Author Archives: Steve Graham

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.

Jobs Reports Reflects a Solid Economy Heading into 2018

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

A breakthrough in Brexit negotiations pushed the sterling to a six-month high against the euro on Friday and added momentum to an upswing in world stocks, supported but strong economic news from Japan and China. Britain and the E.U. struck a deal to move on to talks about trade and a transition period after they agreed to an outline of their divorce. The Stoxx Europe 600 climbed 0.8% as of 9:35 AM, the highest in four weeks. Earlier on Friday, Asian shares rallied for a second session in a row on the news that exports surged 12.3% in November and imports climbed almost 18% from a year earlier. Revised data showed Japan’s economy grew twice as fast as first estimated as business investment picked up. The MSCI Asia Pacific Index rose 0.6% on Friday.

The tech sector’s stocks have been volatile lately, but advances on Friday helped the S&P 500 Index to rebound from four days of losses at the start of the month. The FANG group of Facebook Inc., Amazon.com Inc., Netflix Inc., and Goggle parent Alphabet Inc., gained 1.4% over five days, re-tracing two-fifths of its worst weekly loss in five months. The swift rebound has prompted analysts to predict a rebound in tech leadership that will drive the S&P to a fresh record by year’s end. Should that happen, 2017 would be the first year ever the benchmark posted positive total returns every calendar month. Besides solid economic data, such as Friday’s strong employment report, December has traditionally been kind to stocks, with more up readings in the S&P 500 than any other month since 1927.

Data was mostly upbeat last week. Hiring was solid in November, with employers adding 228,000 jobs. The unemployment rate held steady at 4.1%, but wage growth was less than expected. The ISM on-manufacturing index fell 2.7 points in November but remained firmly in expansion territory at 57.4. Total factory orders slipped 0.1% because of the volatile aircraft sector. Core capital goods orders signaled healthy equipment spending heading into 2018. A narrowing of the trade deficit has seen a plus to GDP in recent quarters, but that support might be changing. The trade deficit widened by $3.8 billion in October, as exports stalled for the month and imports rose 1.6%. The outlook for trade looks good barring policy mishaps, but the strength of the domestic economy may attract more imports than exports and widen the trade deficit.

Next week will be busy for economic data. We get a look at small business confidence, inflation, retail sales, business inventories and industrial production. Also, the FMOC will raise rates and fill us in on whether they will raise rates four times next year, or three.

The strength of the jobs reports reflects a solid economy heading into 2018. The economy does not need the kind of stimulus that Congress and President Trump are proposing even though wage gains are still modest. With an economy at full employment, more fuel to the fire might trigger stronger inflationary pressures. The Fed will certainly respond with a more aggressive policy stance. The danger is, instead of a slow growing economy, the seeds are being sown for a return to the boom & bust scenarios of the past. A slight majority of the members of the National Association of Business Economists anticipate a recession beginning somewhere before the end of 2019 and a solid majority of that group sees the business cycle peaking in the second half of that year. For now though, the sailing is clear. The economy has good momentum heading into 2018. Barring an external shock, the probability of a recession is low in 2018. Enjoy the year, for clouds are starting to thicken out on the horizon.

Latest Data

The U.S. Economy:

Manufacturing remains solid, but factories could not sustain the momentum of the gains of the previous two months. Factory orders fell 0.1% in October, following a 1.7% jump in September. The volatile transportation sector, were responsible for the October weakness in the headline number. Softer Boeing orders brought the transportation sector 4.2% lower in October. Nondefense capital goods orders excluding aircraft increased 0.3% in October, the fourth consecutive positive increase. Orders in this segment are up 9.3% from October 2016. The weakness in aircraft orders brought durable goods orders down 0.8% in October, but nondurable goods orders increased 0.7%. Factory shipments advanced 1.1% and are up 5.8% from a year earlier. Factory conditions remain solid, despite the October weakness in orders. The domestic economy remains strong. Business investment is robust and the global economy is accelerating. The passage of the tax bill is good news for manufacturing. It will add to the national debt, but that is a long-term problem. In the short-term conditions are good.

The U.S. trade deficit widened in October increased from $44.9 billion to $48.7 billion. October’s deficit was the largest since January. Total nominal exports held mostly steady, with a $21 million loss from the month before. Goods exports declined 0.2%. Total imports rose 1.6%.  Goods imports drove most of the increase, rising 1.8%. The report says less about production, but more about consumption. Imports surged to an all-time high in October. Higher energy prices are partly responsible for the increase in imports. Imported petroleum imports have increased rapidly over the past year. Exports are doing well and have been increasing since late-2015 and are up 13% in the past year. The outlook for exports is favorable. The dollar has depreciated over the course of the year and the global economy is growing faster. There are risks centered from policy. The NAFTA negotiations are not going well and trade tensions with China are growing.

