Auto sales plunged in August to a level not seen since February 2014, falling to a seasonally adjusted annual rate of just 16.1 million. This was down from 16.7 million in July. While Hurricane Harvey undoubtedly had a negative impact towards the end of the month, the downtrend in sales began at the beginning of this year. The relevance is that changes in trend for auto sales have historically led changes in trend for overall retail sales and consumer spending. Consumer spending is what drives our economic growth.
Therefore, while Wall Street wallows in a 3% estimate for the rate of economic growth in the second quarter, we should be focusing on what the growth rate will be six months from now. Auto sales indicate it will be significantly lower.
Pending Home Sales
The housing market has also weakened in recent months. The National Association of Realtors’ pending home sales index fell 0.8% in July, which does not bode well for existing home sales in September, considering that it takes 4-6 weeks for a closing to occur after a contract has been signed. Existing home sale have declined in three of the past four months. Higher prices and reduced inventory are clearly playing a role, but when we look at home sales in conjunction with auto sales, it tells me that the consumer is not as strong as the consensus believes.
Personal Income and Spending
Personal income rose 0.4% in July, with the wages and salaries component rising 0.5% for a second month in a row. Yet, this isn’t translating into a commensurate increase in average hourly earnings, which is my preferred measure of income growth. When we factor in inflation and taxes, real disposable personal income is up 1.4% on a year-over-year basis.
Consumer spending rose 0.3%, led by a 0.6% increase in spending on goods. Real consumer spending was up 2.7% on a year-over-year basis. Note below that the rate of spending growth is greater than the rate of income growth, which is why the savings rate has fallen to just 3.5%.
The Personal Consumption Expenditures (PCE) price index held steady in July at an annual rate of increase of just 1.4%. The core rate, which excludes food and energy, slipped 0.1% to 1.4%. The lack of inflation raises serious doubts in my mind about the assertion that we are at full employment and that wage pressures are starting to mount.
The construction spending report includes the total value of all new construction activity for residential, non-residential, and public projects. Overall construction spending disappointed again, declining 0.6% in July, when the consensus was expecting a gain after June’s disappointing results. Residential construction was the only segment that saw an increase (+0.8%) in activity. Total construction spending is now up 1.8% on a year-over-year basis.
There should be an uptick in construction activity to rebuild and replace hurricane damaged houses and home furnishings, but it is too difficult to determine the timing and extent of that activity for now.
ISM and Markit Manufacturing Indexes
The Institute for Supply Management’s manufacturing index is telling a very different story from the one tabulated by Markit. The ISM index rose to 58.8 in August from a reading of 56.3 in July, led by production and new orders. This was the strongest reading from this survey since 2011. The problem is that we are not seeing this strength in the industrial production reports or in the length of the manufacturing workweek. There is a similar divergence between consumer confidence and consumer spending.
Markit’s PMI Manufacturing index has been far more consistent with the real economic data coming out of the manufacturing sector. This index fell modestly to 52.8 in August from July’s reading of 53.3, which was one of the weakest readings for growth this year. Output continues to weaken, indicating a decline in manufacturing activity for the first two months of the third quarter.
The Jobs Report
While out to dinner with my family last week, our waitress asked what we were celebrating. My wife explained that she had just passed the Bar Exam (for a second time) after several months of grueling study. Complimenting my wife’s efforts, our waitress explained that she had her Master’s degree, was currently a principal at a charter school, and just started waiting tables at the restaurant three nights a week. Wow!
According to the Bureau of Labor Statistics, along with our waitress, 155,999 job seekers found employment in August. The prior two monthly estimates were revised lower by 41,000 jobs. Despite the waning strength in the PMI manufacturing survey, and the fact that the number of hours worked declined, the sector supposedly created 36,000 jobs last month. The construction industry created 28,000 new jobs, which is equally as perplexing.
Average hourly earnings rose a mere 0.1%, keeping the year-over-year increase at 2.5%, but the average workweek shrank from 34.5 to 34.4 hours. That will have a negative impact on weekly take-home pay. The lack of income growth raises real doubt about the accuracy of the unemployment rate and the number of jobs that are really being created by this economy.
I am not buying the uptick in the rate of growth for the second quarter to 3% as the beginning of a new uptrend. Loan demand is softening, while credit is showing early signs of stress. Home sales plateaued, and auto sales are in outright decline. Real income growth cannot sustain the current rate of consumer spending growth. I expect the rate of economic growth will slow in the second half of this year. Yet this will be exceedingly difficult to decipher by the incoming data, as the hurricanes will impact nearly every data report in the months to come.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.