Gardner Intelligence Blog

Rising Treasury Rate May Impact Durable Goods Spending

In July, the month-over-month rate of growth was 4.8 percent, which was the slowest rate of growth since February 2017. Also, this was the first time the growth rate was slower than 6.2 percent since February 2017. The annual rate rate of growth clearly has entered a decelerating growth phase.

Real consumer durable goods spending in July 2018 was $1,658 billion real dollars (seasonally adjusted at an annual rate). Low interest rates have helped boost durable goods spending as a percent of total consumer spending, but with the 10-year Treasury rate rising year over year, there may be further deceleration in the rate of growth in durable goods consumer spending ahead.

The dynamics of the housing market continue to be dominated by constrained supply. Much of the constraint is a result of a severe and prolonged shortage of home-building labor. As national unemployment rates have fallen to rarely seen lows, available labor has become increasing tight and as a result has choked the rate of new home construction. Meanwhile, new household formation is growing, creating increased demand for new housing. With demand far outstripping supply, the industry is poised for growth.

An examination of U.S. housing starts over the last 20 years provides stark evidence of the effect that a lack of labor is having on the market. U.S. housing starts, reported at a seasonally adjusted annual rate, were 1.173 million at the end of June 2018 according to the Census Bureau. By comparison, at the peak of the housing market boom in early 2006, homes were being constructed at nearly twice the current rate. Examining long-run construction rates does not show a significantly different picture. In the twenty-year period ending with 2001, the average home building rate was over twenty percent higher than it is today. All of this points to a severely underserved market in which a low supply of homes for sale has driven prices higher, creating a very lucrative situation for builders and their suppliers. 

Durable Goods Orders Jump 8.3 Percent in July

New orders for real durable goods in July 2018 were the second lowest of 2018. However, compared with one year ago, durable goods new orders increased 8.3 percent. July was the fourth time in six months that orders grew more than 8.0 percent, the 13th time in 14 months that orders have grown. The annual rate of change accelerated to 6.1 percent in July after decelerating in June. With real consumer durable goods spending growth flattening, it is likely that durable goods orders have hit a peak this cycle. Orders tend to lead industrial production by about three months and capital equipment consumption by 10 to 15 months.

Motor vehicle and parts orders increased 13.8 percent compared with one year ago, growing for the sixth time in seven months. July’s growth was the fastest month-over-month growth since February 2016. As a result, the annual rate of change accelerated to 2.7 percent, the fastest since June 2016.

The Gardner Business Index (GBI) ended August at 57.1, moving higher from the prior month and breaking a five-month string of flat or slowing growth coming off the index’s all-time high of 60.1, recorded in February. August’s reading puts the index back above the highest readings reached during the last two cycle peaks of 2012 and 2014. Compared to the same month one year ago, the index is up 4.1 percent. Gardner Intelligence’s review of the underlying data for the month indicates that the Index was driven higher by supplier deliveries, production and new orders. The components which lowered the index’s average-based calculation included backlogs, and exports. The exports reading for August registered just slightly below 50, indicating a very slight contraction in exports.

Supplier deliveries continues to be the fastest growing component among the six elements which form the total index, with a year-to-date average reading of 61.9. Moreover, the significant expansionary growth in new orders, production, employment and backlogs is an encouraging sign of long-term growth. Experiencing accelerating growth across multiple business indicators – as opposed to only a few growing indicators – gives greater confidence in the direction and durability of the manufacturing business environment.

Of the many economic factors that have an impact on the automotive industry in, strong employment levels and wage gains are likely two significant factors behind the auto industry’s performance in 2018. The industry has exceeded the expectations of many experts from as recently as the end of 2017. Working counter to these factors is an eroding financial picture in which banks are less willing to provide credit. Additionally, vehicle-loan default rates are closer to their peak during the great recession than their long-run levels prior to 2008. The recent net effect of these influences has been largely to offset one another, if not slightly to the benefit of the industry. In the first half of 2018, monthly light truck and SUV sales remained near the one-million unit market while car sales during the second quarter were flat, halting an otherwise downward trend.

While the exact reasons for any given firm’s future may be unique to that firm’s circumstances, the collective results of these forecast may shed light on the general direction of the industry in the coming months and years. Reviewing Wall Street’s financial projections for 23 automotive firms with cumulative first quarter revenues of 223 billion dollars reveals a somber outlook for the industry between the second quarter of 2018 and mid-2020. Overall earnings and revenues by the end of 2018 are projected to be modestly better than a year ago. However, the cumulative projections for 2019 indicate a flat to slight downward trend in revenues and contracting earnings. 

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