Monday Morning Coffee: NAFTA Treaty is on the Road to Renegotiation

By | February 6, 2017

Welcome to FTR’s “Monday Morning Coffee “ blog. The following article is designed to keep busy executives up to date with the latest economic data releases. Released every Monday, this blog promises to keep our clientele updated with the latest weekly economic news and developments, highlighting its impact on the transportation, freight, and equipment markets. Hopefully, this will be an informative addition to the fine body of work associated with FTR.

Overview

Coffee and Economic Review

Treasuries rose with U.S. stocks, while the dollar slipped, as the latest jobs report showed weak ending wage growth. This coincided as hiring increased, giving the Fed room to keep rates low. European stocks rose 0.7% on Friday and the MCSI Emerging Market index rose 0.4%, erasing a weekly loss. The Bloomberg dollar index was little changed on Friday and is headed its sixth weekly slide, the longest slump since August 2010. The S&P added 0.1% on Friday, on the week. Equities got a lift as the Labor Department reported the biggest increase in employment in four months. However, average hourly earnings slowed to a 2.5% annual increase, the weakest since August.

Job growth was strong in January at 227,000, but the unemployment rate increased to 4.8%, mainly because the participation rate rose to 62.9%. This suggests that the nation is still not at full-employment. Average hourly earnings rose only 0.1%, slightly concerning because a number of states raised the minimum wage. The ISM manufacturing index was positive, rising from 54.5 to 56, while the non-manufacturing index was steady, falling from 56.6 to 56.5.  January auto sales fell from 18.4 million to 17.6 million. Real consumer spending rose 0.3% in December and the core PCE deflator rose only 0.1%.

After a busy week of economic data, the U.S. calendar is fairly light. We look for the nominal trade deficit to have narrowed modestly in December and import process probably increased only 0.1%. With little economic data being released, attention will be on fiscal policy. The timing and scope of any infrastructure and tax relief policies remain uncertain. Also, uncertain is trade. The NAFTA treaty is already on the road to renegotiation, but trade with Mexico is under a potential threat under Mr. Trump. China is certainly going to be the next target. The biggest downside risk to the U.S. economy would be the start of global trade wars. Although both China and Mexico have a lot to lose, but so does the U.S. and the potential consequences are large, in scope. Also, the fate of traditional allies, ranging from Europe to Canada and Japan are uncertain under Mr. Trump. For the near-term, the outlook for the economy looks fairly bright, however, the outlook for the middle-term and long-term are darker, if trade wars start to erupt.

Next week, we look at the trade deficit on Tuesday and import prices on Friday. A number of Fed officials are scheduled to speak. A March rise in rates is still unlikely, but June remains a probably target.

Latest Data

The U.S. Economy:

Growth in personal income increased 0.3% in December, up from a 0.1% advance in November. The December report puts 2016 in the books, with personal income rising 3.5%, less than the annual growth of 4.4% gain in 2015. The growth in spending helped consumption, where personal spending also grew 0.3% in December, up from 0.2% in November. The growth in spending in December was helped by utility spending, where more normal cold temperatures prevailed after several warm months and auto sales, which were strong in December. Spending rose by 2.8% in December, the same as two out of the last three months. Prices increased in December, with the PCE deflator rising 0.2%, following a 0.1% advance in November. Food prices fell for the second consecutive month, while energy prices rose 1.7%.  Excluding food and energy, the PCE deflator rose 0.1% in December. The PCE deflator was up 1.6% y/y and the core deflator rose 1.7%. The U.S. now leads most developed economies in inflation, but the rate is not enough to change the Fed’s outlook about monetary policy. The rate is enough that the Fed will move once in the first half of the year and data will provide a guide for the second half.

Construction spending declined 0.2% in December, following a 0.9% increase in November. Public construction spending drove the decrease, falling 1.7%. Private construction spending rose 0.2%, up 6.3% from a year earlier. Total construction was up 4.2% above its year earlier level.  Private residential construction rose 0.5% in December, up 3.7% for the year. Private non-residential construction was unchanged in December. After reaching a ten-year high in November, construction spending pulled back. The weakness in the public sector was not quite offset by the strength in the public sector. Construction does remain elevated in 2017, on strength in private residential construction. Public construction finished the year 1.8% below 2015’s level. There could be more strength there is a stimulus package is passed by Congress.  If not, the outlook for the public sector will be more subdued.

Manufacturing was off to a good start for the year. The ISM manufacturing index rose from a revised 54.5 in December to 56.0 in January. The index is comfortably above its fourth quarter average of 53.3 and suggests that manufacturing is expanding this quarter. Details were decent. New orders increased from 60.3 to 60.4. 12 industries reported growth in new orders, including, plastics/rubber, apparel, leather, and miscellaneous manufacturing. Production rose from 59.4 to 61.4. Inventories rose from 47 to 48.5. Backlogs improved from 49 to 49.5. Employment stood out rising from 52.8 to 56.1. Trade details were less supportive, falling from 56 to 54.5. Imports slipped from 50.5 to 50. We look for manufacturing to improve, supported by inventory build and decent domestic demand. There are risks coming from the high dollar and uncertainty about trade policies under the Trump administration. The odds of additional economic and political tensions with trading partners are increasing, adding downside risks for the economy. A proposed 20% tariff with Mexico would wreck-havoc on the supply and manufacturing chains. The additional costs would be paid for by the consumer and be inflationary.  It would likely send Mexico into recession. The outlook for manufacturing is looking better, but there are dark clouds emanating from Washington concerning trade.

