Wednesday, 15 of August of 2018

Economics. Explained.  

Car and Truck Sales

August 3, 2018

Unit car and truck sales fell 3.1% in July to 16.68 million units after having risen 0.1% in June.  A 16.8 million pace is moderate and is essentially the same as it was at this time last year.  Car sales have leveled off in the past year or so and auto industry experts think this  modest pace will continue for the rest of this year.  They talk about the fact that the period of ultra-low interest rates has ended.  The Fed is raising short-term interest rates and is expected to boost rates two more times later this year.  They talk about how automobile quality has improved so that consumers are holding onto their vehicles for longer periods of time.  And now they talk about higher prices for gasoline which could dampen growth.  All of those are fair points.  However, we expect car sales to continue to climb slowly for some time to come for a couple of reasons.

First, all measures of consumer confidence are close to their highest levels thus far in the business cycle.

Second, real, disposable consumer income (what is left after taxes and inflation) is rising at a solid pace as jobs growth continues apace, and as the tax cuts began to boost after tax income

Third, the stock market is in the midst of a correction with the S&P 500 index,  the Russell 2000 and the NASDAQ allessentially at record high levels.  That is an indicator of investor sentiment.  In addition, a rising stock market also boosts consumer net worth.  With corporations destined to benefits from tax cuts this year, interest rates still low, and the consumer spending at a solid 2.5% pace, corporate earnings should continue to rise.  We anticipate a 10% increase in earnings in 2018 which should put the stock market at an even higher record level by yearend.

Fourth home sales remain at s solid pace.  Because car and home sales are the two biggest ticket items in a consumers budget, it is not surprising that a change in trend will be evident in these two categories first.  If home sales seem pretty solid it would be surprising if car sales did not follow suit.

It is true that gasoline prices have risen, but the Energy Information Institute expects gasoline prices to peak at about $2.95 per gallon by the end of June as the summer driving season reaches its peak and then decline slowly in the second half of the year.

Finally, keep in mind that consumers have paid down tons of debt and are now in a position to spend.  Jobs are climbing at a pace of 190 thousand per month.  The unemployment rate has fallen to a level that is far below the full employment mark.  Consumers are benefiting from stable and still low gasoline prices. For all of these reasons we look for  3.1% GDP growth in 2018 and car sales to remain healthy.

Stephen Slifer

NumberNomics

Charleston, SC


Leave a comment