The ISM non-manufacturing index retreated in November, falling from 60.1 to 57.4. The decrease represents slower growth in the non-manufacturing segment of the economy, but still remains at an elevated level. The business activity index fell from 62.2 to 61.4. New orders dropped 4.1 points to 57.8. The employment index slipped from 57.5 to 55.3. Although falling in November, the new orders index marked the 100th consecutive month of growth in new orders. 12 industries reported growth in new orders, down from 16 in October. The non-manufacturing segment of the economy continues to expand. There is some uncertainty concerning healthcare and taxes. There are constraints for labor. Wages will accelerate, supporting the service sector. In all, the economy looks solid.

Productivity growth was unrevised in the third quarter, rising 3% at an annualized rate, noticeably stronger than the 1.5% rise in the second quarter and the 0.1% increase in the first quarter. The third quarter increase was the strongest since 2014. The recent surge in business investment in equipment seems to be paying off. The Fed can’t directly influence productivity, so the burden falls on businesses and consumers. In theory, the tight labor market will put upward pressure on unit labor costs. This will provide incentive to boost equipment spending to boost productivity. However, there is a time-lag between investment and a measurable rise in productivity. A quick turnaround in sustained productivity is unlikely. Policy can help boost productivity. Investment in education/job training and infrastructure can help boost productivity. Productivity growth is important is the Trump administration wants to hit 3% GDP growth. For this to occur, productivity growth must average 2.25% per annum, noticeably higher than the 0.8% average of the last five years. Reducing tax rates have been shown to only have a small impact on productivity growth.

November was another strong month for employment growth. Payrolls increased by 228,000, following an addition of 244,000 in October. Private payrolls rose by 221,000, following the revised addition of 247,000 in October. Goods producing industries contributed notably for November, rising by 62,000. Construction added 24,000 and manufacturers added 31,000. Average hours worked increased to 34.5 thanks to longer hours in services. Average hourly earnings increased 0.2%, up a modest 2.47%, still a weak reading for a full employment economy. The participation rate stayed at 62.7%. It is up only 0.3 of a percentage point since bottoming out in 2015 at 62.4%. Next year, the focus will be on wage growth. Wage growth should rise to 3.4% by early 2019, unless there is some structural reason that is holding back wage growth.

International:

Euro-area economic momentum accelerated at the fastest pace in seven years in November. The combined PMI for services and manufacturing rose to 57.5, up from 56.0 in October. The increase was led by manufacturing, which saw only one higher reading in the last 20 years. Business as a whole so far has been unaffected by political uncertainty in several countries, notably Germany and Spain. Neither German Chancellor Angela Merkel’s struggle to form a governing coalition or Catalonia’s vote to separate from Spain has left lasting marks on the 19-nation economy, which is heading for its best performance in a decade. Supported by monetary stimulus from the European Central Bank, the bloc is enjoying its most synchronized expansion since before the single currency was established. Even so, price pressures are below the ECB’s goal. The question for 2018 will be how long this spurt of strength last and when will price pressures start to intensify? Still, the euro-area economy has good momentum heading into 2018.

Important Data Releases This Week

November NFIB will be released on Tuesday, December 12 at 6:00 AM EST. We look for the survey to rise from 103.8 to 104.5. The outlook for small businesses is improving. The economy is doing well and the labor market is strong, although wage growth is lagging. The probability of tax reductions will raise confidence.

November PPI index will be released on Tuesday, December 12 at 8:30 AM EST. We look for index to increase 0.3%, following the 0.4% rise in October. Input prices rose in October even as energy prices were unchanged. With the global economy accelerating input prices will rise, although lower output in China due to pollution controls will keep commodity prices subdues through the winter.

November CPI index will be released on Wednesday, December 13 at 8:30 AM EST. Although input prices were fairly strong in October, there was little pass-through to the consumer side. The CPI only increased 0.1% in October. We look for a 0.2% increase in November.

November retail sales will be released on Thursday, December 14 at 8:30 AM EST. Retail sales rose 0.2% in October after September’s 1.9% hurricane related surge. Sales are projected to advance 0.3% despite the weaker auto sales. The consumer is feeling confident and the holiday shopping season looks healthy.

October industrial production will be released on Friday, December 15 at 8:30 AM EST. We look for industrial production to be flat in November after the 0.9% surge in October, as factories came back on line after the hurricanes. Although November might disappoint, the general trend in both total IP and manufacturing is upwards.


FTR is the leader in economic analysis and forecasting for the commercial freight and transportation equipment markets. For more information: Click here

Future is Bright, though Clouds are on the Horizon

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

World stocks hovered below record highs on Friday, set to reverse two weeks of losses. The MSCI World Index, which tracks shares in 47 countries, rose 0.1% on Friday and was set for gains of more than 1% for the week. Stocks in mainland China dropped to three-month lows on concerns about fresh government steps to curb financial risks and a rise in Chinese bond yields. Earlier this month Chinese stocks rose almost 15% from their lows in May and some analysts said that investors were selling to lock in profits.

