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SUV sales start to accelerate
New vehicle sales; Purchasing manager gauges; US rates

Purchasing manager surveys: The Australian Industry Group (AiGroup) Performance of Construction Index (PCI) rose from 41.3 points to 42.7 points in February. The ‘final’ CBA/IHS Markit Services Purchasing Managers’ Index (PMI) fell from 50.6 points to 49.0 points in November. A reading above 50 indicates an expansion of business activity.

New vehicle sales: In February, 79,940 new vehicles were sold, down by 8.2 per cent over the year. But SUV sales in February were actually up 5.4 per cent on the year. The rolling annual total of new vehicle sales in February was 1,045,422, down 8.1 per cent on the year after falling 8.2 per cent in the year to January.

US rate cut: The US Federal Reserve has announced an emergency rate cut, reducing the federal funds rate by 50 basis points to a range of 1.00-1.25 per cent. Federal Reserve chair Jerome Powell said “The virus and the measures that are being taken to contain it will surely weigh on economic activity” for “some time”.

The services and construction sector gauges highlight conditions in the sectors as well as providing guidance on the economy more generally. The vehicle sales data provides guidance on consumer spending as well as conditions for the Autos and Components sector of the sharemarket.

What does it all mean?

• Central banks are pulling their weight in supporting economies through the COVID-19 ‘medical emergency’. Now it is up to governments. Tax cuts or one-off cash handouts will work to support economies (perhaps the latter in stored value cards with a short expiry date). The Australian federal budget is balanced, providing a lot of scope for fiscal stimulus. But real economic recovery will only come when COVID-19 is contained.

• Luxury vehicle sales are growing and now it seems that SUVs are joining them. Low rates and higher home prices give budding vehicle buyers more purchasing power.

What do the figures show?

Purchasing manager surveys

• The Australian Industry Group (AiGroup) Performance of Construction Index (PCI) rose from 41.3 points to 42.7 points in February.

• The ‘final’ CBA/IHS Markit Services Purchasing Managers’ Index (PMI) fell from 50.6 points to 49.0 points in February. Readings above 50 indicates an expansion of business activity.

• According to the AiGroup: “Across the four construction sectors in the Australian PCI®, house building activity showed further improvement in February, expanding at its fastest pace in three months (trend). Elsewhere, conditions remained subdued. Engineering construction declined at slower rate, while the fall in commercial construction was sharper (a lower index result in the month) and the apartment building activity index remained deeply negative.”

• The CBA/IHS Markit February PMI: “While modest, the rate of decrease signalled by the index was the steepest for a year. Bushfires in some parts of Australia and the global outbreak of the coronavirus dampened activity, according to anecdotal evidence. Meanwhile, demand conditions deteriorated during February, after having strengthened at the start of the year.”

New vehicle sales

• The Federal Chamber of Automotive Industries reported: “The February 2020 market of 79,940 new vehicle sales is a decrease of 7,162 vehicle sales or -8.2 per cent on February 2019 (87,102) vehicle sales. February 2020 had the same number of selling days (24.0) as February 2019 and this resulted in a decrease of 298.4 vehicle sales per day.

• The Passenger Vehicle Market is down by 4,503 vehicle sales (-16.6 per cent) over the same month last year; the Sports Utility Market is up by 2,012 vehicle sales (5.4 per cent); the Light Commercial Market is down by 4,308 vehicle sales (-21.7 per cent); and the Heavy Commercial Vehicle Market is down by 363 vehicle sales (-8.2 per cent) versus January 2019.”

• Sales across states and territories over year to February: NSW (down 11.3 per cent); Victoria (down 8.4 per cent); Queensland (down 8.5 per cent); South Australia (down 5.2 per cent); Western Australia (down 7.3 per cent); Tasmania (down 8.3 per cent); Northern Territory (down 30.8 per cent); ACT (up 52.8 per cent).

• The biggest selling vehicle in February was the Toyota Hi-Lux (3,421) from Toyota RAV4 (3,375) and Ford Ranger (3,202).

• The rolling annual total of new vehicle sales in February was 1,045,422, down 8.1 per cent on the year after falling 8.2 per cent in the year to January. Passenger car sales fell by 17.3 per cent on the year with SUVs down 1.2 per cent and “other vehicles” down 8.5 per cent.

• In the year to February, SUVs accounted for a record 61.5 per cent of combined SUV and passenger vehicle sales.

What is the importance of the economic data?

• The Federal Chamber of Automotive Industries releases estimates of new vehicle sales on the third business day of the month. The figures highlight the strength of consumer spending as well as conditions facing auto & components companies.

• CBA and the Australian Industry Group (AiGroup) release surveys on the manufacturing, and services sectors each month with AiGroup also releasing a survey for the Construction sector. The Australian surveys are the local equivalents of similar surveys released for other countries. The surveys are useful, not just in showing how the sector is performing, but in providing some sense about where it is headed. The key ‘forward looking’ components are orders and employment.

What are the implications for interest rates and investors?

• Interest rates will remain at super low levels for a lengthy period. For home owners and mortgagees that is good news. Less positive for those living off interest income.

• Stabilisation of new vehicle sales would be positive for listed Auto & components companies.

Published by Craig James, Chief Economist, CommSec