Auto Sales Lowest In 5 Months

by: Hale Stewart

Last weekend I said that the two important data releases this week, in addition to the latest jobs report, would be the personal savings rate and auto sales. We now know that both came in relatively poor.

For the second month in a row, March had the lowest savings rate since before the 2008 recession. This tells us that consumers in the aggregate have little room left before being tapped out. Yesterday's auto sales report told us that consumers have pulled back at least a little on purchasing durable goods. This isn't fatal: similar pullbacks occurred in both 2011 and 2012 (shown in red in the below graph of light vehicle sales) [note the graph does not include yesterday's 14.92 annualized data point]:

Typically before recessions vehicle sales have declined by about 10%. This is only a 4% decline.

But the situation is deteriorating.

One of the other metrics I found that has been very consistent is that prior to recessions, year-over-year (YoY) retail sales growth grows less than YoY PCE growth. Real retail sales are much more volatile than personal consumption expenditures [PCE] as this graph below (subtracting YoY PCE growth from YoY real retail sales growth through 1997) shows, in a very specific and non-random way:

Note that early in economic expansions, YoY real retail sales growth far outstrips YoY PCE growth. As the economy wanes into contraction, YoY real retail sales grow less and ultimately contract more than YoY PCEs. You can see that by noting that retail sales minus PCEs are always negative BEFORE the economy ever tips into recession. That's 11 of 11 times. Further, in 10 of those 11 times (1957 being the noteworthy exception), the number was not just negative, but was continuing to decline for a significant period before we tipped into recession. This makes perfect sense, as retail sales generally include many far more discretionary purchases. As the economy accelerates, consumers make more discretionary purchases. As it slows, the more discretionary retail purchases are the first things cut.

Here's what the graph of the two looks like now:

Retail sales are just becoming less than PCE growth on a YoY basis. This represents a significant weakening of consumers. So April's relatively poor vehicle sales are a point of concern.