With the U.S. stock market at a record highs and daily stock gyrations near multi-decade lows, some investors have raised concerns about the lack of fear in the market. The S&P Index has climbed 16% this year and is on pace for an eighth month of gains, the longest streak since just before the 2007-2009 financial crisis. The CBOE Volatility Index, better known as the VIX, closed at a record low this month. The U.S. equity options market data does show that investors are not as complacent as many analysts suggest. Positions in options on the S&P Index and the VIX index does show investors gradually adding to hedges over the last few months. There have been brisk volumes suggesting that there has been renewed interest in protective positions. While the data does not suggest the market is gearing up for an immediate crash, as it would be suggested if the VIX shot up, it does imply that investors will not be taken by surprise if volatility starts to trend up in coming months.

There was a light schedule ahead of the Thanksgiving holiday. Existing home sales rose solidly in October, with overall sales rising 2%. Inventories fell further and the median price has risen 5.5% in the past year. Sales are being restrained by lack of listings and sales may weaken further under the projected current tax reform bill. Advance orders for durable goods came in lower than expected, but nearly all the shortfall was in the volatile nondefense aircraft segment. Excluding transportation, orders were decent. Orders for the prior month were revised higher and the longer-trend remains solidly positive.

Next week, the economic calendar is packed. September’s new-home sales likely won’t stick as the boost from the hurricanes fades. The data on personal income will be decent, with personal incomes projected to rise 0.3%. Personal spending is projected to rise 0.2%. Vehicle sales should still stay strong in November, supported by replacement of vehicles damaged in the hurricanes. The core PCE is projected to rise 0.2%, leaving it up 1.4% from a year earlier. Although below the Fed’s target, that won’t alter the committee’s feeling that inflation is poised to make additional gains. The Fed is still on course to move in December. The manufacturing ISM will likely see a small increase from the current 58.7 to 60.0. The manufacturing sector remains solid and poised for further gains.

This week will also feature the second estimate of Q3-GDP accounts. Data since released suggests the 3% original 3% estimate may be revised higher to 3.2%. The economy is doing well. The fourth quarter is tracking near 3%. The consumer will be the prime driver. Employment growth remains healthy and incomes are starting to accelerate. In addition, business investment is perking up. The global economy is accelerating and the effects of the lower dollar are a plus for exports. Near-term risks are fairly low, but 2018 will see some fundamental changes that will present a challenge.

There are challenges and risks in 2018. The chief risk is geopolitical, with potential threats from possible actions in North Korea. There are political challenges in Europe, with Brexit and Germany’s political alignment. Trade could present large problems and consequences under the Trump administration. Most of the downside risks come from the financial sector. Central banks are withdrawing stimulus and equity markets are at all-time highs. China’s debt is a potential time bomb. How markets react to withdrawal of stimulus is a big question? A global market correction is a real possibility. Small corrections normally do little economic damage, but large-scale ones have real economic repercussions. 2018 will start out great, but it will be a transition year for financial markets. The future is bright, but there are still clouds on the horizon.

Latest Data

The U.S. Economy:

The Conference Board’s index of leading economic indicators rose 1.2% in October, following a 0.1% increase in September. Jobless claims, the ISM new orders and building permits made significant contributions. Manufacturers’ new orders for nondefense capital goods excluding aircraft was the only negative contributor. The coincident indicator advanced 0.3% in October. The rebound from the hurricanes seemed to be a primary driver to the October strength as parts of the southern economy that was damaged started to come back on line. Employment additions are steady and manufacturing conditions are solid. Continued advances will propel the economy forward.

The pace of U.S. economic activity accelerated in October. The Chicago Fed National Activity Index increased to 0.65 from 0.36 in September. The contribution of production-related indicators rose to 0.53 from 0.18. Employment-related indicators contributed 0.11 to the index, compared to 0.13 the previous month. The personal consumption/housing sector decreased to -0.04 from -0.02. The three-month moving average rose to 0.28 from 0.01. The headline index indicates that economic activity was above average. As is often the case, the production related indicators drove the increase in the October index. Industrial production increased in October and is likely to remain robust in coming months. Employment rebounded from the hurricanes. The consumer is solid and business investment is increasing due to stronger confidence, rising oil prices and growing exports. The economy remains on solid ground.

Existing home sales continued to rally in October. Sales increased 2% in September to an annual total of 5.48 million units. Sales remained down 0.9% from a year earlier. The industry is still trying to regain momentum so sales are slightly below their peak in March. The market remains tight as inventory fell again and the inventory-to-sales ratio remains near a record low. With the hurricanes in the rear-view mirror, sales are starting to recover in the affected areas. What is not recovering is listings. Sales have levels off over the past year, but price appreciation is not moving much. The stronger labor market will help boost sales, but the current state of the proposed tax relief would add to home ownership costs. There is a downward risk if the tax package becomes law.

