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.
The dollar retreated on Friday after two days of gains while global stocks pulled further back from all-time highs as investors unwound positions on growing expectations the Federal Reserve will raise interest rates later this month. In Europe, economic data continues to point to a broadening recovery as activity in the euro-zone businesses grew at the fastest pace in nearly six years and job creation at the fastest pace in a decade. Euro-area inflation accelerated to the fastest pace since January 2013, providing fresh arguments for an exit from the ECB’s monetary stimulus program.
In South Korea, firms are being squeezed in China, in suspected retaliation for South Korea’s deployment of a U.S. missile defense system. In China, state media and grassroots political groups have led angry calls to boycott popular Korean products, highlighting the tools China can deploy back at the corporate interests of trade partners it disagrees with. The actions reflect back on the new confrontational stance taken by new U.S. President Donald Trump. What happens to Korean firms is a pretty good playbook to what could happen to U.S. firms. Rather than a dramatic trade war, a program of regulatory harassment of companies, a lower level of political intensity for China. Some companies are feeling pressure to cut ties with South Korea and Korean media reported that China had ordered tour operators to stop selling trips to the country.
U.S. stocks advanced for the sixth consecutive month as economic data was solid. The strong signals overcome statements by Fed Chair Janet Yellen that more than doubled the probability of a rate hike in March. The S&P rose 0.7% in five days to end the week at 2,383.12. A majority of the gain registered Wednesday as investors cheered the softer rhetoric by Donald Trump, but were somewhat disappointed by the lack of details. Favorable economic data helped buoy confidence among investors.
Consumer and business surveys continue to strengthen. The IMS manufacturing index rose from 56 in January to 57.7 in February. The Conference Board’s index rose from 111.6 in January to 114.8 in February. The ISM non-manufacturing index rose to 57.6 in February from 56.5 in January. Car sales edged down 0.2% to 17.59 million units, a slightly better reading than expected for the month. Confidence surveys are strong but hard data for the first quarter are coming in a little weaker than expected. Real spending fell 0.3% in January, the first monthly decline since August. Some of this was weather-related. Excluding that factor, spending was unchanged, still soft. The Atlanta Fed’s GDP tracker shows the first quarter is running at a 1.8% rate for the first quarter, reduced from 2.5% because of the lower spending and inventory releases. The economy is solid, but not robust early in the year.
Fed Chair Janet Yellen’s comments Friday signaled a rate hike is coming. It is remarkable that Yellen tipped the FMOC’s hand before a meeting. She must feel comfortable that the data and markets support a move. The market moved the probability of a March move to 96%. We still think the Fed will raise rates three times this year, but a fourth rate move is now more probable.
This week, we get a look at factory orders, international trade, productivity and employment. The employment report is important, but would have to be a disaster to stop the Fed from a March increase. We look for a solid report at 200,000 and the unemployment rate will likely fall from 4.8% to 4.7%. Earnings will hold up.
The U.S. Economy:
The pending home index dropped 2.4% in January, erasing all of December’s gains and falling to the lowest level since January 2016. The index equaled 106.4 in January, is now only 0.4% ahead of its year-ago level. The recovery in housing demand bottomed out in mid-2010 and the recovery has been uneven. The recent rise in mortgage rates likely slowed activity at the end of last year. Fundamentals are still favorable for sales, even if rates continue to increase, which is likely. Gains in employment and wages are a support for activity. We still expect sales to slowly increase through 2017 and well into 2018.
New orders for durable goods rose 1.8% in January, driven by a large jump in aircraft orders. Excluding transportation, orders fell 0.2%. Capital goods orders were up 4.3%, with nondefense advancing 3.6%. The most important series, core capital goods orders lost 0.4%, the first decline since September. Total shipments fell 0.1%, but core capital goods shipments lost 0.6%. Aircraft orders were up 69.9%. The report shows that although manufacturing is strengthening, there are setbacks. Most data on manufacturing has been positive the last few months. The latest regional surveys have been positive. There are some headwinds, the dollar remains strong and post-election uncertainty on trade policy could make factories adapt a wait-and-see policy for a few more months.
The advance goods trade report showed a significant widening of the trade deficit, rising to $69.2 billion in January, up from $64.4 billion in December. Nominal exports slipped 0.3%, with weakness in capital goods and other goods. Imports rose 2.9%, with increases fairly broad-based. The early Lunar New Year likely had an impact on the trade deficit, boosting imports. On a year-ago basis, exports are up 8.3% and imports are up 8.9%. The timing of the Lunar New Year holiday will distort January readings, but the distortion will work itself out by March. Exports will be under pressure, as the dollar will likely rise, as the Federal Reserve raises rates. Trade is also at risk under the threat of tariffs and a border-adjustment tax under the new administration. There could be significant disruptions to supply chains.
