but remains down from a year ago.
Measures of consumer sentiment from the University of Michigan and the index of consumer sentiment from Morning Consult instead showed substantial declines in July. The Morning Consult index saw substantial erosion as July progressed and as of Friday, July 27, was down 5.5% from June. The Michigan Index was down 5% in July. As of last Friday, the Morning Consult was down 16.9% from February 29, 2020. This index is timelier, representing the full month each month, and it is based on a much larger and likely more representative sample of consumers.
Jobless claims drop: As of July 17, 3.27 million Americans remain on traditional unemployment benefits, which are limited to at most six months of coverage, but 13.2 million people remain on some form of unemployment benefits, including pandemic unemployment assistance, which provides coverage beyond six months. That broadest measure of benefits has declined by 1.5 million over the last four weeks. Initial claims declined last week to 400,000, after increasing the prior week and remain higher than the pandemic low at the beginning of July. The increasing numbers are caused by seasonal adjustments, as non-seasonally adjusted initial claims fell to a pandemic low last week.
An Auto Market Report video will be published in Smoke on Cars on Tuesday, August 3.