What's Next For Auto Incentives?
Will GM Pay You To Take A Car?
Paul Kasriel
Wow! We know car sales are punk, as evidenced by their 1.9% decline in the August retail sales report, but is there no limit to what Detroit will do to move the metal? On Monday's premiere show of her 19th season, Oprah gave each of the 276 members in her studio audience a brand-new Pontiac G-6 car, compliments of GM. What's GM trying to do - make it up on volume? Econ 101 tells us that a company will continue to produce in the short run so long as its sales revenues cover its variable costs. But certainly, there is some extra steel and plastic that go into the production of a G-6. What's next? Will GM start paying you to unburden them of inventory? I know that the Oprah show give-away was a marketing ploy, but it makes you wonder how desperate Detroit might get to move the metal.
Retail Sales in Q3 Show A Significant Soft Trend
Retail sales declined 0.3% in August, after an upwardly revised 0.8% increase in July (previously estimated as a 0.7% gain). The details of July-August retail sales numbers indicate a marked slowing in consumer purchases in the first two months of the third quarter. Total retail sales in the July-August period increased at an annual rate of 2.6% vs. a 6.6% increase in the second quarter. The same conclusion is derived even from the various sub-components of retail sales. For example, excluding autos, gasoline, and building materials, retail sales rose at an annual rate of 4.0% compared with a 3.7% increase in the second quarter. Retail sales excluding autos increased 0.2%, following a 0.3% advance in the prior month. During the July-August period, retail sales excluding autos moved up only 3.6% vs. a 7.9% annualized rate in the second quarter.
Unit autos sales in the July-August period rose at an average pace of 15.9 million units vs. a 15.6 million pace in the second quarter, which should make a small positive contribution to consumer spending in the third quarter. Auto sales data in the retail sales report are not used in the computation of GDP. In August, with the exception of building materials (+0.4%) and gasoline (+0.3%), sales of apparel (-1.4%), furniture (-0.9%), and general merchandise (-0.4%) decline in August.
Current Account Deficit Largest On Record
The U.S. current account deficit increased to $166.2 billion in the second quarter from $147.2 billion in the first quarter. The deficit on goods and services was $150.3 billion, up from $138.6 billion in the first quarter. In the financial account, foreign owned assets in the U.S. increased $256.2 billion in the second quarter, representing a smaller increase vs. the $445.3 billion gain in the first quarter. There was also a smaller increase in foreign official assets in the U.S. during the second quarter -- $73.9 billion vs. $127.9 billion in the first quarter.
It is also a new record when measured as a percentage of nominal GDP (see chart below). The current deficit balance as a percentage of nominal GDP was 5.7% in the second quarter vs. 5.13% in the first quarter.
A measure of this magnitude is typically identified as a danger zone for a nation's currency. Not surprisingly, the dollar has recorded a significant decline after the late-2000 peak. The dollar's swoon is somewhat more contained now compared with the sharp decline in 2003. On a year-to-year basis, the dollar has dropped 7.3% during the week ended September 10.
The current account deficit is the mirror image of how much the U.S. is borrowing from foreigners. Based on the current account deficit in the second quarter, foreigners are willing lenders of about $1.8 billion per day. If financial markets doubt the return on their investment a run on the dollar is a possible scenario.
September 14, 2004
Paul L. Kasriel, Director of Economic Research (plk1@ntrs.com)
The information herein is based on sources which The Northern Trust Company believes to be reliable, but we cannot warrant its accuracy or completeness. Such information is subject to change and is not intended to influence your investment decisions.
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