Consumer Appetite For Cars, Homes Bolsters U.S. Economy
Historically low interest rates are luring in auto and home buyers with higher incomes than service-sector workers hardest-hit by pandemic. Consumer Appetite For Cars, Homes Bolsters U.S. Economy
Consumers have continued spending on big-ticket items such as vehicles and homes during the coronavirus pandemic, helping support the U.S. economy as it battles a surge in cases and renewed business shutdowns.
Historically low interest rates are luring in auto and home buyers, many of whom have higher incomes and firmer job security than low-wage, service-sector workers hardest-hit during the recession, economists and industry experts say.
“Looking at the car sales, looking at the retail activity, looking at the housing data, it has been pointing to a really bigger recovery story,” said James Knightley, an economist at ING Groep NV. “If you’ve got a job and feel pretty secure and you see your equity holdings rise in value, you’re probably still feeling pretty good.”
Mr. Knightley said the big-ticket purchases could weaken if the rise in coronavirus infections and dialed-back state reopenings significantly dampen employment and consumers’ ability to spend. Incomes also could take a hit if the federal government doesn’t continue providing expanded unemployment benefits to the millions of people still out of work because of the crisis, he added.
“I’m just growing a little bit more nervous that after this good run, we could be in for a softer set of numbers,” he said.
Congress is debating whether to extend an extra $600 a week in unemployment benefits provided by the federal stimulus enacted in the spring. The aid is scheduled to expire at the end of July.
Solid spending on durable goods—typically more expensive products designed to last more than three years—differs from previous downturns, when consumers sharply pulled back on these larger purchases while continuing to spend at service-sector businesses, according to findings from a Harvard-based nonprofit research group.
Spending on long-lasting, durable goods accounts for about 7% of gross domestic product. Outlays at service-sector businesses comprise a much larger share of economic output and were the hardest-hit businesses by the pandemic. Growth in services will need to rise much more for the U.S. to achieve a full economic recovery.
In May, consumers increased their spending on services by 5.4%. A Commerce Department report due out Thursday on retail spending, which covers spending on autos but not houses, is expected to show a June increase of 5.2%, according to a Wall Street Journal survey of economists.
Major auto makers reported steep drops in second-quarter sales, as the pandemic led car plants and some dealerships to close for extended periods this spring.
Still, sales have improved steadily since bottoming out earlier in the pandemic and broadly outperformed expectations this spring and summer. Retail sales of new autos were just slightly below pre-virus forecasts in the week ended July 5, according to J.D. Power, an auto-industry research firm.
Brandon Merrill, age 32, of Orem, Utah, and his wife, wanted a vehicle with all-wheel-drive for Utah’s snowy winters, and in May they decided to buy their first new car after seeing online vehicle advertisements offering low-cost financing deals during the pandemic.
The loan for the Subaru Crosstrek has an interest rate of 0.9% for 60 months. “Having such a low interest rate for that long a time is unheard of,” Mr. Merrill said.
Sales of used vehicles have benefited too, with sales about 20% above J.D. Power’s pre-virus forecasts in the week ended July 5, mirroring past downturns when consumers turned to more affordable auto options.
Consumers also are buying pricier vehicles. Sales of new luxury vehicles were up compared with J.D. Power’s pre-virus forecast at the beginning of July.
“The folks who are able to buy an $80,000 premium vehicle every two years, they potentially may still be able to do that,” said Thomas King, who leads the data and analytics division at J.D. Power.
Higher-income consumers tend to work in jobs that can more easily be done remotely, providing them with greater job security and confidence to make large purchases during the recession.
Lower-income Americans have suffered the brunt of coronavirus job losses in service sectors like leisure and hospitality. That means they have less income to spend on cars and don’t tend to qualify for the incentive offers and financing deals that people with higher incomes tend to, Mr. King said.
Purchases of high-end homes have done relatively well in the U.S. In May, the luxury market outpaced the rest of the housing market in price growth and views, according to Realtor.com.
“Stay-at-home orders and social distancing have put a new value on the extra space,” said Danielle Hale, Realtor.com’s chief economist. “We’re seeing this in the luxury market as well, which could mean there is renewed interest from high-end buyers to find a second-home that is within driving distance from their primary residence.”
Home purchases can help propel the broader economy, as they spur spending on home furnishings, building supplies and garden equipment.
New-home sales surged 16.6% in May to an annualized rate of 676,000 units, according to the Commerce Department, just below levels seen before the coronavirus struck the U.S. economy. New homes account for a small slice of the U.S. housing market.
Existing-home sales, which account for most purchases, fell in the same month, but economists and brokerages said they expected purchases picked up in June.
Real-estate experts and economists point to a rise in mortgage applications as a sign the broader housing market, which includes previously owned homes, is seeing heightened activity.
“It’s been an insane real-estate market where people are just itching to buy homes, and there’s not enough of them,” said Tony Orlando, a Detroit-based Redfin Corp. agent.
