Car & Truck Blog

Summer Weather to See Economy Bounce Back

06/06/2014 07:44 PM

The U.S. economy was battered even more than first suspected by the harsh winter, actually shrinking from January through March. The result marked the first retreat in three years, but economists are confident the downturn was temporary. According to the Commerce Department, gross domestic product contracted at an annual rate of 1% in the first quarter. That was worse than the government's initial estimate last month that GDP during the period grew by a slight 0.1%. The economy last posted a decline in the first three months of 2011 when it dropped 1.3%.


The data primarily reflected a sharp slowdown in businesses stockpiling, which subtracted 1.6 percentage points from growth, a full percentage point more than the initial estimate. Analysts noted that the weaker inventory figure would likely translate into more restocking and stronger growth in the second quarter. The trade deficit was slightly larger than previously thought. Business investment in structures fell at an annual rate of 7.5% in the first quarter, also worse than the initial estimate.

While one definition of a recession is two consecutive quarters of contraction in GDP, there is little concern the economy is about to topple into a downturn. The widespread belief among analysts is that the weakness in the first quarter was based on a variety of temporary factors that will be quickly reversed once the weather warms up.

The fact that new and used auto demand was exceptional in May – the annual new vehicle annual sales rate hit a 7-year high and strong seasonal demand lifted NADA’s used vehicle price index to a new high of 126.8 – supports this viewpoint.

In addition, U.S. employers hired at a healthy pace in May for a fourth straight month, further fueling hopes the economy will accelerate moving forward. The Labor Department stated that employers added 217,000 jobs last month. That's down from 282,000 in April, which was revised slightly lower.


While down from April’s revised figure of 282,000, the month’s performance was much better than what had occurred at the start of the year. In fact, job gains have now averaged 234,000 in the past three months, up from only 150,000 in the previous three.

Despite the gains, the unemployment rate, which is calculated from a separate survey, remained 6.3%. The job market has reached a significant milestone. Nearly five years after the Great Recession ended, the U.S. has finally regained all the jobs lost in the downturn; however, job growth hasn’t been sufficient enough to keep up with the 7% rise in the population.

Existing-home sales increased for the first time this year in April, while inventory meaningfully increased and home price growth moderated, according to the National Association of Realtors. Monthly sales gains in the West and South offset a modest decline in the Midwest while the Northeast was unchanged. Total existing-home sales, which are completed, rose 1.3% to a seasonally adjusted annual rate of 4.65 million in April from 4.59 million in March, but are 6.8% below the 4.99 million-unit level in April 2013.

Total housing inventory at the end of April jumped 16.8% to 2.29 million existing homes available for sale, which represents a 5.9-month supply at the current sales pace, up from 5.1 months in March. Unsold inventory is 6.5% higher than a year ago, when there was a 5.2-month supply. The median existing-home price for all housing types in April was $201,700, which is 5.2% above April 2013; in the first quarter the median price was 8.6% above a year earlier.

According to Freddie Mac, the national average commitment rate for a 30-year, conventional, fixed-rate mortgage was 4.34% in April, unchanged from March but up from 3.45% in April 2013.

The U.S. average retail gasoline price increased by almost two cents this week to reach $3.69 per gallon as of June 2, four cents more than the same time last year. The retail price increase is driven by higher crude oil prices, strong demand for gasoline (both domestically and for export), and lower inventory levels. However, EIA expects crude oil prices to decline this summer, in contrast to last year when oil prices rose over the same time period. Consequently, the regular gasoline retail price is expected to average only 3 cents higher this summer compared with last summer. For the year, the EIA predicts that gas prices will average $3.48 per gallon, down from $3.50 in 2013. The average diesel fuel price fell by less than a penny to $3.92 per gallon, five cents more than the same time last year.


Many economists estimate that GDP will post a sizable rebound to growth of around 3.8% in the current April-June quarter, fueled by pent-up demand. Analysts are also optimistic that growth will remain above 3% in the second half of this year, giving the economy the kind of momentum that has been lacking for much of the first five years of recovery from the country's worst recession since the 1930s.