Motor Vehicle Sales

Motor vehicle sales are a big portion of consumer spending which goes into GDP. I have been expecting 2018 motor vehicle sales to be weak, but I expect a pickup in GDP growth in Q2. As you can see in the chart below, total vehicle sales were 16.9 million which missed estimates for 17.1 million and was below last month’s 17.2 million in sales. It appears vehicle sales have plateaued. Domestic made vehicle sales were 13 million which beat the consensus estimate of 12.8 million.

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Vehicle sales were only up 0.1% in dollar terms in April. As I discussed often in 2016 and 2017, the incentive growth was unsustainable. We are now seeing weaker results as incentive growth has been in the low single digits. More recently, the industry had to deal with the overhang that came from the burst in auto sales after the hurricanes last fall. I expect total sales to stay around where they are now until the next recession. It’s disappointing to see two down months in a row after the uptick in March.

Strong ISM Manufaturing Report

With the strong regional Fed manufacturing reports in May, I was very optimistic about the ISM manufacturing report. Relative to the extremely hot regional Fed reports, this ISM report disappointed me slightly, but it was still a great report. As you can see from the chart below, the PMI was 58.7 which beat the consensus estimate for 58.5. It didn’t come close to beating the highest estimate like many of the regional Fed reports did. The regional Fed reports are very volatile. I trust the ISM Manufacturing report more than them, but even the ISM reports have been too optimistic compared to the hard data reports in the past few quarters because they have small sample sizes like the regional Fed reports.

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This report is the same as the 12 month average and was up 1.4 points from last month. It is consistent with 4.8% GDP growth which is exactly the same as the Atlanta Fed Nowcast as I’ll get to later. If manufacturing was the dominant sector in the economy, GDP growth might be that high. Since June 2009, it has been consistent with 2.6% growth.

The details of this report were very solid. New orders were up 2.5 points to 63.7. Even though the headline number is 2.1 points below the February peak, the new orders index is only 0.5 off its high. The price paid index was very hot as it was up 0.2 to 79.5. The backlog of orders was up 1.5 points to 63.5 which is a 14 year high.

Now let’s review a couple of the quotes taken from business leaders. A petroleum and coal products firm’s management team stated “Continued talk around steel tariffs has resulted in price increases for domestic line pipe, while HRC seems to be moving sideways. Temporary exemptions for allies and an agreement with South Korea have not calmed the market.” To be clear, HRC is hot rolled coil steal. The quote mentions the temporary exemptions for allies which have now expired. If there was trouble with pricing before the exemptions expired, then there will be even more difficultly now. Trump’s tariffs are coming at a time where inflation is as high as it will be this cycle, meaning they’re pushing up prices at the worst time. Luckily, even with these tariffs, inflation is still low because of technological advancements and demographics. Inflation is below the Fed’s target of 2% core PCE price growth.

Most of the quotes from this report mentioned the increase in prices. A fabricated metals products company stated, “We are concerned about the strong dollar affecting our export orders as well as the steel tariffs, which are causing domestic steel prices to rise.” We’re finally seeing firms mention the strong dollar as a headwind. Recently, the dollar has declined slightly as it has fallen from $94.83 to $93.92, so that headwind might be abating. New export orders for the ISM index fell from 57.7 to 55.6. We could see better export numbers in June if this dollar decline continues. The exports in the Q2 GDP report might be hurt by this dollar rally.

Strong Construction Spending Report

The April construction spending report was great which makes sense given the uptick in hiring in the industry. Month over month growth was 1.8% after the 1.7% decline last month. This was better than the consensus for 0.8% growth. Furthermore, as you can see in the chart below the year over year growth was 7.6% which was an acceleration from last month’s 3.6% growth.  The growth came from spending on multifamily units which was up 4.3%. There was no gain in spending on single family homes and there was a 0.7% gain in home improvements.

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GDP Estimates Are All Headed Up

The mostly great economic growth has led to improvements in the regional Fed Nowcast reports. The Atlanta Fed Nowcast is at 4.8% growth which is the highest of this cycle and the most optimistic guess. This hearkens back to the 5.4% growth expected for Q1 on February 1st. While that was clearly a wildly off base projection, it was very early in the quarter. We are one month later in this quarter, so this estimate is much more realistic. The real consumer spending growth and real private fixed investment growth estimates increased from 3.4% and 4.6% growth to 3.5% and 5.4% growth respectively. The blue chip estimate is for 3.2% growth and the CNBC rapid tracking estimate shows the average estimate is 3.7%.

The NY Fed Nowcast Q1 growth came in at 3.26% as the wholesale inventories, construction spending, and real personal consumption expenditures boosted the estimate the most. The St. Louis Fed expects 3.71% growth. You can see in the chart that the Atlanta Fed has extreme bouts of volatility in the beginning of quarters and the St. Louis Fed estimate is the most stable. To be clear, this Atlanta Fed Nowcast will be much closer than the estimate on February 1st which ended up being wrong by 3.1%.