He said homes across price points in the Detroit area have seen strong demand, particularly more affordable ones. Mr. Orlando was recently waiting for his client to arrive at a viewing for a $350,000 house in Troy, Mich., that was just put on the market. During a 30-minute window, he noted about 15 groups of people filtered in and out of the home.
“Buyer demand is out of control,” Mr. Orlando said. “There’s not enough houses.”
U.S. Consumer Spending Grows For Sixth Straight Month, Albeit Slower
Consumer spending rose 0.5% in October while household income fell sharply.
The U.S. economy is recovering at a sturdy but slowing pace heading into the holidays.
Consumers stepped up their spending by a brisk 0.5% in October, down from a gain of 1.2% the month before, the Commerce Department said Wednesday. Factory orders for long-lasting goods rose a solid 1.3%, in part because businesses shelled out more for long-term projects, the agency said. Sales of newly built homes slipped last month but remained near the highest level in almost 14 years.
All pointed to an economy continuing to regain ground lost during the spring coronavirus lockdowns and other restrictions, even if the expansion has slowed since the third quarter’s rapid rebound.
The good news was tempered by reports Wednesday of rising layoffs, falling income and declining consumer confidence.
New applications for jobless benefits, a proxy for layoffs, rose to 778,000 last week, the second straight weekly increase after declining since the summer, the Labor Department said. Household income fell 0.7% last month, as temporary federal aid programs for unemployed workers faded, the Commerce Department said. A measure of consumer confidence released Wednesday showed that Americans have become more worried about the months ahead, according to a University of Michigan survey.
Those shifts could cause many households to rein in spending this winter, which would impede the recovery. Consumer spending accounts for more than two-thirds of economic activity in the U.S.
“There’s much more momentum than we had presumed,” said Pooja Sriram, U.S. economist at Barclays. “The real question we’ve been asking ourselves is, is this momentum sustainable?”
She and other economists have doubts. A new wave of Covid-19 infections over the past month led some cities and states to impose new restrictions, such as evening curfews, that could reduce households’ ability to spend. The Jan. 1 expiration of expanded unemployment benefits will likely lead to a drop in income for many jobless workers.
Gross domestic product, the broadest measure of goods and services, grew at a record annual rate of 33.1% in July through September, or 7.4% from the prior quarter, the Commerce Department said in its second reading. But that still left output 3.5% below its level at the end of last year. U.S. company earnings picked up strongly last quarter, the report showed.
Economists believe growth will slow in the fourth quarter. Forecasting firm IHS Markit projects output to expand at a 5.7% annual rate in October through December.
Consumer spending has been strong enough to help fuel economic growth since the spring, when the coronavirus pandemic forced millions of businesses, schools and government agencies across the U.S. to shut down or limit their activities.
General Electric Co. told employees this month it plans to cut more jobs in its jet-engine business because of the pandemic’s impact on commercial air travel, even with the promise of a vaccine on the horizon. Other big companies announced job cuts this month as the pandemic persists.
Before last week, jobless claims hadn’t risen for two consecutive weeks since July. They are down sharply from a peak of nearly seven million in late March. But they remain higher than in any previous recession—the pre-pandemic peak was 695,000 in 1982—for records tracing back to 1967.
Unemployment filings can be more volatile around the holidays, due to workweek changes that can cause seasonal-adjustment anomalies. The four-week moving average, which smooths out weekly variation, increased by 5,000 to 748,500, the Labor Department said.
Increases in jobless claims were widespread across states. Some of the states with sharp increases in coronavirus cases, including Minnesota, Ohio and Illinois, saw a large rise in claims last week.
Job growth was strong in October, though it has slowed every month since June. Unemployment fell a full percentage point to 6.9%, but remains high at nearly double the February 3.5% rate.
Despite last month’s drop, household income was 5% above its March level. Many households have built up savings, in part because they haven’t been able to spend on many services shut down by the pandemic. While Americans are spending less on airfares, restaurants and concerts, they have increased spending on cars, appliances and building materials for home projects.
The economy’s path ahead depends partly on the fate of couples like Jennifer and Ben Milano, parents of twin girls in Long Island, N.Y. Mr. Milano lost his job at a travel company in March.
He recently underwent back surgery and is undergoing physical therapy. He and his wife also repaired a pipe in their bathroom. They could afford to do so because they received federal stimulus checks under the Cares Act and Mrs. Milano, an ear doctor who had been furloughed in the spring, was called back to work this summer.
But the stimulus money is running out. Since losing his job, Mr. Milano has been receiving unemployment benefits, which are set to expire in March. In January, they will have to resume payments on their mortgage as a reprieve granted by their bank expires.
They are looking to cut back again.
“Do I go into my 401(k) and start pulling out of that?” he said. “I’m not so worried for January. I’m worried about March, if this continues the way it is.”