This Week's Economic Data: What to Watch for the Auto Sales Outlook
GDP, Consumer Confidence, Mortgage Applications
According to Edmunds.com's forecast for March, auto sales will total 14.9 million at a seasonally adjusted annualized rate (SAAR). March will then be the third straight month of SAARs greater than 14 million. These SAARs are the highest since Spring 2008, excluding the Cash-for-Clunkers program in August 2009. Pent-up demand from deferred auto sales during the recession is finally coming back to the market in a substantial way and the three-month SAAR run suggests a new momentum emerging for auto sales. Certainly, there is no shortage of pent-up demand still to be released; Edmunds.com estimates that there are at least four million units left to be recovered. The need to replace aging vehicles — 10.8 years on average for vehicles in operation in 2011 — should put increasing pressure on consumers to return to market. But, for consumers who do not “need” a new car, current economic conditions and future expectations will remain a key driver of whether consumers feel confident enough to purchase large durable goods such as autos, and these factors should be closely watched when considering the outlook for auto sales. This week's economic data contained several numbers that shed some positive light on what we can expect from auto sales in the coming months.
- Gross Domestic Product (GDP): Maybe the most anticipated number of the economic week was the third and final report on real GDP for fourth quarter 2011. GDP is the broadest measure of economic activity and covers the whole economy. The quarter-over-quarter growth rate was unrevised from the previous estimate of 3 percent. The final number matched the consensus expectations and reflects growing economic strength — albeit a moderate growth. In addition, gross domestic income (GDI) grew 4.4 percent. GDI measures all wages and profits in the economy whereas GDP measures all domestic spending. While the two numbers should converge in theory, there can be lags. GDI is considered more accurate since it is less subject to revision. Growth in GDI reflects an improving labor market, which can only help auto sales. Recent increases in jobs growth and decreases in jobless claims further support labor market improvement — again, at a moderate rate. In any case, given the amount of pent-up demand for autos, auto sales growth could well outpace economic growth if consumers are sufficiently motivated to buy. For example, generous incentives from GM and increased confidence from a rising stock market contributed to strong auto sales in the first quarter of 2011, despite decidedly weak GDP growth of 0.4 percent.
- Consumer Confidence: The consumer confidence data reported this week continued to show an upward trend for March. Confidence reflects consumer motivation to buy a new vehicle. It is often as critical a component of auto sales as consumer ability to pay and access to credit. Accordingly, consumer confidence is highly correlated with auto sales, in general. During the growth in auto sales momentum in late 2010 and early 2011, this correlation was particularly strong. More recently, in late 2011, confidence lagged behind auto sales growth. This is not particularly surprising since auto sales strength at that time stemmed primarily from the recovery of sales deferred during the shortages caused by the Japanese earthquake. Since then, confidence has risen rapidly, as have auto purchases. This upward trend bodes well for continued auto sales strength. But, the outlook should be tempered by the fact that the present situation component of consumer confidence showed greater strength than the expectations component, which decreased somewhat. In other words, consumers feel better about the present economy than about its future direction.
- Mortgage Applications: Another data report this week that pointed to strength in consumer confidence — and, more importantly, consumer willingness to spend on large purchases — was the Mortgage Bankers Association's weekly index on purchase applications for home mortgages. This index rose 3.3 percent this week, lifting the four-week average 2.1 percent. And even though the pending home sales index fell in February (also reported this week), the fact that more consumers are attempting to purchase a home suggests that the obstacles to buying a home may lie in the ability to obtain financing, rather than the desire to do so. Credit conditions for housing purchases do not appear to have loosened as much as credit conditions for auto purchases — the average credit score of home buyers has yet to fall, whereas the average credit score for new auto loans has been falling since 2009. As a result, consumers who find themselves shut out of the housing market could well comfort themselves with a new car.
Lacey Plache is the Chief Economist for Edmunds.com. Follow @AutoEconomist on Twitter.