May sales of autos and trucks came in below expectations (13.7M vs. 14.5M). That makes a total of five series released today—all traditionally volatile on a month-to-month basis—that have been weaker-than-expected (payrolls, unemployment, manufacturing, construction, and auto sales). It's a "perfect storm" of weak news coming on a Friday, amidst escalating tensions in the Eurozone, and so it's no wonder the market sank.
But back to autos. In the past three years, auto sales have risen at an annualized rate of no less 11.7%, even counting May's 4.5% decline from April. That's weak? On the contrary, we have just seen two years of fabulous, double-digit growth in a sector of the economy that was fighting for its life just threee years ago. No one would have dared predict back then that sales would be this strong today.
In any event, the larger trend (see chart above) is much more important than the month-to-month fluctuations. It's very important to remember that the reported number is a seasonally adjusted annualized sales rate, so a rather small change in actual monthly sales, or a slight error in the seasonal adjustment factors, can result in big swings in the reported number. If you were to extrapolate each monthly swing in this series into the future and trade on that basis, you would be whipsawed to death inside of one year.
Going into today's releases, this market was on tenterhooks, fearful that the economy was on the verge of sinking into another recession. It could be mere coincidence that five series came out on the weak side of expectations, or it could be that the economy has lost some forward momentum. It's also important to reflect on the approaching fiscal cliff, which as Larry Kudlow notes is contributing greatly to the market's unease:
If all the Bush tax rates go up, incentives will go down and liquidity will leave the system. You can’t pick up a newspaper these days and not find a story about how the fiscal cliff is elevating uncertainty and slowing U.S. growth. House Speaker John Boehner asked Obama for help in extending the Bush tax cuts this summer. But Obama said no. Instead, he wants to raise marginal tax rates on successful upper-income earners, capital gains, dividends, estates, and many successful corporations.
Where’s the corporate tax reform that would lower rates and broaden the base and end the double-taxation of the overseas profits of American companies? A business tax cut would help enormously, but it’s nowhere in sight. Obama is too busy trashing Bain Capital profits and Romney’s business career, both of which, by the way, have recently been praised by former president Bill Clinton. (It was Clinton, you might recall, who lowered investment taxes and presided over an economic boom.)
The larger trends, however, remain intact: jobs are growing, incomes are rising, sales are rising, layoffs are declining, manufacturing is doing pretty well, and residential construction has turned up after 5 years of decline. The economy doesn't change on a dime, and not even 5 disappointing reports in one day can disprove that.
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