New orders for durable goods surprised on the downside, falling 1.2% in October. The decrease was more than expected, but was largely driven by the volatile nondefense aircraft segment, which fell 18.6%. Orders for core capital goods fell 0.5%, following three positive months. Inventories increased 0.1%. Total orders remained 2.5% higher from a year earlier. Excluding transportation, orders rose 0.4% and were up 8.5% y/y. Factory conditions are improving, but the report suggests not as steadily as expected. Shipments increased 0.1% and have been gaining momentum in recent months. The streak of machinery orders bodes well for business investment. What happens in Washington may have a positive impact on business investment, but the probability of Congress accomplishing nothing is sadly high. Either way, the strength of the domestic and global economies does mean a decent outlook for the factory sector.

International:

The biggest economic surprise of 2017 will be the euro-economy. Growth appears to likely come in at 2.2% versus forecasts last year at this time at 1.4%. The question that surfaces is this recovery for real? After all, the euro-economy has averaged less than 1.6% over the past 18 years. The renewal of growth has taken a lot of effort from the European Central Bank, not only low interest rates, but some 2.2 trillion euros that the ECB bought in its QE program. Adding to the stimulus was the realization that governments must be fiscally involved. Germany, for example has increased public spending on roads and bridges, faster internet and social housing to turn that country I to the economic powerhouse of the continent. Some structural reforms have been taken after years of being called for by the ECB, the IMF and others. Although off its mid-2013 peak of 12.1%, unemployment is still high at 8.9%. There will be at least a couple more years before labor shortages become an issue. The question now is how to keep the economy rolling, while slowing stimulus. There is some political hurdles to overcome. Brexit is an issue to be dealt with in 2018 and Germany’s political lack of unity will present problems in 2018. For now, politics is just noise and the euro-economy appears ready to roll on into 2018.

Important Data Releases This Week

October new home sales will be released on Monday, November 27 at 10:00 AM EST. New home sales were strong in September, rising 18.9% to 667,000, as the South bounced back from the hurricanes. We look for a decrease to 600,000 in October. Tight inventories remain a constraint on sales.

GDP (1017Q3-second estimate) will be released on Wednesday, November 29 at 8:30 AM EST. Data released since the initial estimate of national accounts point to a modest upward revision. Real consumption likely was edged down, but business investment will be revised up. Government probably had a small increase. Inventories will be revised higher. We look for an upward revision to 3.2%.

October personal income and spending will be released on Thursday, November 30 at 8:30 AM EDT. We expect personal income to rise 0.3% in October, after rising 0.6% in September. Nominal spending will rise 0.2%. Spending ended the third quarter on a high note and is up 2.7% y/y. The core GDP deflator is also expected to rise 0.2%. Inflation is still weak, but the Fed thinks it will strengthen.

November ISM manufacturing index will be released on Friday, December 1 at 10:00 AM EDT. The ISM manufacturing index retreated in October from a unusually strong September reading. Part of the decrease can be attributed to a return to a normal trend after the start-up of activities following the hurricanes. The underlying trend continues to be positive and the index will rise from 58.8 to 60.0.

October construction spending will be released on Friday, December 1 at 10:00 AM EDT. Construction spending surprised on the upside in September, rising 0.3%. The advance came from the public sector, which is not likely to be repeated. We look for construction spending at advance 0.1%, continuing the slow trend in that industry.

November vehicle sales will be released on Friday, December 1 at 12:00 AM EDT. Sales jumped in the last two months, following the hurricanes. We look for sales to decrease to 17.8 million, down from 18.08 million in October and 18.57 million in September. Sales will return to the mid-16 million range after the replacement cycle of the hurricanes has run its course.


FTR is the leader in economic analysis and forecasting for the commercial freight and transportation equipment markets. For more information: Click here

Recent Data has been Upbeat

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 o

 

n 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

European shares struggled to follow Asian peers higher as the euro strengthened after a busy week. The Stoxx Europe 600 fluctuated before turning lower with most national gauges. European Central Bank President Mario Draghi said he was optimistic concerning wage growth in the region, but stressed patience. Shares in Japan ended fractionally higher and the yen jumped to the strongest in four weeks.

Soap maker and real-estate stocks have taken over a rally that used to be led by social media and smartphone makers. Companies with stable earnings and dividends have led growth in November, a departure when leadership was led by cyclical companies. Investors are looking for safety even as the market is poised for its longest streak of monthly gains in a decade. The S&P slipped 0.1 percent last week to 2,578.85, the second straight monthly decline. Demand for stocks is slowing. Halfway through November, U.S. equity EFTs have absorbed about $2 billion. Over the past year, these funds have attracted an average $18 billion a month.

Last week’s economic calendar was busy. Three of the leading inflation indicators showed a firming of inflationary pressures. The PPI rose 0.4% and three-quarters of the increase did not come from energy. The CPI barely rose, but excluding food and energy, the advance was stronger. Core services have been weak most of the year, but services prices rose 0.3% and core goods recorded a rare increase. In addition, the import price index showed the strongest rate of nonfuel import price inflation in more than five years.