Real GDP ended 2016 on a solid note Real GDP rose 1.9%, according to the BEA’s second estimate. Consumer spending maintained the strong third quarter gain. Inventories also contributed to growth. Government spending made a small contribution from state and local governments. Trade was a real drag on growth. Consumer spending contributed 2.05 of a percentage point to growth, up from 2% in the third. Investment contributed 1.4 of a percentage point, led by a 1.1 percentage point from nonfarm inventories. The U.S. economy is preforming well and near term prospects are favorable. Growth is likely to top 2% in the current quarter, equal to the trend growth since the recession ended.
The Conference Board’s index of consumer confidence rose 3.2 points in February equaling 114.8. The February reading was the strongest since August 2001. The present conditions index increased by 3.4 points to 133.4, the highest level since 2007. The expectations index rose 3.1 points to 102.4. Confidence has strengthened since the Autumn and now sits at the highest level in a decade, driven mainly by consumer expectations over the last few months. Confidence has improved for most income brackets except for $15,000 or lower. Still, consumers planning major purchases are still weaker than a year ago, suggesting some caution about spending.
Personal income accelerated to 0.4% in January, up from a 0.3% advance in December. However, personal spending dropped 0.3%, as spending declined for autos and utilities. The decline will likely be short-lived as the consumer has been supported by rising wages and increasing employment growth. The PCE deflator rose 0.4% in January, raising the probability that the Fed might move earlier than expected in March, instead of waiting until June. Energy prices drove the index higher, but food prices remain tame. The core deflator rose 0.3%, up 1.7% from a year earlier. Fed speeches have hawkish lately as the economy reaches full employment and other economic data has been solid. Although spending fell in January, consumer confidence is strong and the healthy trend in consumption will continue. There are risks to the upside if the new administration passes some form of stimulus. On the other hand, interest rates are rising and trade policy could have a negative impact on the economy. A border-adjustment tax would raise the price of imports and fuel inflation. The Fed would move quicker in such an environment and raise downside risks in 2018. In the short-term, we expect decent spending and slowly rising rates.
Construction spending fell 1.0% in January, following a revised addition of 0.1% in December and a 1.5% jump in November. Private construction rose 0.2% in January, the fourth consecutive increase. Private residential construction saw a 0.5% increase, also the fourth consecutive monthly increase. Private nonresidential construction was unchanged in January. Of the largest components, spending on commercial structures fell 0.5% in January, but remained up 11,9% on the year. Manufacturing structure spending did rise 0.6% in January, but was down 6.8% y/y. Public construction fell 5% in January and was down 9% from the previous January. The outlook for construction is positive, but restrained. There could be some upside if the Trump administration passes some form of increased infrastructure investment. That seems to be down on the list from his priority on immigration and potential tax relief, so the chances of any renewed investment is pushed into 2018, if at all.
The February ISM manufacturing index rose from 56 in January to 57.7, the highest since 2014. Details were solid, as new orders rose from 60.4 to 65.1. The orders index has been above the 60 mark for three consecutive months. 16 industries reported growth, led by apparel, leather-allied products, primary metals and machinery. No industry reported a decline. Production rose from 61.4 to 62.9, the second consecutive month the index has been north of 60. Growth in production was led by plastics, machinery and primary metals. Inventories increased from 48.5 to 51.5. A reading of inventories higher than 42.8 is consistent with an expansion of manufacturing inventories by the BEA. The difference between new orders and inventories widened from 11.9 to 13.6, pointing to stronger production. Backlogs rose from 49.5 to 57. New export orders rose from 54.5 to 55. Imports rose by 4 pints to 54. The employment index fell from 56.1 to 54.2, the only blemish on the report.
Manufacturing conditions have improved and there could be upside potential. Sentient has been decent lately, but an improvement in hard data has been slower to advance. Improvements in durable goods orders and industrial production have more subdued. Although the inventory correction is largely completed, there are headwinds emanating from the high dollar and uncertainty concerning trade. Manufacturing appears to be rising from its recent funk, but tariffs could slow the industrial sector down. Manufacturing employment has falling mainly because of technology and automation. Tariffs would have damage the real economy. Job retraining would more beneficial for manufacturing and the broader economy than tariffs and ripping up trade agreements.
