Volume 14, Number 3
US MARKET OUTLOOK
MAY/JUNE EDITION SUMMARY
Overall Impact for May/June 2013 edition:
While the full impact of the fiscal cliff remains to be seen, early indications are that the combined tax increases and spending cuts are not likely to derail the recovery. Fourth quarter GDP change has been revised upward to a 0.4 percent expansion, a substantial improvement from the initially reported 0.1 percent contraction. While still weak, one-off factors of declining private inventories and defense spending account for the majority of the drop; first quarter 2013 GDP growth is expected to have improved significantly.
Through the majority of the recovery home prices have continued to fall, while sales have been unimpressive and new construction has been at extremely depressed levels, acting as a drag on consumer wealth and spending. This has finally changed course, with the FHA home price index up by 6.5 percent in January relative to last year. Prices have been consistently rising, with increases every month over the past year. Sales and new construction are slowly increasing, providing a boost to the economy that will offset some of the negative impacts from other factors.
The March employment report was disappointing, with only 88,000 jobs created. However, January employment was revised upward by 29,000 and February by 32,000. Employment gains for the first quarter are in line with the average over the past 12 months, an encouraging sign that the fiscal cliff has not been broadly disruptive. More worryingly, the labor force participation rate has declined to 63.3 percent, the lowest level on record since 1978. If these people do not find their way back to work eventually, the long term growth prospects for the US will be slowed. Consumer confidence fell to 72.3 in April, bringing confidence levels to the lowest point since July of last year. This further reinforces that a return to pre-recession conditions is unlikely in the near term.
Macro Economic Outlook:
• Fiscal cliff impacts have been moderate to date
• Fourth quarter GDP growth was revised upward to 0.4%
• Forecasts for 2013 GDP growth are at 2.1%, with slow improvement into 2014
• The US economy remains resilient compared to most developed nations
• Recession and austerity elsewhere limit growth in the US, as growth in exports will be very difficult
• The economy is expected to improve by 2014 and return to more historical norms
Macro Economic Impact on Residuals:
• Expected movements for this edition are -0.9 ppt
• Relative to the March/April 2013 edition, the real durable goods spending forecast is up significantly, leading to a 0.5-ppt impact on 36-month residuals
• Gas prices were nearly unchanged, with no significant impact on residuals
• Overall macro impact for May/June compared to March/April is +0.5 ppt
• This edition compares favorably to the May/June 2012 edition, which was in line
with expectations for a total overall change of -0.9 ppt
• Beginning in the May/June edition, industry level supply has been added as a driver in addition to segment level supply
• At the industry level, supply is increasing significantly, leading to a 0.5-ppt drop in residuals
• Segment level supply changes vary dramatically, ranging from -0.4 ppt for Premium Fullsize Utility, Premium Compact, and Premium Compact Utility to +0.6 ppt for Subcompact
• On average segment level supply has a neutral impact on residuals
In an ever-changing auto industry, ALG continually evaluates the different aspects of its residual forecast model to make sure that it’s as predictive as possible given the state of the auto market and the economy. The economic downturn that the US market suffered in recent years was more extreme than has been seen in decades, and the effect has not be limited to the short-term effects of disposable income, but has also been seen in consumer attitudes about spending. There is currently a very different dynamic to consumer spending, and some of the factors that drove consumer behavior previously have waned in importance.
After a thorough analysis, ALG has updated its macro drivers going forward from this edition. Real wages and home prices have been replaced by real durable goods spending as a driver of our demand forecast and residual values. While home prices have historically been correlated with residual values, this relationship has weakened as the economy has entered recovery. Consumers are behaving more cautiously and are much less likely to use home equity to finance large purchases, limiting the effect of rising home prices on auto sales and values. Total spending on real durables was found to be highly predictive of the price of used autos, as it reflects consumers willingness to purchase big ticket items.
These larger purchases often follow a similar pattern when it comes to the continuum between discretionary and non-discretionary spending. Staple items tend to have a fairly low elasticity, with consumers buying similar amounts regardless of their wealth position. On the other hand, discretionary outlays, on things like entertainment and vacation travel, are highly susceptible to swings in disposable income. Durable goods often exhibit characteristics of both groups, and autos are no exception. When the economy is down, and consumers are looking to save money, they may put off a durable goods purchase, as many car buyers did during 2008 and 2009, or downgrade their purchases. But these items are often still necessities, so replacement may be mandatory if something like a vehicle is beyond its usable life.
ALG established this driver after an analysis of nearly 100 different variables, and durable goods was found to have several advantages. Not only is its predictiveness improved compared to the other drivers we had used, but it also encompasses several areas of the economy, from household goods to recreational equipment, with nearly one third composed of the automotive category.
In addition to segment level supply, industry level supply has been added to the residual value drivers as of the May/June edition to account for cross shop that occurs between segments, and the general pressure on prices that occurs with rising aggregate supply.