ECONOMY: SEQUESTRATION HURT, BUT CONSUMPTION & HOUSING HELP
Real gross domestic product (GDP) rebounded in the first quarter of 2013 to 2.4% at an annual rate from 0.4% in the fourth quarter of 2012. First quarter consumer spending was up 3.4% led by motor vehicles with a 9.1% increase, after gaining 22.5% in the fourth quarter of 2012 and 10.1% in the third. Home construction in the first quarter increased at a 12.1% annual rate, after a 17.6% gain in the fourth quarter of 2012.
A second sharp decline of 12.1% in real defense spending related to sequestration subtracted 0.6% from overall real GDP growth. Declining federal spending, if not reversed, will be a drag over the next couple of quarters keeping GDP growth in the 2% range.
If first quarter defense spending had been flat with the fourth quarter, real GDP would have increased 3%.
While federal government spending will continue to be a drag on overall economic growth unless an alternative plan is passed, the effect will probably lessen as time passes.
Strong fourth quarter spending on consumer and business goods had reduced business inventories subtracting 1.5% from GDP growth. In the first quarter, inventories were rebuilt adding 0.6% to real growth.
Housing continues to be the factor that has shifted from a drag on economic growth to a stimulus. After declining for six years in a row, real residential construction spending increased 11.9% in 2012. Pent-up demand in the housing sector is especially large and house prices are moving up at an accelerating rate. With record low mortgage rates, buyers that have been holding back in fear of price declines are flooding back into the market further driving up prices and creating an upward cycle. In addition to the direct effect of house construction on the demand for labor and materials, higher home prices add to household wealth and drive stronger consumer spending.
Another source of future spending is the state and local sector, which has been a drag on overall growth for the past three years. Most states have some sort of balanced budget requirement. During the recession state revenues declined sharply and so did spending to balance the budgets. Now that the economy has improved, revenues have been growing and many states find themselves with large surpluses that will be spent to meet balanced budget rules.
We continue to expect a reasonable compromise to the spending part of the fiscal cliff. In addition to the reduction in federal tax and spending uncertainty, the extraordinary boom in U.S. energy production will reduce the cost of producing energy intensive products in the U.S. and add to manufacturing growth. This improving U.S. outlook when combined with a recovering Europe, stronger China, and a Japan that is aggressively trying to grow, provide the ingredients for improving worldwide economic growth in the next few years.
NEW VEHICLE SALES: SALES GROWTH STRONG
New light vehicle sales picked-up to a 15.3 million annual rate in the first quarter of 2013 from 15.0 million in the fourth quarter of 2012. The first quarter sales rate of 15.3 million was the highest in five years.
The improving economy, a declining unemployment rate, cheap and easy credit conditions, attractive fuel-efficient models, a great deal of pent-up demand, and significant increases in housing and stock market wealth are resulting in higher new light vehicle sales. Continuation of these conditions is expected to produce total new light vehicle sales approaching 16 million units this year and over 16 million next year. As the raw material of the auction business, strong new vehicle sales portend positive auction volume trends going forward.
USED VEHICLE SALES: SALES GROWTH STRONG
First quarter 2013 used vehicle sales were up a strong 7.9% from first quarter 2012. In 2012, 40.5 million used units were sold, the most in five years. Continued strong new sales will provide supply to the used market leading to a 2013 increase in used retail sales in the 5% area.
AUCTION VOLUME: FIRST QUARTER VOLUME FLAT, BUT RECENT MONTHS UP
In the first quarter of 2013, an increase in dealer consignment was offset by a decline in commercial consignment (i.e., total volume minus dealer consignment) and overall auction volume declined 0.4%. While this is a move down from the increase in the fourth quarter of last year, recent monthly figures show significantly more strength with the February through April period up over 3% from 2012.
As commercial consignment volume strengthens this year, total volume gains will accelerate.
TYPE: In 2012, dealer consignment was up 6.4% compared to an 11.2% increase in 2011. Commercial consignment was down 6% in 2012 compared to -21.4% in 2011.
This year we expect to see auction volume gains in dealer consignment and a turnaround in commercial consignment producing an up year with a significant increase in total auction volume.
In the first quarter light truck auction volume increased slightly, while passenger car volume declined marginally.
AUCTION PRICE: SLIGHTLY DOWN
Average auction prices continued declining at a slow rate as strong retail sales driven trade-in supply remains high.