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Auto Sales Drive Rise in Consumer Spending

August 31, 2010

Fueled by a 1.6 percent increase in vehicle sales in July, the segment that accounts for up to 70 percent of the nation’s economic activity jumped out to its fastest pace in four months.

Consumer spending rose 0.4 percent in July, the Commerce Department reported yesterday. Sales excluding the automotive segment edged up 0.2 percent.

“Today’s increase in retail sales shows that overall economic activity is still growing, although at a more modest pace than we would like,” said Gary Locke, Commerce secretary.

July saw new-vehicle sales cruise to an 11.55 million unit annual pace, the third highest level this year. However, automotive analysts and dealers quoted in the Washington Post questioned whether auto sales are “on an upward arc or whether they are just treading water.”

Experts quoted in the story linked the rise in auto sales to an increase in incentive spending and fleet sales, a sentiment backed by an August report issued by the NADA Used Car Guide. However, an analyst for the guide said the jump in fleet sales isn’t necessarily a bad thing for the still-recovering auto industry.

Jonathan Banks, an analyst for the NADA Used Car Guide, wrote in his August report that automakers have shifted from the push-based sale strategy to brand building. He pointed to fleet sales as an example.

Once viewed as a means to dump products in an overcapacity environment, fleet sales are now viewed as key profit centers for manufacturers, Banks wrote. This shift in strategy could push a higher supply of one-year-old vehicles into the used market next year, which has been hampered by supply problems.

“The automotive industry has retooled itself to adapt and thrive in an environment of less than 12 million new-vehicles sales,” wrote Banks. “OEMs have significantly cut their products to better align supply with demand, while the dealer focus has shifted to used-vehicle sales and service revenue to maintain profitability.”

Banks, however, noted that July trends did reveal that consumers are becoming more frugal, as many continue to shy away from high-dollar vehicles in the still-weak economy.

With the rise in spending, the personal savings rate slowed to 5.9 percent of after-tax income, down from a high in June of 6.2 percent. However, even with the decline in July, the saving rate is nearly three times higher than it was before the recession began in December 2007.

The fear now is whether the more-frugal consumer will hamper economic growth and the economy’s recovery.

Economic growth in July slowed to 1.6 percent in the April-to-June quarter. That was revised down from the initial estimate of 2.4 percent. Most private-sector analysts, however, had expected a revision to 1.4 percent.

“The downward revision to GDP growth stemmed primarily from unusual and surprisingly large swings in inventories and net exports late in the quarter,” said Under Secretary Rebecca Blank. “Although the economy has slowed somewhat, American consumers increased their spending for a fourth consecutive quarter with disposable personal income increasing at more than a 4 percent annual rate. Business investment also grew at a solid pace. Investment in equipment and software specifically grew at more than a 20 percent annual rate for the second straight quarter.”

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