Webb Takes Mild Approach When Viewing Current Consumer Recovery
ATLANTA — The April Auto Industry Brief from Manheim's Tom Webb contained an overall cautionary tone about economic recovery but still included several positive trends, especially regarding consumer rebounds.
Webb indicated that flow measurements of the economy such as employment, income, retail sales and more show ongoing economic strengthening.
"Balance sheets, however, whether they be those of the household sector or the federal government, suggest a further de-leveraging and shoring up needs to be done," Webb cautioned.
"Fortunately, this is a task that can be done while the economy simultaneously moves forward, albeit at a dampened pace," he continued.
Webb mentioned that total retail sales — excluding vehicles — rose 0.6 percent in March, marking the third consecutive monthly gain. When reviewing that statistic, he placed it into perspective of the used-vehicle industry.
"After discounting for an early Easter and record tax refunds, we were not overly impressed with the level of retail spending in March, but it was nice to see that — as with used vehicles — the gains were broad based; incorporating the high-end, the low-end and everything in between," Webb explained.
"Although the stimulus provided by tax refunds is now over, retail sales should continue to increase nicely, if employment gains roll in at a six-digit rate every month. And we expect those types of employment gains will occur," he went on to highlight.
Webb noticed that consumer balance sheets look better, but he still spotted some pitfalls.
The Manheim economist pointed out that total household net worth has increased for three consecutive quarters; a trend he expects to continue throughout this year.
"The rise in the stock market has helped and the arresting of the decline in home values has been an even more important factor," Webb emphasized.
Webb also stressed that the combination of consumers increasing assets while simultaneously reducing liabilities is another positive sign that eventually could trickle through to the automotive industry.
Yet again, though, Webb shared positive trends with a dose of circumstances that he still believes are troubling.
"In 2009, consumer mortgage debt declined at a record pace," Webb reported. "But, as noted last month, this was not a case of consumers actually paying down debt, but rather a case of lenders writing it off as a result of foreclosures and bankruptcies.
"Thus, although the numbers suggest a healthier household balance sheet, the reality is lower consumer credit scores and increased lender caution," he continued. "That spells higher future borrowing costs and less willingness to lend."
Webb contends that consumers need high current income, low inflation, and low interest rates to pay down debts more effectively.
"Total personal income, which took an unprecedented hit during the Great Recession, recently moved positive on a year-over-year basis," Webb noted.
"And, again, if the expected employment gains materialize, incomes will be pushed even higher," he went on to say.
"This, coupled with low inflation and low interest rates, should enable consumers to simultaneously increase discretionary spending and improve their balance sheets," Webb added.
Webb Responds to Questions Submitted by Industry
Webb wrapped up his latest Auto Industry Brief by tackling a couple of questions suggested to him.
—Statistics show the housing industry improving, but I also note that professionals in the field are very cautious and sometimes downright bearish. Why the disconnect?
"Industry participants have every reason to be cautious," Webb replied. "Today's housing market is very difficult to read given artificial supports (such as the now-expiring home buyer credit) and the lack of transparency into inventory levels given that so many homes are in various stages of foreclosure.
"Recently, nearly two-thirds of all home sales have been to buyers at either of the two extremes — first-time buyers (due to the credit) or professional investors paying cash for distressed properties," he continued. "If the investors are short-term flippers, there has been no meaningful change in the inventory overhang.
"The craziness of the housing market is also reflected in the ratio of existing home sales to new-home sales," Webb reminded. "Historically, existing homes have outsold new homes by a factor of less than six-to-one. But in 2009 and early 2010, the ratio often widened to more than 15-to-1. Analysts consider this widening gap a measurement of distress in the market since it arose when foreclosures hit the market and builders could not compete with the falling prices for existing inventory. It is important to note that it is new-home sales, not existing home sales, that contribute the most to GDP.
—The Department of Transportation's Vehicle Miles of Travel (VMT) report showed slippage again in February. Is this significant?
"VMT in February declined 2.9 percent from a year ago. That resulted in a year-to date decline of 2.3 percent," Webb noted. "And, more important given the volatility in the series, VMT on a 12-month rolling average basis reversed its earlier bounce back from the cyclical low.
"Although VMT is always looked at by the salvage business (given its relationship to accident volumes), the series also provides other insights," Webb explained. "For example, the consumer sector's sensitivity to gasoline prices. And, when looked at over the long term, the VMT data suggest the possibility of a permanent shift in household behavior that could lead to longer ownership cycles, and thus a reduced level of underlying new and used-vehicle sales."