Economic Activity Update
Last week featured key updates on economic activity, highlighted by Federal Reserve Chairman Kevin Warsh’s speech at the Jackson Hole economic symposium in Wyoming. The Auto Market Weekly Summary includes insights on personal income and spending, PCE inflation trends, GDP growth, and consumer confidence. Despite persistently high gas prices above $4 per gallon and a 10-year Treasury yield nearing 4.7%, automotive sales trends are stabilizing, with signs of increased activity in the used-vehicle market.
Bottom Line Up Front
Warsh delivered his inaugural Jackson Hole address, coinciding with his 100th day as chairman. Following his speech, the probability of a rate hike by the Federal Reserve surged from 35% to over 60%, with a 40% chance of two hikes by December, a significant increase from 15% the previous day. Warsh emphasized the Fed’s firm commitment to the 2% inflation target, noting modest progress despite recent optimistic readings. He suggested that private domestic final purchases may be a more accurate economic indicator than GDP, with growth revised to 4.2% for Q2, significantly surpassing the headline GDP figure of 1.5%. Warsh also indicated that current financial conditions do not seem overly restrictive, allowing for potential tightening beyond previous market expectations.
For dealers, the automotive market reflects similar tensions: new-vehicle sales have remained stable, and used-vehicle activity rose as Manheim sales conversion improved. However, new-vehicle financing rates increased across nearly all credit tiers in August, while used-vehicle rates remained flat. Consumers showed rising inflation expectations, as indicated by the Conference Board’s measure rising to 5.8%. Even though July’s income gains offered some short-term relief, higher financing rates might dampen future demand.
Personal Income and Spending
In July, consumers’ financial conditions improved slightly, with income growth outpacing spending for the first time since February:
- Personal Income: Increased 0.4% from June and was up 3.7% year-over-year, a slight decrease from June’s 3.9%.
- Personal Spending: Grew 0.2% from June, the slowest increase since January, with year-over-year growth at 5.9%, significantly above income growth.
- Real Expenditures: Held steady in July, reflecting nominal spending aligned with inflation.
- Savings Rate: Rose to 3% in July, after a decline over the past three months.
PCE Inflation Trends
The Fed’s preferred inflation measure, PCE, rose in July, driven primarily by fuel prices:
- PCE Inflation: Increased 0.2% from June; year-over-year inflation remained at 3.7%.
- Core PCE Inflation: Excluding food and energy, was unchanged at 3.3% year-over-year, also up 0.2% from June.
- Services Inflation: Continues to be affected by housing and health care costs; both have shown a decline for two consecutive months.
- Transportation Services: Inflation rose 7.1% year-over-year, driven by maintenance, repair, and transportation costs. Notably, airfare and public transit costs saw significant increases.
- New and Used Vehicle Prices: New-vehicle prices rose 0.6% year-over-year, while used-vehicle prices declined roughly 2%.
GDP Growth
The second estimate for Q2 GDP showed no change from the advance estimate, though there were notable shifts in the underlying details:
- Real GDP Growth: 1.5% annualized rate for Q2, consistent with estimates and down from 2.1% in Q1.
- Consumer Spending: Revised to 3.4%, primarily due to health care service adjustments.
- Investment: Fixed nonresidential investment showed slight improvement, bolstered by AI infrastructure investments.
- Final Sales: Revised to 4.2%, an important indicator of underlying economic demand.
Consumer Confidence
The Conference Board’s Consumer Confidence Index dipped in August:
- Index Value: Fell by 0.8 points to 89.4, marking its second consecutive decline.
- Present Situation Index: Increased by 6.8 points to 121.2, indicating improved consumer assessments of the current labor market.
- Expectations Index: Dropped 5.8 points to 68.2, its lowest in seven months, reflecting rising consumer pessimism.
- Inflation Expectations: Increased slightly to 5.8% from 5.6% in July, influenced by gasoline price pressures.
- Purchase Plans: Auto purchase plans declined marginally but remained strong relative to the previous year; homebuying plans decreased by 10% year-over-year.
Overall, the economic landscape presents challenges and opportunities, as monitored in the automotive sector amidst shifting consumer sentiment and financial conditions.
