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Smoke on Cars

Auto Market Weekly Summary: July 31


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Article Highlights

  1. Economic growth and consumer spending accelerated in June.
  2. New home sales declined due to high mortgage rates.
  3. Consumer confidence improves as Americans feel better about the future.

Economic growth accelerated in the second quarter and was stronger than expected despite slowing growth in consumer spending.

Still, consumer spending accelerated in June, enabled by strong wage gains. Consumers also have more buying power with inflation coming down.

New home sales declined in June, while pending home sales increased slightly. Total home sales fell in June as high mortgage rates hurt affordability, and existing home supply remains limited.

Measures of consumer confidence and sentiment increased again in July and indicate consumers are feeling better about the future.

Economic Growth and Consumer Spending Accelerated in June

The first estimate of the second quarter’s real GDP growth showed an acceleration to 2.4% growth annualized from 2.0% growth in the first quarter.

Personal consumption decelerated to growth of 1.6% from 4.2% growth. Spending on goods slowed to a weak 0.7% growth from 6.0% in the prior quarter, while spending on services decelerated to growth of 2.1%.

Increasing inventories offset further declines in residential investment resulting in a 5.7% increase in private domestic investment. Government spending decelerated. Exports declined more than imports resulting in a slight reduction in GDP. With the rise in Q2, real GDP was up 2.6% from a year ago.

Consumer Spending Accelerated, Including on Motor Vehicles and Parts

Consumer spending re-accelerated in June and was stronger than expected. June’s nominal spending was revised to a larger 0.2% gain from its original 0.1% estimate.

Personal income growth decelerated to a 0.3% gain from an upwardly revised 0.5% gain in May. Employee compensation growth remained at 0.5% for the third consecutive month. Government transfer payments declined 0.1% after growing 0.4% in May, as unemployment compensation declined 2.2% as it also did in May. Proprietors’ income increased 0.3%, up from a downwardly revised 0.2% in May. Personal income from dividends declined, but interest income growth remained robust. Spending on durable goods increased 0.8% in June, while spending on nondurable goods increased 0.5%, and spending on services increased 0.4%.

Spending on goods accelerated while spending on services was flat. Spending on motor vehicles and parts increased 2.0% following an upwardly revised 1.8% decline in May.

The personal savings rate declined to 4.3%, which is the monthly average year to date. The Personal Consumption Expenditure Index (PCE), the key gauge of inflation that the Fed follows, increased by 0.2% in June, an acceleration from an increase of 0.1% in May.

According to the PCE, overall price inflation declined to 3.0% year over year in June, which was the lowest level since March 2021, while the core inflation rate fell to 4.1% from 4.6%. Factoring in inflation, real spending increased 0.4% in June, accelerating from an upwardly revised 0.1% gain in May.

The spending data indicate that the consumer is not pulling back, and strong wage gains and full employment are a key part of that story. As inflation comes down, consumers have more buying power.

New Home Sales Declined Due to High Mortgage Rates, Low Inventory

Based on new contracts signed on newly constructed homes, new home sales saw declining sales in June and had prior sales growth in May reduced.

New home sales at an annualized pace of 697,000 were down 2.5% from the previous month but up 23.8% year on year. Compared to June 2019, new home sales were down 8.7%.

New home inventory increased 0.7% from May but was down 3.6% from a year ago. New home supply rose to 7.4 months from an upwardly revised 7.2 months in May, the lowest level in over a year yet still above normal. With the decline in new and existing home sales in June, total home sales were down 3.2% for the month and down 14.7% from a year ago.

Pending home sales increased 0.3% in June, and May’s decline was revised up. Pending home sales were down 14.8% from a year ago. 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 Confidence Improves as Americans Feel Better About the Future

The Conference Board Consumer Confidence Index increased by 6.3% in July, as views of the present situation and future expectations both improved.

Consumer confidence was up 22.8% from a year ago. Plans to purchase a vehicle in the next six months increased to the highest level in nine months and were up year over year.

The confidence index did not fall as much during the pandemic as the sentiment index from the University of Michigan. Still, both series improved in June and July and were up substantially year over year against the peak of the inflation surge in 2022.

The Michigan index increased 11.2% for the month and was up 39% from a year ago. Consumers’ views of vehicle buying conditions rose again in July to the best level since February.

The daily index of consumer sentiment from Morning Consult has also measured improving sentiment in July, as the index is up 1.7% over June as of July 28. Expectations of the future improved the most in June and July and are now at the highest level since August 2021.

Gas prices increased in July, and price increases accelerated over the last week. According to AAA, the national average price for unleaded gas has increased 5.5% so far in July to $3.73 per gallon as of July 27, which was down 13% year over year.

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