Industrial production jumped 0.9% in October, led by a 1.3% surge in manufacturing output. The factory sector has been held back by the hurricanes the last few months. The Federal Reserve said excluding the effect of the hurricanes, output advanced 0.3% for the total index and 0.2% for manufacturing. Although there has been noise, the trend for the industrial side is upwards. Retail sales rose 0.2% in October ad September’s surge was revised upwards to 1.9%. The October increase was more than expected, considering gas prices retreated and auto sales stepped back. The consumer is resilient and that bodes well for the important holiday season. Housing starts jumped 13.7% in October, halting a streak of three monthly declines. Most of the increase was in the multi-family sector, but single-famil

 

y starts did enjoy a 5.3% increase as well. Rebounding from the hurricanes had a large input to the October increase. Over the past year, residential construction has been basically flat.

Next week will be short, with a look at existing home sales, consumer confidence and advance durable goods. Recent data has been upbeat and the fourth quarter may come in near the same 3% rate of the preceding two quarters. The underlying strength of the economy suggests growth will track near 2.8% over the next few quarters, not quite 3% but a solid performance. If the tax reform effort becomes law, that could boost growth by roughly quarter of a percent for about three quarters. Of course, timing and the final form of the law could change that estimate. Tax reform, or not, the economy is in solid shape. The economic outlook for 2018 looks decent, barring a geopolitical blunder. However, interest rates are rising and trade is an issue. Even on a calm day, there are still a few storm clouds.

Latest Data

The U.S. Economy:

Producer prices exceeded expectations in October. The PPI for final demand rose 0.4% in October, following a 0.4% rise in September and a 0.2% increase in August. Goods and core goods prices rose 0.3%. The PPI for energy was unchanged in October after jumping 3.4% in September following the aftermath of the hurricanes. On a year-ago basis, the PPI was up 2.7%, up from 2.5% in September. Although producer prices beat expectations in October and energy was not the driver as in September, the trend in inflation remains weak. Prices for gas dropped 4.6% in October, following the hurricane-induced 10.9% jump in September. For the PPI to achieve sustained velocity, energy prices must be on an upward slope.

While producer prices were fairly strong in October, there was little pass-through to the consumer side. The CPI rose 0.1% in October, following the hurricane-affected 0.5% increase in September. A 0.3% rise in shelter was the main positive driver. The energy CPI slid 1% on a 2.4% decline in gasoline prices. Food prices were unchanged.  Excluding food and energy, the CPI rose 0.2%. Total CPI was up 2.0% from a year earlier, while the core reading was up 1.8%. The gain in October does place the CPI up 4.3% annualized in the last three months, better than the 2% reading in August. Some of this strength is transitory. The Fed is forward looking and believes in the Phillips curve. They will raise rates in December. There is a risk in the tightening process will anchor long-term inflation expectations at their current low level. The Fed will likely tighten 3 times next year, but that will depend on the next Fed chair.

Retail sales slowed in October, in part a payback for the big surge in September. Retail sales rose 0.2% in October, following the 1.9% jump in September. Sales in certain sector, particularly cars and autos and building supplies, jumped in September because of the hurricanes. Sales at gasoline stations fell 1.2% in October, after a 6.4% jump in September. Sales excluding gasoline and autos increased 0.3% in October. Total sales were up 4.6% from a year earlier. The near term outlook for spending remains modest. Sales grew in October despite lower auto sales, but that disconnect will likely not persist. Fundamentals for the consumer are solid. Modest income growth is a restraint on spending. Wages should still pick up as the labor market tightens. There are risks and uncertainty about the lack of action in Congress is one worry, rising interest rates are another growing restraint. Still, the consumer is expected to still be the major driver of growth.

Business inventories were unchanged in September, following a 0.6% rise in August. Wholesalers escaped hurricane damage for the most part and stocks advanced 0.3%. Manufacturers saw a 0.7% increase. However, retailers were hit by the storm and retrenched 0.9%. Auto and parts dealers suffered the biggest September decline as hurricanes Harvey and Irma damaged vehicle fleets. Retailers, excluding the auto sector declined 0.1%. Business sales were strong, rising 1.4%, Retailers made the most gains, with sales rising 2.1%. Merchant wholesalers saw sales rise 1.3% and manufacturers saw a sales gain of 0.8%. The business inventory-to-sales ratio fell to 1.36 months from 1.38. The hurricanes disrupted supply chains. Families in the South first rushed to buy supplies ahead of the storm and rushed to buy vehicles to replace the damaged ones. Wholesale petroleum inventories also declined because of evacuation orders. Conversely, clothing and general merchandise stores saw weaker sales as bad weather kept consumers home. In all, the disruptions did not bleed into October’s numbers. The strong global and domestic economy has producers running at a high level. Rallying commodity prices are a boost to production. Policy uncertainty remains a downside risk, but the U.S. economy is strong enough to create a healthy inventory build on its own. Businesses may have to adjust if Congress fails to deliver on tax reform and infrastructure work.

