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Beyond jobs, car sales to give insight on consumer health

´╗┐Forget the jobs report. The most interesting bit of U.S. economic data next week is Monday's auto sales release, which will offer a measure of the middle-class consumer and a sector of the stock market that has had a rough ride so far in 2017. Economists are looking for another solid month of sales north of 17 million new vehicles at a seasonally adjusted annualized rate for March but nothing like the 18.4 million hit in December, the highest since August 2005. The number would however point to a third consecutive decline on a 12-month rolling basis. With sales peaking and prices set to drop, the secondary effects are expected to be felt beyond car makers and dealers. Lease and used-vehicle prices are expected to fall sharply this year, according to Ally Financial, which cited its estimate earlier this month when it lowered its 2017 profit forecast. Morgan Stanley said in a Friday note used-car prices could tumble between 25 and 50 percent by 2021, with both new cars and off-lease supply hitting record highs this year."There's an avalanche of used cars ready to hit the market place," said Brad Lamensdorf, co-manager of the AdvisorShares Ranger Equity Bear ETF. According to Lamensdorf, the need to move inventory has translated into reckless lending. "It's not fraudulent, but people are up to their neck in debt," he said. "Default rates are going to be much more significant."The stock market is taking note. The S&P 1500 automotive retail index . SPCOMAUTR is down 6.5 percent year to date, with Advance Auto Parts (AAP. N), AutoNation (AN. N) and Sonic Automotive (SAH. N) down double digits in 2017.

Carmax (KMX. N), which reports earnings on Thursday, is seen as a bellwether in the used-car industry. Its stock is down 8 percent so far this year. Another red flag from the sales floor: the average number of days a new vehicle sat before being retailed hit 70 in the first 19 days of March according to a note from J. D. Power and LMC Automotive. That is the highest since July 2009. With the market tightening, industry insiders expect more price cuts."The competitiveness of the industry continues to be evident in ever-rising incentive levels," said Deirdre Borrego, senior vice president of automotive data and analytics at J. D. Power in a note.

"Incentives will reach a new high for the month of March."At the same time, competition to finance loans is likely to further increase credit risk for auto lenders, Moody's Investors Service said this week. Ally Financial stock (ALLY. N) fell 9.6 percent in March. Even the challenge to General Motors (GM. N) this week from a hedge fund, aimed at boosting a lagging stock price, reflects the concern that the industry is hoarding cash without significant prospects for growth.

NO RECESSION, BUT ... The market for autos, however important, is not as big a part of the U.S. economy as the housing market was when its collapse in 2008 triggered the sharpest recession since the Great Depression. However, and taking into account all the moving parts of the industry's supply chain, a halt in the auto sector could strain an economy that is already eight years into a recovery cycle. And it would hurt blue-collar workers the most. If a jump in auto loan defaults materializes, there is also the risk that consumers will shut their wallets and hurt economic growth, two-thirds of which depends on consumer spending."When you look at how consumers are spending there is a question mark if the less-than-prime buyer is suddenly having issues," said Ian Winer, head of equities at Wedbush Securities in Los Angeles."The spillover effect is: what other industries are also using rather aggressive financing in order to get revenue? Jewelry and mattresses jump out at me as two big examples."Tempur Sealy shares

U.S. trade deficit falls from two year high on weak imports

´╗┐The U.S. trade deficit fell from a near two year high in February as slowing domestic demand weighed on imports and stronger global growth boosted exports of American goods. The politically sensitive trade gap with China narrowed sharply by 26.6 percent from January to $23 billion ahead of a summit between President Donald Trump and China's Xi Jinping this week, although seasonal factors were likely behind the dramatic drop, economists said. The Commerce Department said on Tuesday the trade deficit declined 9.6 percent to $43.6 billion, also as exports increased to their highest level in more than two years, after rising to a near two-year high of $48.2 billion in January."The U. S has its work cut out for it if it is going to try to alter the pattern of trade that has developed between China and U.S. companies over the last 10 to 20 years," said Chris Rupkey, chief economist at MUFG Union Bank in New York. Economists had forecast the overall trade gap falling to $44.8 billion in February. When adjusted for inflation, the deficit decreased to $59.7 billion, with exports of goods the highest on record as an earlier drag from a strong dollar fades. The real trade deficit was $65.1 billion in January. Despite the decline in the real trade deficit, trade will probably be either neutral or impose a small drag on gross domestic product in the first quarter after subtracting 1.82 percentage points from fourth-quarter growth.

In addition to trade, weak consumer spending also likely constrained the economy in the first three months of the year. The Atlanta Federal Reserve is forecasting GDP rising at a 1.2 percent rate in the first quarter, a deceleration from the 2.1 percent pace logged in the October-December period. The dollar were little changed against a basket of currencies, as were stocks on Wall Street. Treasuries were trading lower.

ELIMINATING THE TRADE IMBALANCE Trump's administration has ordered a study into the causes of U.S. trade deficits and a clamp-down on import duty evasion. He believes that large deficits are slowing American growth and employment. Trump also wants to renegotiate the North American Free Trade Agreement (NAFTA). A second report from the Commerce Department on Tuesday showed new orders for U.S.-made goods increased for a third straight month in February on growing demand for machinery and electrical equipment, suggesting the manufacturing-led recovery was broadening.

"The strength in manufacturing activity and overall job creation will result in the Federal Reserve looking through what looks likely to be a soft quarterly reading on real GDP growth," said John Ryding, chief economist at RDQ Economics in New York. In February, imports of goods and services fell 1.8 percent to $236.4 billion amid declines in imports of cell phones and motor vehicles. Imports had risen in recent months, in part on higher oil prices. Some of the decline in imports in February likely reflects slower consumer spending. Data on Friday showed real consumer spending decreased for a second straight month in February, the first back-to-back monthly decline since April 2009. Still, food imports hit a record high in February and imports of capital goods were the highest in nearly two years. Exports of goods and services increased 0.2 percent to $192.9 billion, the highest level since December 2014 as shipments of automobiles and parts hit their highest level since July 2014. Exports of industrial supplies and materials were the highest since December 2015. The nation exported more goods to Germany, the United Kingdom, Canada, Japan and Italy. However, exports to China fell 2.7 percent and Mexico saw a 7.1 percent drop in goods sourced from the United States.