Robust auto sales keep economy on steady growth path

WASHINGTON Wed Sep 4, 2013 7:02pm EDT

1 of 3. A 2013 Chrysler 300 sedan is seen at the Washington Auto show in this file photo taken February 6, 2013.

Credit: Reuters/Gary Cameron/Files

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WASHINGTON (Reuters) - The U.S. economy appears to be faring better in the third quarter than analysts had feared with automakers reporting surprisingly strong August sales on Wednesday, helping to buoy expectations of a pullback in monetary stimulus ahead.

In another report, the Federal Reserve said strong demand for autos helped keep the economy on a "modest to moderate" growth path in recent weeks, an assessment that leaves the door open for a reduction in the central bank's bond purchases.

Auto sales rose 17 percent last month to a seasonally adjusted annual rate of 16.1 million units. That was the fastest pace since October 2007 and beat the 15.8 million-unit rate analysts surveyed by Reuters had expected.

It was also the latest sign that economic activity is picking up after hitting a speed bump in July and supported stocks and bond yields, although the dollar fell from a six-week high against a basket of currencies as investors looked forward to a key jobs report on Friday.

Auto sales are a key leading indicator of consumer spending, which accounts for about 70 percent of U.S. economic activity.

"We continue to head in the right direction," said Ryan Sweet, a senior economist at Moody's Analytics in West Chester, Pennsylvania. "With vehicle sales above 16 million (and) a slow but steadily improving job market, the Fed is going to feel comfortable tapering in September."

The central bank has been buying $85 billion in bonds each month to keep borrowing costs low. It is widely expected to reduce that amount when officials meet later this month and a strong gain in hiring for August would cement those bets.

A raft of weak data for July, including figures on consumer spending, industrial output, durable goods orders and homebuilding, had prompted economists to downgrade their third quarter growth estimates to as low as a 1.5 percent annual pace.

But the strong vehicle sales suggested those forecasts could undershoot.

"It may be a sign that the consumer will add more to growth this quarter than we initially thought," said Sweet. The economy grew 2.5 percent in the second quarter.

The auto sector's good fortunes were captured in the Fed's Beige Book report, which found strong demand for motor vehicles lifted spending in most parts of the country in early July through late August.

The report, prepared for the Fed's September 17-18 meeting and based on information collected from its business contacts nationwide, said several of the central bank's 12 districts reported strong demand for auto-related products.

AUTOS DRIVE GROWTH

"Chicago highlighted the auto industry as a main source of strength for that district's overall manufacturing sector, and contacts there expect demand for heavy and medium trucks to ratchet up further and to support growth in overall manufacturing for the remainder of the year," the Fed said.

In Cleveland, there were reports motor vehicle parts suppliers and assembly plants would need to expand capacity in order to meet demand, it said.

The strong sales reported by car makers and the Beige Book's findings backed up a survey from the Institute for Supply Management on Tuesday showing an acceleration in manufacturing activity in August, driven by sturdy gains in new orders.

"The relatively positive tone on the manufacturing sector appears quite consistent with the underlying theme of the recent ISM manufacturing sector reports, and is likely to be seen as an early signal of a more meaningful upturn in activity in the coming months," said Millan Mulraine, senior economist at TD Securities in New York.

"It will add to the other economic reports showing steady progress in the recovery, and pointing to some modest upside momentum for growth in the coming months."

Strong demand for autos also fueled import growth in July, helping to drive up the nation's trade deficit. The Commerce Department said the trade deficit widened 13.3 percent to $39.1 billion.

Auto imports reached an all-time high, and overall imports rose 1.6 percent.

Exports slipped 0.6 percent even as exports of petroleum products hit a record high and the country sold more food and industrial supplies.

A widening trade gap usually subtracts from GDP, the deficit held near its second quarter average, suggesting trade would likely have little effect on third-quarter economic growth.

(Reporting by Lucia Mutikani, additional reporting by Bernie Woodall and Ben Klayman in Detroit; Editing by Andrea Ricci and Krista Hughes)

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Comments (2)
dareconomics wrote:
heap money is being used to paper over the problems in the economy. Light vehicle sales have rebounded to pre-GFC levels, and at first glance, this is a positive development. However, the information is being presented without context. Placing August’s sales results into context places a giant gap in the mainstream media narrative.

First, a sales pace from 2007 isn’t that great. The red line illustrates that from 1997 to 2007, auto sales surpassed this month’s pace in all but two months while the country’s population was lower, 267 million to 302 million in those years compared to 316 million today. Since 1998, the country has added six New York Cities, but auto sales have basically remained flat during this time.

Second, in light of this chart showing declining incomes for Americans

you may wonder where people are getting all of this money to purchase shiny, new cars. Wonder no more:

Subprime deja vu: Bank car loan lending standards ease:

A record 84.5 percent of people acquiring cars in the second quarter financed the deals with loans or leases, Experian said on Tuesday. That is up from 79.7 percent in 2008.
The shifts came as average credit scores for new car loans from all lenders fell for the fourth consecutive year.
U.S. banks made 36 percent of their car loans to subprime borrowers in the second quarter, up from 34 percent a year earlier, according to data from Experian.
On nearly 20 percent of new car loans, lenders take the additional risks of allowing borrowers six to seven years to repay.
Total U.S. outstanding auto loans rose to nearly $751 billion, up 10 percent from a year earlier.

Credit fueled expansions are never sustainable. In addition to the various bubbles created courtesy of your Federal Reserve, please add the “New Car Bubble” to the list.

Full post with charts, links and images:

http://dareconomics.wordpress.com/2013/09/04/around-the-globe-09-04-2013/

Sep 04, 2013 2:31pm EDT  --  Report as abuse
carlo151 wrote:
Not credit fueled expansion dareonomics, I hate to shine sun on your cloudy day. It is the US replacing cars that they did not do for more than 3 years during the worst of the Great Recession.

Cars are not just shiny objects you buy on credit, they are how you get to work and how you get your kids to school.

These sales numbers are predictable (were predicted by many) as the age of the US cars on the road went way up back in 2010.

Sep 05, 2013 7:51am EDT  --  Report as abuse
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