Industrial production increased a healthy 0.9% in October, following a 0.4% rise in September. It was the largest monthly gain since April. The increase was fueled by a large increase in manufacturing, aided by utilities. Mining lost ground. Manufacturing increase a sizable 1.3%, matching April’s gain. The Federal Reserve did say that excluding the impact of the hurricanes, total IP rose 0.3% and manufacturing 0.2%, in line with recent trends. Manufacturing employment and hours worked were early indications that manufacturing was picking up. Motor vehicles and parts saw a 1.0% increase in production. Manufacturing excluding the auto sector increased 1.3%. Total manufacturing is up 2.5% from a year earlier and non-auto output is up 2.9%. Business equipment production was up 0.5%, up 4.2% from a year earlier. Utility output rose 2% in October and is up 0.9% y/y. Mining lost 1.3%, but production is up 6.4% above a year earlier. Capacity utilization rose 0.6 of a percentage point. The report confirms that manufacturing is healthier and the U.S. is on solid footing, despite the recent hurricanes. The dollar has been retreating most of the year and the global economy is getting stronger. The healthy domestic economy is also a strong driver of industrial activity. The return of business investment is also a plus for the industrial sector.

Homebuilder sentiment increased modestly from 68 in October to 70 in November. This was the highest level since March and the second highest since July 2005. Builder’s confidence was rewarded, as housing starts regained some of the ground lost in August and September. Total housing starts increased 13.7% in October to an annual pace of 1.290 million. The monthly increase was led by multi-family starts, which increased 36.8% to an annual pace of 413,000 units. Single-family starts increased a healthy 5.3% to a annualized pace of 877,000. Permits rose 5.9% to an annual pace of 1.297 units. The permit backlog edged up, ris9ng 1.3% m/m to 152,000 units. Part of October’s strength was the resumption of construction in Florida and Texas after the hurricanes. Still, the October increase just leveled out residential construction since last December. Although it has slowed in the past year, there is still room to grow for residential construction. There are still constraints in labor and capacity bottlenecks. The multifamily sector may be approaching a peak, but there is lots of room to grow for the single-family sector.

Important Data Releases This Week

October existing home sales will be released on Wednesday, November 20 at 10:00 AM EDT. Existing home sales increased in September after three months of declines. The industry suffers from lean inventories and that will likely cause sales to be flat in October.

October advanced durable goods will be released on Wednesday, November 20 at 8:30 EDT. Recent data for the factory sector has been upbeat. Final statistics showed durable goods orders advancing 2.0% in September. August and September data has been to some degree affected by the hurricanes. October may see a rebound, coupled with the recent positive trend in equipment investment. Look for a 0.3% advance in October.


FTR is the leader in economic analysis and forecasting for the commercial freight and transportation equipment markets. For more information: Click here

Just an Economic Warning Light, Not Really Engine Trouble

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

Stocks around the world extended declines after European equities suffered the biggest plunge in four months. Carmakers led the decline in the Stoxx Europe 600 in its biggest two-day drop since August. Stocks in Asia fell after a rally that saw a record high during the week. The sell-off began as the U.S. Senate revealed its tax plan would delay cuts to the corporate rate until 2019. The move fed growing pessimism about prospects for meaningful U.S. fiscal reform, which had boosted share prices in the U.S.

U.S. equities posted its first weekly loss in more than two months after investors turned leery after Congressional Republicans made little progress in passing tax cuts. Shares that would have benefited from the tax cuts led the declines, but selling spread to economically sensitive stocks as credit markets flashed warning signs about the pace of growth. The S&P 500 Index slumped 0.2% in five days. While analysts debated how much the market had prices in tax reforms, stocks reacted to headlines indicating the cuts might not be as deep or come as soon as expected. Adding to troubles for banks was the flattest yield curve in a decade, which would wear at yields at banks. Even with the declines in equities, the economy looks solid, but the market may be short of reasons to continue to move upwards.

The week’s economic calendar was bare compared to the preceding week’s jam-packed schedule. What data that was released confirmed the trend of strong labor demand and elevated business confidence enjoying regulation rollbacks. The JOLTS survey indicated that demand for workers is exhibiting strength. Consumer confidence backtracked in November, but lost only part of the big jump in confidence the month preceding.

This week will provide some insight on inflation, with both the PPI and CPI indexes being released and small business confidence. Retail sales, business inventories and industrial production will provide more insight and builder’s confidence and housing starts will be released.

New cycle lows in the 2s/10s spread brought the flattening of the yield curve into focus. The difference between the yields on the 10-year and 2-year Treasuries fell to 69 bps last week, which is 16 bps narrower than a month ago and the lowest level since 2007. While the yield curve is far from inverted, the decline in the 2s/10s back to 2007 levels has raised concerns about the outlook for growth. Short-term rates are heading higher and longer-term rates should also rise as U.S. growth strengthens. The yield curve will likely flatten further this year. The chances of a recession in the next two years are currently low, at 15%. However, a significant pickup in inflation, or a substantial widening of the federal deficit could change the pace of interest rate increases and change the degree of flattening. This is just a warning light, not really engine trouble, but there could be trouble ahead. For now, the economy looks solid and Q4 GDP growth could equal the 3% rate we saw the last two quarters.

