Do Vehicle Sales Signal A Re-engaged Consumer?

Includes: F, GM
by: Robert Brusca

Vehicle sales have registered an upside that is unexpected and have done so in a most delightful way. The unit sales jumped to 14.18 mu in January from 13.56mu where they had been stuck for several months. This gain brings the pace of sales to its strongest mark since May of 2008. It leaves sales still short of the 15mu plateau they had reached prior to the 2001 recession and, of course short of the 16mu-plus pace they had maintained between recessions from 2000 through 2007. Sales are not all the way back but they are a good deal of the way back and on a quite steady-looking trend.

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What makes the rebound so delightful is that the bulk of it is in terms of domestically made vehicles which means the sales will hit the bottom line of the GDP report and hard. When sales of imports are elevated we see increased consumer spending and possibly some investment spending on vehicles by businesses, but the impact on GDP is reduced when imports rise. When domestic demand is satisfied by imports they subtract off the gain made by consumption or investment and leave a net zero impact on GDP. But this month domestically made vehicle sales rose by 4.7%. Import sales were up by nearly as much in percentage terms rising by 4.3% but since domestic sales are three-times larger than imports the impact of the domestic sales is well over three-times larger.

Chrysler and Ford (NYSE:F) posted sizable gains in sales while GM sales slipped partly on some issues concerning battery safety its popular Volt where GM continues to monitor demand. It has said it will keep production in line with demand there. GM also saw its large truck sales slip. Its market share fell in January and its year ago comparisons were weak owing partly to incentives that GM had in place then and does not have in place now.

All in all it was a good month for sales. US vehicle sales of autos were much stronger while truck sales slipped slightly. Auto sales tend to be more profitable. For imports, both car and truck sales had moderate gains.

The quarter is off to a good start with the January sales expressed as a growth rate over the Q4 level showing a 33% growth rate. Domestic sales have posted a 36% growth rate in the nascent quarter while imports are up by a strong 61% pace, led by a more than 100% rate of change for auto imports. Much of this is the ongoing rebound in sales of foreign cars after Japan's production disruptions took their toll. As the January data show, the sharp foreign growth rate quarter-over-quarter is caused more by the legacy effect of a week Q4 than by strong start to 2012-Q1.

In the broader context we have consumer spending picking up and autos sales of this magnitude could add nearly 1% point to monthly retail sales depending on fleet sales diversions which will still count as GDP but be treated as capital investment. In last month's personal spending and income report we saw that the savings rate was up and income gains were growing but spending had gone flat. Now we see that spending has picked up again. Be wary of playing this game each month of pairing off the spending growth rate with the income growth rate. Savings are volatile and that data series gets revised. When I see spending jump out ahead of income, as it had done several months ago, my first reaction is not to warn that it is unsustainable. These days, banks have been far more careful about doling out credit and people have been more careful about how to use it. That does not mean that credit mistakes won't be made. But there is another explanation to spending that seems stronger than income. Many people know their income before it is posted or paid and revealed in official data. If you get a bonus you likely know it before you see it. If you are a commission salesman you know what is due to be paid to you before you get it. There are many examples that allow us to look at increases in sales ahead of income trends as evidence that income is expected to pick up rather than as a spending excess.

We see another effect of that sort this month where spending and income again may be off kilter. It's too early to think we know what income gains will be this month but in the wake of better income last month spending on autos, at least has picked up one month later. So let's not let the sun rise and set on the monthly savings rate but let's look at its trend.

On balance we have some good news on the economy. The week's economic data are starting out to be relatively solid even if not exciting. And we have an employment report on tap amid several signs of improved labor market and consumer sentiment conditions. True we have has some mixed reports on the consumer, but when the consumer is talking with his wallet open or purse open it is good listen to the sound of spending instead of arguing with it.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.