Auto Sales Top Out as Energy Prices Bottom Out
- February Retail Sales declined by 0.1 percent, and January was revised down to -0.4 percent.
- Ex-auto Retail Sales also dipped by 0.1 percent as categories showed mixed results.
- The Producer Price Index for Final Demand fell by 0.2 percent in February.
Today’s indicators show the impact of sub-$29/barrel oil in February, as low energy prices held producer prices in check and deflated nominal retail sales. The rebound in oil prices in March, if sustained, will have the opposite effect. Crude oil in the mid-to-upper 30s will warm up inflation indicators in March and April and will support gains in nominal retail sales. We believe that it is still possible for oil prices to test the February floor, but every day above $30 suggests that the floor for oil is firmer. Headline retail sales dipped by 0.1 percent in February, and January saw a big downward revision, from +0.2 percent to -0.4 percent. Nominal dollar motor vehicle sales for January are now shown to be down by 0.2 percent, in line with the slightly lower unit sales for the month. Two consecutive monthly declines in retail sales does focus the attention and challenges our call for ongoing moderate GDP growth this year steadied by consumer spending. However, we believe that firmer energy prices and improving real estate markets this spring will support firmer nominal retail sales. Auto sales are more nuanced. We have seen evidence that the sub-prime component of auto financing is showing higher delinquencies. Also, light truck sales may be impacted by lower oil field activity. Moreover, a big part of the increase in total light vehicle sales to a record-tying pace last year was due to a run-up in light truck sales. So the ability of auto sales to sustain the 18 million unit sales rate of last September, October and November is in question. In our March U.S. Economic Update, we show auto sales peaking this year at a 17.6 million unit rate and then easing in 2017 to a 16.5 million unit rate. These are still strong numbers but they imply that unit auto sales will tend to ease by the second half of this year.
The producer prices index for final demand eased by 0.2 percent in February as energy prices fell. The energy component of final demand goods fell by 3.4 percent for the month, the seventh decline in the last eight months. Firmer energy prices in March will break that streak. The year-over-year change in the PPI for final demand is now back up to zero after first going negative in February 2015. The PPI for final demand services showed no change in February, held down by the transportation component. The year-over-year change in the PPI for final demand less food, energy and trade is up to 0.9 percent. If we have firmer energy prices through this year then we will see the headline price indexes continue to push up. For now, the Federal Reserve remains in observation mode. We think that by mid-June the Fed will raise the fed funds rate as a pre-emptive strike against increasing inflation.
Market Reaction: Equity markets opened with losses. The 10-year Treasury yield is down to 1.95 percent. NYMEX crude oil is down to $36.40/barrel. Natural gas futures are up to $1.98/mmbtu.
For a PDF version of this Comerica Economic Alert click here: Retail Sales 03-15-16.
The quality of U.S. economic data has shifted in recent weeks from being generally a little worse than expected to being generally a little better than expected. The February payroll data showed a strong 242,000 jobs added to the U.S. economy and the continuation of a 4.9 percent unemployment rate. Global financial markets have stabilized after a choppy start to the year. Oil prices have firmed to about $37 per barrel for West Texas Intermediate crude. Inflation data was a little warmer than expected in January. We have started to dial back our probability of near-term recession for the U.S. from an uncomfortable high of about 33 percent a month ago to about 25 percent in early March. If the recent data pattern continues, we will dial it back further next month. Given the Federal Reserve’s professed data dependent policy for judging the appropriateness of further interest rate hikes, one would think that a rate hike this spring would be back on the Fed’s table. The fed funds futures market doesn’t think so. According to the CME Group’s Fedwatch tool, which translates bets on fed funds futures into implied probabilities, the odds of a fed funds rate hike at the upcoming March 15/16 FOMC meeting are a very low four percent. We agree. We expect the Fed to make no changes to its benchmark short term interest rates next week. But we are hopeful that we will get some meaningful forward guidance from the Fed that focuses financial market expectations in a reasonable direction. Right now fed watchers are adrift, waiting to see which way the prevailing winds will blow. Expectations for four interest rate hikes this year were shredded by low oil prices and unsteady China. A scenario of zero rate hikes this year is inconsistent with warmer inflation data, a sub-5 percent unemployment rate and the need to mitigate ongoing financial market distortion from low interest rates. We are hopeful that forward guidance from the Fed, issued on March 16, will start to illuminate the way forward, with one, two, or three 25 basis point rate increases this year. In our March interest rate forecast, we have incorporated two rate hikes for 2016, one in June and the other in December.
We believe that two rate hikes this year, to put the fed funds rate near 0.88 percent at the end of the year, would position the Fed appropriately for its upcoming battle against inflation. Inflation will be stoked by rising wages, rising commodity prices and tight housing markets. While overall wage growth was subdued in February due to the changing mix of jobs in the U.S. economy, wages by occupation are heading up. High demand occupations, including construction workers and healthcare workers, are leading the way. We expect oil prices to be higher at year-end than they are today. Even stable oil prices will allow inflation indicators to warm up over the course of the year. Housing will also be a key driver of inflation this year. Most major housing markets are undersupplied and will support ongoing price growth even with a modest increase in mortgage interest rates this year. Rental markets are tight too, driving up readings on housing-related inflation.
Strong job growth and improving house prices are supporting consumer spending. Nominal consumer spending was up 0.5 percent in January. Auto sales remained firm at a 17.5 million unit sales rate in February. In December, sales at full-service restaurants were up 8.8 percent from a year ago.
For a PDF version of the complete Comerica U.S. Monthly with additional commentary, tables, and charts, click here: USEconomicUpdate – 03_2016.