Auto Market Weekly Summary: May 30

Growing income and spending data indicate that the consumer is alive and well, and inflation is still a factor that could lead to further Fed rate increases.

First-quarter economic growth was revised upward but still reflected a slowing economy in aggregate. Beneath the headline deceleration was strong consumer spending.

Consumer incomes and spending saw accelerating growth in April. The personal savings rate declined. Key measures of inflation increased. Now that we are almost past the debt ceiling drama, we will be back to worrying about inflation and more tightening by the Fed.

New home sales increased in April, while pending home sales were stable. Total home sales are still declining as new homes are a much smaller part of the market, but new homes are increasingly representing more of the available inventory.

Measures of consumer sentiment have declined in May.

Consumer Spending Accelerated in April

The increase in the first-quarter real GDP was revised up to a 1.3% annualized increase from the 1.1% originally estimated. Personal consumption was revised up to an increase of 3.8% from the original estimate of 3.7%. Growth in spending on goods was revised down to 6.3% compared to the 6.5% increase first estimated. Spending on services was revised up to a gain of 2.5% from the originally estimated gain of 2.3%.

Gross private investment was upwardly revised to a decline of 11.5% from an original drop of 12.5%, driven by declining inventories along with more declines in residential investment. Real GDP growth year-to-year was unchanged at 1.6% after the revisions.

Consumer spending reaccelerated in April and was much stronger than expected. March’s nominal spending was revised to a small 0.1% gain from its original unchanged estimate.

Personal income growth also accelerated to a 0.4% gain from a 0.3% gain in March. Employee compensation growth accelerated to 0.5% from 0.3% in March. Government transfer payments saw growth turn negative to a 0.4% decline, and unemployment compensation decelerated to a 0.4% gain from 3.5% in March. Proprietors’ income declined 0.4%, a larger decrease than March’s 0.1% decline from February.

Spending on durable goods increased by 1.6% in April, while spending on nondurable goods increased by 0.8%, and spending on services increased by 0.7%. All three categories saw accelerating growth. Spending on motor vehicles and parts increased by 3.8%, following a 1.4% decline in March. The personal savings rate declined to 4.1%, the lowest level since January but still higher than a year ago.

The Personal Consumption Expenditure Index, the key gauge of inflation that the Fed follows, increased 0.4% in April, an acceleration from an increase of 0.1% in March. According to the PCE, overall price inflation rose to 4.4% year over year in April from 4.2% in March, while the core inflation rate increased to 4.7% from 4.6%.

Factoring in inflation, real spending increased 0.5% in April when it had been unchanged in March. The income and spending data indicate that the consumer is alive and well, and inflation is still a factor that could lead to further Fed rate increases.

New Home Sales Post a Surprising Increase in April

New home sales, which are based on new contracts signed on newly constructed homes, delivered a surprising increase in April, but March’s gain was revised down so effectively April was little changed. New home sales at an annualized pace of 683,000 were up 4.1% from March and up 11.8% year over year. Compared to April 2019, new home sales were down 1.7%.

New home inventory increased 0.2% from April but was down 0.2% from a year ago. New-home supply declined to 7.6 months, the lowest level in a year and getting closer to normal. Even with the increase in new home sales in April, total home sales were down 2.4% for the month and down 19.7% from a year ago because existing home sales declined 3.4%. Pending home sales were unchanged in April when a small increase was expected, leaving pending home sales down 22.6% from a year ago. Like new home sales, pending home sales are based on new contracts, but limited supply and high mortgage rates are keeping existing homeowners on the sidelines.

Consumer Sentiment Declines

The consumer sentiment index from the University of Michigan declined 6.8% in May as the underlying measures of current economic conditions and expectations both declined.

The final reading for the month was slightly better than consensus expectations as well as the mid-month reading. Expectations for inflation in a year declined to 4.2% from 4.6% in April, but expectations for inflation in five years rose modestly from 3% last month to 3.1%. The Fed cares most about consumers’ longer-term expectations for inflation, which is back to the peak level seen last June when inflation peaked. Consumers’ views of vehicle buying conditions declined in May to the lowest level this year but remained better than a year ago.

The daily index of consumer sentiment from Morning Consult has measured less of a decline in sentiment in May. Still, the index had been up until last week as worries about the debt ceiling dominated the news. As of May 26, that index has declined 0.2% in May.

Consumer attitudes have been sensitive to inflation and especially the price of gasoline for over a year now. Gas prices have declined slightly so far in May, but prices have increased over the last week. According to AAA, the national average price for unleaded gas has fallen 1.1% so far in May to $3.57 per gallon as of May 25, which was down 22% year over year.

Jonathan Smoke

Chief Economist

Jonathan Smoke leads Cox Automotive’s economic and industry insights team, which tracks key metrics and trends impacting both the wholesale and retail markets for vehicles informed by the proprietary data from the company’s businesses and platforms. For 28 years, Smoke has focused on translating data and trends into relevant actionable insights for the industries that represent the biggest purchases that consumers make in their lifetimes: real estate and automotive. Smoke joined Cox Automotive in 2017.