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Tags: consumer | spending | cars | economy

Consumers Dining Out Less and Buying Fewer New Cars May Be Omens

Consumers Dining Out Less and Buying Fewer New Cars May Be Omens
(Dollar Photo Club)

Dr. Edward Yardeni By Thursday, 07 July 2016 11:47 AM Current | Bio | Archive

Perhaps it’s just the summer heat, but consumers are acting a little peakish. Data on restaurant and auto sales, two areas of strength during much of the economic recovery, came in soft recently.

Reason to worry? Let’s have a look:
(1) Empty tables. The NPD Group recently reported that visits to fast-food restaurants were flat in March, April, and May, down from a quarterly pace of 2% since September 2015, noted a 6/26 WSJ article. Likewise, visits to fast-casual restaurants declined by 1% in May after excluding results for Chipotle Mexican Grill, which has struggled with a number of non-economic-related problems. The drop marked the first decline since NPD began tracking the segment in 2004.
The WSJ attributed some of the drop to the recent decline in commodity food prices, which may be convincing consumers to shop at grocery stores and cook instead of going out for meals. “Commodities inflation has eased, allowing grocers to pass along those savings to shoppers. May marked the fifth time in the past seven months that grocery prices declined. [Meanwhile, m]any restaurant companies have said they’re raising menu prices to offset rising labor costs, including rising minimum wages in many cities. As the gap between restaurant prices and grocery store prices continues to widen — it is the largest spread since the mid-1980s, excluding the latest recession--consumers may have even less incentive to eat out,” the WSJ concluded.
Earlier this week, Darden Restaurants gave the market its latest reason to worry. The company, which has undergone a restructuring and been growing faster than the industry, recently reduced its same-store sales outlook for its May 2017 fiscal year to 1%-2%, down from 1%-3%. It also said earnings per share would come in between $3.80-$3.90 in fiscal 2017, below analysts’ expectations for EPS of $3.99, the 6/30 WSJ reported.
As one of the five members in the S&P 500 Restaurant Stock price index, Darden has helped push the index up 237.4% since the bull market started in March 2009 through Tuesday’s close, far outpacing the S&P 500’s 205.6% return over the same period.

In early 2009, the industry sported a forward P/E that was just above 12.0. Since then, the P/E has expanded to top 24.0 earlier this year before dropping back to a recent 22.9. Forward earnings are still expected to climb 12.4%, thanks to a slight increase in revenue and continued profit margin improvement.

But if traffic fails to pick up, the industry may face the double whammy of lower earnings and a lower earnings multiple.
(2) Stalling vehicles. Consumers also may have started to pull back on auto purchases, with motor vehicle sales sliding to 16.7 mu (saar) in June, down from a peak of 18.2mu during September through November of last year. Debbie noted on Tuesday that “The Q2 average of 17.2mu was the weakest in over a year. Domestic car sales sank to a four-year low of 5.0mu (saar) from a recent high of 5.9mu just eight months ago. Domestic light truck sales declined from 8.7mu (saar) to 8.2mu the past two months, though continue to fluctuate around cyclical highs.”
Also, the used car market is starting to sputter. Q1 sales continued to rise, up 7% according to the National Automobile Dealers Association, but pricing has come under pressure as the market is starting to get flooded by the many new cars sold and leased in recent years. “Wholesale pricing fell during each of those months (in Q1) versus 2015, Manheim Consulting data shows. Manheim estimates used-vehicle supply will hit records during a three-year period starting in 2016,” noted a 4/11 WSJ article.
The new supply of wholesale used vehicles — including cars coming off leases or rental lots and cars that have been repossessed — hit a low in 2012 just above 4.0 million, and Manheim sees it climbing to 7.5 million in 2018. It is increasing in part because the number of new leased cars has climbed in recent years, and they’re due to come off lease. Monthly auto leases as a share of new retail vehicle sales jumped to 32.3% in February up from just under 20% in 2012, the 3/6 WSJ wrote. It added: “About 3.1 million vehicles will come off lease this year, a 20% increase compared with 2015 … Returns will climb to 3.6 million in 2017 and 4 million in 2018.”

Add aggressive lending in the industry, and the future may be challenging. Short-seller Jim Chanos of Kynikos Associates has been out warning that trouble is brewing in the used auto sector. “[I]n some markets lenders are lending 125% on used car values ... which should scare the heck out of everybody,” he said, according to a 6/15 Business Insider report.
The stock market has been anticipating a top in new car sales since December 2013, when the S&P 500 Automobile Manufacturers stock price index peaked. It has subsequently fallen 28.2%, while the S&P 500 has gained 16.9%. Likewise, the industry’s forward P/E has shrunk from roughly 10.0 in 2013 and 2014 to a recent 5.5. Even including the recent selloff, Auto Manufacturers are among the best-performing industries since March 2009, climbing 521.5% compared to the S&P 500’s 205.6% gain. The S&P Automotive Retail industry also posted impressive returns of 464.4% over the same period.
(3) Expensive kids. We’ve long been told that consumers have been pinched by healthcare costs and the need to repay student loans. But the WSJ has added child care costs to the list of things that may be preventing consumers from buying a new or used car.
A 7/1 article noted that child care and nursery school costs have increased at a 2.9% annual average, above inflation’s 1.6% rate since mid-2009, when the recession ended. “In 41 states, the cost of sending a 4-year-old to full-time preschool exceeds 10% of a median family income — the level the federal government deems to be affordable — according to data from the left-leaning Economic Policy Institute. Full-time preschool is more expensive than average tuition at a public college in 23 states. Care for an infant costs more than average rent in 17 states,” according to the article.
(4) High rents. Rents have also been increasing faster than inflation. Apartment rents increased by 4% y/y in Q2. That was less than the 5% growth in Q4, which the 7/5 WSJ article interpreted to mean that the apartment market is cooling as supply begins to catch up with demand. That said, the vacancy rate was largely flat at 4.5%, and more than 127,000 new apartments were filled in Q2, far above the 67,550 apartments built during the quarter, the article noted.

Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research. To read more of his blogs, CLICK HERE NOW.

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Perhaps it's just the summer heat, but consumers are acting a little peakish. Data on restaurant and auto sales, two areas of strength during much of the economic recovery, came in soft recently.
consumer, spending, cars, economy
Thursday, 07 July 2016 11:47 AM
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