Auto Market Weekly Summary: July 3

First quarter real GDP growth was revised up substantially but still reflected a modestly slowing economy in aggregate.

Consumer incomes saw accelerating gains in May and remained strong while spending decelerated, leading to higher savings. All key measures of inflation declined.

New home sales increased in May, while pending home sales declined. Total home sales improved in May as the new home growth more than made up for a modest decline in existing home sales. However, declining pending sales indicate further declines ahead for existing home sales as homeowners are locked into low-rate mortgages that are no longer available.

Measures of consumer sentiment have increased strongly in June, and inflation expectations are coming down. 

Q1 GDP Growth Revised up but Still Reflects a Modestly Slowing Economy

The increase in first-quarter real GDP was revised up substantially to a 2.0% annualized increase from the 1.3% second estimate. Personal consumption was revised up to an increase of 4.2% from an estimate of 3.8%.

Growth in spending on goods was revised down to 6.0% compared to the 6.3% previously estimated. Spending on services was revised up to a gain of 3.2% from an estimated gain of 2.5%.

Gross private investment was downwardly revised to a decline of 11.9% from a decline of 11.5%, driven by declining inventories along with more reductions in residential investment. Real GDP growth year-over-year increased to 1.8% after the revisions.

Consumer Incomes Accelerate, Spending Slows, Savings Rise

Consumer spending decelerated in May and was weaker than expected. April’s nominal spending was revised to a smaller 0.6% gain from its original 0.8% estimate.

Personal income growth accelerated to a 0.4% gain from a downwardly revised 0.3% gain in April. Employee compensation growth accelerated to 0.5% from 0.4% in April. Government transfer payments accelerated to 0.3% growth from a 0.1% decline in April, but unemployment compensation decelerated to a 2.3% decline from a 0.4% gain in April. Proprietors’ income increased by 0.3%, the first increase in three months.

Spending on durable goods declined 0.9% in May, while spending on nondurable goods fell 0.3%, and spending on services increased 0.4%. All three categories saw decelerating spending. Spending on motor vehicles and parts declined 3.0% following a downwardly revised 2.0% increase in April.

The personal savings rate increased to 4.6%, which tied March for the highest level this year and the highest since January 2022. The Personal Consumption Expenditure Index (PCE), the key gauge of inflation that the Fed follows, increased 0.3% in May, a deceleration from an increase of 0.4% in April.

According to the PCE, overall price inflation fell to 3.8% in May from a year ago, the lowest level since April 2021, while the core inflation rate declined to 4.6% from 4.7%.

Factoring in inflation, real spending was unchanged in May when it had increased 0.2% in April. The income and spending data indicate that spending on goods is slowing, but consumer incomes are strong, savings are building again, and inflation is coming down.

New Home Sales Post Surprising Increase in May

New home sales, based on new contracts signed on newly constructed homes, delivered another surprising increase in May.

New home sales at an annualized pace of 763,000 were up 12.2% from April to May and up 20.0% from a year earlier to the highest pace since February 2022. Compared to May 2019, new home sales were up 26.7%.

New home inventory declined 0.9% from April and was down 2.9% from a year ago. New-home supply increased to 7.0 months from a downwardly revised 6.7 months in April, the lowest level in over a year and close to normal.

With the increase in new home sales in May, total home sales were up 1.9% for the month but down 16.1% year-over-year, with existing home sales down 20.4% from a year ago.

Pending home sales were down 2.7% in May, when a smaller decline was expected, and April was revised down. Pending home sales were down 20.8% year-to-year. Like new home sales, pending home sales are based on new contracts, but limited supply and high mortgage rates keep existing homeowners from putting their homes on the market.

Consumer Sentiment Jumps in June on Lower Inflation Expectations

Consumer Sentiment from the University of Michigan increased by 8.8% in June as the underlying measures of current economic conditions and expectations both increased.

The final reading for the month was better than consensus expectations as well as the mid-month reading. Expectations for inflation in a year declined to 3.3% from 4.2% in May, and expectations for inflation in five years declined slightly from 3.1% last month to 3.0%.

The Fed cares most about consumers’ longer-term expectations for inflation, and that measure is coming back down after increasing this spring.

Consumers’ views of buying conditions for vehicles increased in June from the lowest level this year in May, and the June view was much better than a year ago.

The daily index of consumer sentiment from Morning Consult has also measured improving sentiment in June, as the index posted a strong 4.4% gain over May. Expectations of the future improved the most in June and are at the highest level since August 2021. Gas prices declined slightly in June and fell over the last week. According to AAA, the national average price for unleaded gas declined 0.9% in June to $3.54 per gallon as of June 29, which was down 27% year over year.