February vehicle sales were unchanged in February at 17.6 million units, better than expected. Truck sales continue to capture market share as gas prices remain steady. Incentive spending remains high as dealers and manufacturers try and maintain a strong sales pace. Car sales fell from 6.6 million to 6.5 million, a 0.8% decrease from January and down 11.8% from a year earlier. Light truck sales were stable near 11 million and up more than 7% from February 2016. Imported vehicle sales declined 2.5% from 3.7 million to 3.6 million, but were up 5% from a year earlier. The market share for imported vehicles fell to 20.6% from 21.1%. Helping fuel the vehicle sales pace are trucks used in residential construction, the low price of gasoline and healthy incentives. Gas prices declined in February, but are up more than 30% from a year ago. Sales will start to move toward a trend-like range of 16.5 million and 17.0 million units. Potential changes in tax policy could help spur sales. Imported vehicles could take a hit if changes in trade policy make imported cars more expensive.
The ISM non-manufacturing index accelerated to 57.6 in February, up from 56.5 in January. Details were solid, as new orders, business activity and employment rose. The business activity index increased from 60.3 in January to 63.6. This was the fourth consecutive month the index was north of 60. For the second consecutive month, 13 industries reported growth. Utilities, mining and other services led growth. New orders rose from 58.6 to 61.2, the highest since the second half of 2015. Employment rose from 54.7 to 55.2. The index suggests the service economy accelerated in February, but hard data suggests a weaker path. Sentiment remains high and the survey may be catching some of that impact. Fundamentals remain supportive of nonmanufacturing activity. The consumer is being supported by steady employment and wage gains. Energy prices are helping mining and housing is slowly improving. The near-term prospects look solid.
Euro-area manufacturing accelerated for a sixth month in February and there are signs that inflationary pressures are building as factories ramp up to meet with demand. The Purchasing manager’s index climbed to 55.4 in February, up from 55.2 in January. Companies raised prices at the fastest pace in five years, as higher commodity prices and a weaker euro drove up costs. The report follows a series of recent data that suggests the currency bloc’s economy is gathering momentum amid political uncertainty. Manufacturing expanded in all the region’s major economies, with activity strongest in the Netherlands, Austria and Germany. The euro-area’s manufacturing sector is reporting the strongest production and order-book growth in almost six years. There is growing evidence that a seller’s market is developing as demand for many goods is exceeding supply, which suggests core inflation is awakening.
Euro-area inflation accelerated to the fastest pace since January 2013, providing fresh arguments to those calling for an exit the European Central Bank’s monetary stimulus program. Consumer prices rose 2% in February from a year earlier. Rising oil prices have been pushing up inflation across the euro-area, including Germany, Spain and Italy. In a sign of greater pipeline pressures, producer prices jumped to the highest level in almost five years, rising 3.5% in January. Core inflation was unchanged in February for the third consecutive month at 0.9%, which suggests a calmer attitude concerning inflation risks. In January, ECB President Mario Draghi pointed to a new set of criteria arguing that the return to the ECB’s inflation goal must be durable, self-sustained and representative to the euro-area as a whole.
Canada’s GDP growth was solid in the fourth quarter, but the details present a less rosy glow. Real GDP advanced 2.6% at an annualized rate in the final months of 2016. The topline performance was driven by a plunge in imports. Domestic demand only grew 0.4% annualized rate, held back by a big drop in investment. Imports fell 13.5% annualized rate, largely because of a tough comparison set up by the delivery of a large oil project in the third quarter. The Canadian economy enjoyed three quarters of above-trend growth, but would have contracted in the fourth quarter, if not for the fall in imports. The weak loonie is making imports more expensive and distressed oil prices are hurting investment. Future growth needs to be more balanced. Nonresidential investment needs to help the residential part. The trade sector needs more exports, not imports. In Canada and employment growth is picking up, both good signs for Canada.
Important Data Releases This Week
January factory orders will be released on Monday, March 6 at 10:00 AM EST. We look for factory orders to rise 1.5% on the strength of the big leap in aircraft orders. The capital goods orders fell in the first release of the durable goods report and likely will fall in this release. Manufacturing is doing better, but the road is still rocky. On trend, manufacturing is turning positive, but the pace is still restrained.
January international trade will be released on Monday, March 6 at 10:00 AM EDT. We project the trade deficit to widen by $4.4 billion to $48.8 billion in January, a clear sign that trade will be a weight this quarter. Already released goods data showed the deficit widening from $64.4 billion to $69.2 billion. The early Lunar New Year likely distorted the deficit by pull-forwarding imports.
February employment will be released on Friday, March 10 at 8:30 AM EDT. We look for employment to rise by 200,000, stronger than the 183,000 average over the prior six months. Weather likely helped boost construction. Federal job growth will be limited by President Trump’s freeze on non-military hiring. The labor market has been strong lately and wages are likely to rose 0.3%. That would leave wages up 2.8% y/y in February.