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For true consumer sentiment, look at auto sales

March 22, 2013: 9:52 AM ET

Vehicle sales are often seen as a more accurate measure of consumer sentiment than retail or home sales. They show that tax cuts don't seem to be hampering Americans yet.

auto-salesFORTUNE -- Despite higher taxes and worries over government spending cuts, consumers have surprisingly held on to their optimism. In February, they bought more of almost everything, from homes to groceries to clothes.

It's easy to doubt the positive data, given all the economic headwinds today. After all, the payroll tax cut ended in January, taking $1,000 annually from the paychecks of a typical U.S. family earning $50,000. And the billions of dollars in federal spending cuts that kicked in on March 1 are expected to weigh on many households.

And yet, retail and home sales have been stronger than expected this year, as consumers slowly shake off worries about the economy. Sales of previously owned homes grew to the highest level in more than three years, rising 0.8% to a seasonally adjusted annual rate of 4.98 million, the National Association of Realtors reported Thursday. Similarly, retail sales rose 1.1% in February from the previous month.

If you still don't believe how well consumers have held up, some on Wall Street point to a favorite economic indicator: Auto sales.

"They've held up well," says Larry Kantor, head of research at Barclays, adding that vehicle sales are a better signal of the country's economic health than most other indicators.

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Unlike retail and home sales, data on auto sales don't get revised later as new economic data comes in, making it a more accurate real-time indicator. Plus, auto purchases are considered big-ticket items typically made after relatively careful thought about future income and payments. The fact that sales have continued climbing suggests consumers are confident enough to take on payments.

In February, U.S. auto sales rose 3.7% to 1.2 million. The rate of sales, seasonally adjusted, translates to a full year of sales of 15.38 million sold, according to Autodata Corp. General Motors (GM) led the way with 224,314 vehicles sold, up 7% from a year earlier. Ford (F) followed with 195,822, up 9%. Toyota (TM) and Chrysler both saw sales rise 4% during the same period.

To be sure, sales have been strong over the past three years -- in part, reflecting pent-up demand as buyers look to update their old vehicles. When the U.S. auto industry reports sales next month, sales are expected to rise 8% in March from the previous month, according to J.D. Power and Associates. And for the fifth month in a row, the pace of annual sales is expected to top 15 million.

While this is a positive indicator, there's still reason to be skeptical, says Chris Christopher, economist at IHS Global Insight. Consumers are spending more on necessities such as cars but have held back on luxuries such as eating out. Last month, restaurant and drinking-establishment sales fell by 0.7%.

But that could change. February's retail figures could get revised later, reflecting consumers actually ate out more than we thought. And so for now, auto sales tell us more about the U.S. consumer.

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About This Author
Nin-Hai Tseng
Nin-Hai Tseng
Writer, Fortune

Nin-Hai Tseng covers economics and finance. Before joining Fortune, Tseng was a reporter at The Orlando Sentinel and a public affairs associate at GE. She holds an MPA from Columbia University and a BS in Journalism from the University of Florida. She lives in New York City.

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