Real Consumption Growth on a Steady Keel Even as Income Slows
As I noted above, consumption has exceeded personal income growth for the last three quarters even as consumer debt has shown little or no expansion. The only other major source of spending income is savings, typically from higher earners.
The other standout feature on the table is that consumer growth has been stuck at 2% or so except for the fourth quarter of 2010. A spike in auto sales promotions in December inflated auto sales and real consumption growth by almost a full percentage point.
Other than autos, there really hasn't been much change in consumer spending growth rates by category since the beginning of the recovery. In the first quarter, six consumer categories showed accelerating growth and nine showed a slowdown. Only the volatile auto sector (which saw a dramatic slowing in growth rate) saw a meaningful decline in growth in the first quarter. Even that change is a bit suspect and reflects the BEA's estimation of a dramatic shift in the mix of autos used by businesses and government versus consumers. Consumers got almost all the credit for sharply expanding auto sales in the fourth quarter. Then in the first quarter, businesses got almost all the credit for auto sales even as total growth remained about the same between the two quarters.
Real Estate Data Mixed as New Home Sales Accelerate, but Pending Existing Home Sales Decline
Our housing team had a busy week, but the news was mixed. New home sales finally saw some improvement and, just as importantly, inventories dropped to a brand new low. Our housing analyst Eric Landry had this to say:
New home inventories print record low, setting up the possibility for brighter days down the road.
Sales of new homes increased 7% from March to a seasonally adjusted rate of 323,000 units in April but declined 23% from last year's tax-credit-fueled result. The West led sequential gains, with a 15% increase, while the other three regions' gains ranged between 5% and 8%. New home sales still obviously sit at very depressed levels, and it doesn't pay to get too excited about 10% up or down. Suffice to say, the building industry is putting very little new housing into the market for the third year in a row, a situation that is slowly correcting the supply imbalance that's been in existence since the middle of last decade. In fact, if we had to make a bet one way or the other, we'd say the new home market (separate from the existing home market) is likely well into "overshoot" mode. Production sits near record low levels while inventories have never been lower for as long as records go back (1963). If normalised for population growth, the decline looks even more pronounced. To the extent that existing homes aren't always a perfect substitute for new, there exists the possibility for dramatic production increases once consumers re-enter the market, as there just isn't enough inventory to satisfy even a modest uptick in sentiment. When that uptick will arrive, however, is anybody's guess.
Pending Home Sales Fall Off a Cliff
However, pending home sales looked abysmal. Fortunately, existing home sales (which the pending index portends) have a smaller impact on GDP than do new home sales. Eric analyses the pending home sales data below:
Pending home sales indicate much lower existing home sales for at least the May report.
April contract signings fell a surprisingly large 12% from March and 27% from last year's tax-credit-fuelled period. The National Association of Realtors is attributing at least some of the weakness to severe weather, noting that the US saw the heaviest precipitation in 20 years in April, as well as tight lending standards. We don't doubt that both had dampening effects, but we're very disappointed with the result nonetheless. The weakness was pretty widespread, with only the Northeast eking out a 2% sequential gain. The South sunk 17% from March, the Midwest 10%, and the West 9%. Investors should brace themselves for a significant sequential and year-over-year decline in May existing home sales several weeks from now, as a print in the low 4 million SAAR range is likely if the historical correlations hold. Unfortunately, they usually do.
Durable Goods Orders Decline 3.6% from March to April
A week ago I warned that durable goods orders would show a sharp decline as the volatile transportation sector, which includes aircraft and autos, showed a near 10% decline. Boeing (BA) had a particularly slow month, as we noted. Without transportation orders, durable orders were still down 1.5% sequentially (though up 6.5% from a year ago on a similar basis). These figures, taken in the context of the previous month's results and March's upward revision, seem to be more indicative of a pause than the start of a large decline. I also believe that the indirect impact from a slowing auto industry (due to Japanese manufacturing issues) is weighing on a wide range of manufacturing data.
A Feast of Data in a Holiday-Shortened Week
A lot of news is due this week, but I suspect it won't tell us a lot more than we already knew. I suspect the ISM purchasing managers' report will show a meaningful decline based on a number of softer regional reports earlier in the month. The Chicago regional report, due the day before the national report, will be announced Tuesday and should provide even more clues on the likely results for the national report. Auto production weighs heavily on all of these indexes, and I suspect the number will be well down from last month's 58.7 reading and probably below the consensus estimate of 58.4.
Our auto analyst David Whiston wrote a great summary on what is happening in the auto industry and puts down a timeline for industry improvement below. The essence of Dave's piece is that the problems are probably good news for non-Japanese auto suppliers but less welcome news for consumers, who will face higher prices and fewer choices, and for the economy in general, which will see a large decline in domestic production for at least a couple of months.
We expect weak May auto sales but no year-over-year decline.
Automakers will report May US light-vehicle sales on June 1. We expect this to be the first month with a major decline as a result of inventory shortages following the March 11 Japan earthquake. We expect the two firms most hurt will be Toyota (TM) and Honda(HMC), while General Motors (GM), Ford Motor Company (F), and Hyundai should be the big winners. Most industry pundits are looking for Hyundai-Kia to finish third for the month behind GM and Ford, and we would agree with this assertion, as the new Sonata's sales continue to outpace its production. GM and Ford should continue to see strong demand for their crossovers as well as brand new compacts such as the Ford Focus and Chevrolet Cruze. Overall, the seasonally adjusted annualised selling rate (SAAR) will likely be in the high 11 million to low 12 million unit range, down from April's 13.2 million but still up from 11.6 million in May 2010.
The entire summer will likely not be stellar at the industry level given the inventory shortages, but we see two points of good news. First, automakers do not need to heavily incentivise vehicles to sell them, a situation that should lead to higher margins for those automakers not suffering significantly lower volumes (i.e., GM and Ford). This is one reason we think both firms will have positive earnings surprises later this year. TrueCar.com reported Wednesday that the industry's incentive spending is currently at its lowest level since November 2002. The other good news is that Toyota and Honda management have been saying North American production will come back faster than expected. On May 11, Toyota issued a press release saying June North American production will be at about 70% of normal levels, up from 30% in May. Some Toyota models, including the Avalon, Camry, Corolla, Highlander, Sienna, and others, will be at 100% production in June. The Wall Street Journal reported last week that Honda will be at full production in North America by August for all models except the new Civic, which will remain at 50% due to parts shortages.
Employment Should Be Up, But Slower Than Last Month
Given the messed up auto industry, retail sales numbers that looked a bit inflated last month, and continued uncertainty in government hiring, it's hard to imagine job growth will match last month's stellar growth of 244,000 people. The consensus is for job adds of 180,000, which seems a rational expectation to me. Even a lower number wouldn't necessarily panic me without a detailed look at individual industry hiring data.