Vehicle sales fell from a robust 18.42 million units in December to a still respectable 17.6 million units pace in January. Car sales fell to 6.58 million from 7.26 million, an 11.6% drop from January 2016. Light truck sales fell from 11.17 million to 11.03 million. Sales are projected to lighten up as the year progresses. Sales will still hold up because of decent employment and wage increases, but the market will adjust to a long-term trend of around 17 million vehicles, not bad, but weaker than recent months.

The year started off strong, as payroll growth accelerated to 227,000 in January, following a 157,00 addition in December. The private sector added 237,000.  Weather had an influence on the January numbers. The relatively warm weather allowed construction to jump by 36,000. Leisure/hospitality added 34,000. The drag from the goods producing industries is abating. Manufacturing and mining together contributed 9,000 jobs and fourth quarter losses were revised away. The unemployment rate rose to 4.8%, as the labor participation rate rose from 62.7% to 62.9%. The only weak component of the report was average hourly earnings, which only rose 0.1%. As a result, year-over-year growth fell back to 2.5% from 2.8% in December. The increase in the labor participation rate is good news as it suggests the labor market still has slack. This will allow the Fed to keep on a slow track raising rates.

Factory orders rose 1.3% in December, slightly better than expected. The topline number was weakened by defense orders. Excluding defense, orders rose 2.4%. Core capital goods orders advanced 1%, the third consecutive monthly increase. Orders are now up 2.9% on a year ago basis. Core capital goods shipments advanced 1%, but remain down 2.4% from a year earlier.  Inventories added 0.1%. The report suggests that factory activity is gaining ground, although a large drop in defense orders and softer transportation weakened the December report. Although January factory employment gains weren’t impressive, the forward looking picture is looking more upbeat. The improvement in capital goods orders and final sales of machinery and equipment are important for productivity. There are headwinds from the high value of the dollar and trade policies are likely to have a negative impact under the new administration in the medium to longer term. The near term does look bright.

The nonmanufacturing segment of the U.S. economy remains in good shape. The ISM nonmanufacturing index came in at 56.5 in January, down from the 56.6 reading in December. The index has remained stable over the past few months. Details were mixed. The business activity index came in at 60.3 in January, compared to 60.9 in December. New orders fell to still elevated 58.6, down from 60.7 in December. The employment index expanded from 52.7 to 54.7. Anecdotes were mixed, expressing both optimism and uncertainty concerning policies of the new Trump administration. Mining executives expressed optimism, but healthcare were uncertain about how the new administration’s policies would affect their industry. Rising wages will be a big support for the consumer sector over the next few months.

International:

Euro-area confidence hit a six-year high in January. An index of executive and consumer confidence rose to 108.2 in January from 107.8 in December, according to the European Commission. This was the highest reading since March 2011. Euro-area inflation hit a four-year high in January, following an increase in energy prices. Inflation in the 19-country bloc jumped to 1.8% in January from 1.1% in December. Eurozone GDP expanded by 0.5% in the fourth quarter, up from 0.4% in the third quarter. The spike in inflation takes the rate near to the ECB’s target of 2.0%.  This may cause the ECB to scale back its bond-buying program. Core inflation was unchanged at 0.9% in January.

The euro-area economy looks a little brighter, with rising orders bolstering job creation. The composite PMI remained at 54.4 in January, the highest since 2011, with growth in manufacturing outpacing services for the eighth month. The survey shows that confidence is improving in the 19-nation economy.  Faster growth in mew business and an upturn in confidence about the year ahead is the highest since before the debt crisis. Employment growth is accelerating and that bodes well for consumer spending in coming months.

Important Data Releases This Week

December international trade will be released on Tuesday, February 7 at 8:30 AM EST. We expect the trade deficit to have narrowed from $45.2 in December to $44.4 in January. The advance goods report showed exports advanced 3% and imports rose 1.8%. The service surplus probably widened slightly in December.

January import prices will be released on Friday, February 10 at 8:30 AM EDT. We expect import prices to rise 0.1%, following the 0.4% gain in December. Global oil prices did rise in January, but the rise in the dollar will keep downward pressure on nonoil imports.


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About Steve Graham

Steve is one of the premier analysts in the transportation equipment industry. On a monthly basis Steve tracks and analyzes in detail the trailer and heavy-duty truck industry. Aside from following these two sectors he is also instrumental in helping our customers analyze the economy and its impact on transportation and transportation equipment.