Latest Data

The U.S. Economy:

Wholesale inventories rose 0.3% in September, following a 0.8% increase in August. Gains were evenly distributed. Durable goods rose 0.3% and nondurable goods increased 0.4%. Wholesale sales had a good month, rising 1.3%, following August’s 1.9% rise. The inventory-to-sales ratio fell from 1.28 to 1.27. For comparison, the I/S ratio was 1.32 in September 2016. Among durable goods, miscellaneous durables led the charge, surging 2.5%. Other strong categories include electrical products, which gained 1%. Hardware advanced 0.7% and metals rose 0.7%. Nondurable goods were mixed. Petroleum products rose 3%. Chemicals, paper and drugs rose about 1%. The stockpile build moderated in September but the strong sales results were positive for the outlook. Wholesale inventories closed the third quarter with a fairly broad-based growth. The hurricanes likely affected some results, particularly petroleum products. Looking past the hurricanes, wholesale inventories are on the right path. Sales growth is slow for nondurables, but strong in durables. With the I/S ratio trending lower, it’s a green light for producers and wholesalers.

Consumer sentiment pulled back in November. The University of Michigan’s index of consumer sentiment fell 2.9 points to 97.8 in November. The declines were shared by both the current economic conditions and economic expectations’ index. Consumers reported fewer income gains from a year earlier and they expect higher inflation and interest rates over the next year. Purchasing intentions slid slightly, with less willingness to buy major purchases. Business conditions were more positive in both current and expectations. The index made a 5.6 point increase in October, so some decline was expected. Gas prices surged in September and then retreated in October, only to edge up in recent weeks. Tax reform is on everybody’s mind and businesses are looking for substantial cuts. However, the plans do raise the national debt by a significant amounts and yielding only a modest economic boost. The probability of a tax reform bill becoming law is very much up in the air. The consumer is doing fine and the tightening labor market is raising wages. However, rising rates and stronger inflation could start to weaken confidence.

International:

The OECD’s composite leading indicator edged higher in September, rising to 100.2, after hovering at 100.1 the previous two months. The U.S. was a reflection of stability as the index was unchanged for the last eight months. Germany posted gains, but the euro-zone as a whole was unchanged. Brazil, Russia and five major Asian economies gained momentum. The report suggests steady growth in the world’s developed economies. The global stability is notable. The synchronized global growth remains firmly on track, with all major economies growing for the first time in several years. China has seen stronger than expected growth. The U.S. and core European economies have provided a much needed boost to global aggregate demand. Increased trade is providing a tail-wind for export-oriented emerging markets. Asia’s tech-heavy manufacturing has benefited from the cyclical upturn in global demand. The improvement in fundamentals in key commodity markets is supporting prices and resource-exporting economies.

Important Data Releases This Week

October NFIB will be released on Tuesday, November 14 at 6:00 AM EST. We look for the survey to rise from 103 to 104.5. The hurricanes likely lowered confidence in September and gas prices surged. A return to more normal conditions will help boost confidence. Some fall in expectations could follow if Congress fails to pass tax reform.

October PPI index will be released on Tuesday, November 14 at 8:30 AM EST. We look for index to increase 0.2%, following the 0.4% rise in September. Inflation will return to a more subdued trend rate after the hurricanes boosted prices. Energy prices, particularly spiked following the hurricane, but have settled down. Stronger global economic activity is causing greater price pressures for industrial commodities

October CPI index will be released on Wednesday, November 15 at 8:30 AM EST. We look for index to rise 0.2% in October following the 0.5% rise in September. Gas prices jumped in September, following the hurricanes, but settled down before drifting higher, following political unrest in Saudi Arabia. Consumer prices will follow the slow trend before the hurricanes disrupted energy supplies.

October retail sales will be released on Wednesday, November 15 at 8:30 AM EST. We look for retail sales to decline 0.2% in October after September’s 1.6% surge. Rebounding from the hurricanes drove auto and gas sales upward. Vehicle sales were decent in October, but down from September and gas prices fell. The consumer remains solid, but spending growth is still modest on trend.

October industrial production will be released on Thursday, November 16 at 8:30 AM EST. We look for industrial production to rise 0.2% in October after the 0.3% rise in September. Manufacturing was weak in September, rising just 0.1%. The outlook for the industrial sector is solid, with strength in both domestic and export markets. Manufacturing is projected to rise 0.2%.

November NAHB homebuilder’s optimism index will be released on Thursday, November 16 at 10:00 AM EST. The NAHB index equaled 68 in October, up two points from September. We expect the index to fall 2 points, reflecting the generally flat housing market.

October housing starts will be released on Friday at 10:00 AM EST. Housing starts fell more than expected in September to a 1.127 million units annual pace, although August starts were revised upwards. Damaged houses from the hurricanes don’t count as starts, but they will worsen the constrained labor market and drive up costs. Residential investment declined 6% in Q3 and will likely fall another 3% in Q4 before starting a slow increase.


FTR is the leader in economic analysis and forecasting for the commercial freight and transportation equipment markets. For more information: Click here

Political Whirlwind Over Taxes is Just Beginning

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

World shares took a breather and the dollar crept up, as investors turned their attention to the U.S. jobs report and welcoming the appointment of a centrist to the helm of the country’s central bank, the Federal Reserve. MCSI’s world equity index, which tracks the shares of 47 countries, was on course for the first dip in seven sessions, barely noticeable after the latest wave of record highs. European shares inched up after Apple’s stock hit new highs. A holiday in Japan kept shares subdued. MCSI’s index of Asian shares outside of Japan inched up 0.1% on Friday to be just under its highest level since late-2007.

News that Federal Reserve Governor Jerome Powell would be the next head of the Federal Reserve was widely expected. Powell has backed current Fed Chair Janet Yellen’s direction on monetary policy for the past five years and has shared her concern that weak inflation justified a cautious approach in raising interest rates. Also in Washington, House Republicans unveiled their plan for tax cuts, setting off a frantic race to give President Trump his first major legislative victory. Passage of that legislation that favors corporations and the wealthy, remains far from certain and some business groups came out against it.

The S&P rose 7 points last week, the eighth time in a row it’s been up. Beneath the surface there was a barrage of headlines affecting investors from everything from earnings to a new head of the Federal Reserve and taxes drawing a new line between winners and losers. Although volatility remains low, homebuilder’s stocks dropped as the House sought limits on mortgage and interest rate deductions. Meantime, Apple joined other tech mega-caps beating estimates and solidifying the industry’s market leadership.

It was a heavy week for economic data. Real spending rose 0.6% and incomes 0.4%. Both readings likely had some hurricanes effect. The FMOC met and kept rates unchanged, but likely remains on track for a December rate increase. Factory orders rose 1.4% in September and the important core capital goods rose 1.7%, the third consecutive increase. The ISM manufacturing index backtracked to 58.7, but remains at an elevated level. Manufacturing is doing well and the rise in core capital goods orders bodes well for productivity. Construction spending was positive for a second month, but the lift came from the public sector, which has declining most of the year.

This week’s economic calendar is light. The JOLTS report come out on Tuesday. Job openings are at a record high, with posting up 10.8% y/y. The University of Michigan’s consumer sentiment comes out Friday, reflecting an optimistic consumer. The economy is doing well, but the political whirlwind over taxes is just beginning. The total cost seems to fit in the increase in the national debt by $1.5 trillion window, but it is early in the process. Odds are about even, it will even make it into law and it is likely to be scaled back significantly from this proposal.

Latest Data

The U.S. Economy:

Personal income accelerated to 0.4% in September, following a 0.2% gain in August. The impact from the hurricanes is included in the August and September estimates of personal income but the BEA can’t qualify the total effects of the storms. Meantime, personal spending jumped 0.6% in September, following a hurricane-influenced -0.1% decline in August. The gain in spending was led by a 3.5% jump in durable goods spending. The durable goods segment was led by a 10% jump in vehicle spending. Non-durable goods and service spending increased by a healthy 0.3% rate in September. Spending in August was hurt by the hurricane and the September rebound was also storm-influenced. Thus, the trend is temporary. However, consumer spending is advancing at a healthy rate. As the economy enters full employment, the number of jobs created will be lower, but wages are starting to accelerate. The consumer is in good shape, at least through 2018. After interest rates start to really impact the economy, the situation may turn less favorable.

The PCE deflator increased 0.4% in September, an acceleration from the 0.2% increase in August and the 0.1% advance in July. The increase was fueled by a jump of 6.8% in energy and service prices. The lingering supply disruptions had a hand in boosting gas prices in September. Excluding food and energy, the core PCE deflator rose just 0.1%. On a year-over-year basis, the PCE was up 1.6% and the core 1.3%. Inflation remains tame, but will likely accelerate because of a tighter labor market, higher oil prices, a strengthening global economy and perhaps, additional tax relief. Inflation is not a present threat, but the Fed is forward-looking and is a believer in the Phillips curve. Another interest rate increase can be expected in December.

Construction spending increased at a seasonally adjusted rate of 0.3% in September, following a 0.1% advance in August. Total spending was 2% higher y/y. The increase was powered by a sharp 2.6% increase in public spending. Private spending fell 0.4% in September and residential spending was unchanged. Of the components of private residential spending, new single-family home spending was up 0.2% and 11.9% higher y/y. Nonresidential construction spending fell 0.8% in September. Of the largest components of public spending, highway and street spending increased 1.1%, but remained down 7.4% from a year earlier. Spending on educational structures rose 5.2%, up 6% y/y. The report surprised on the upside, but was powered by the surge on the public side. Public spending was up now 2 consecutive months after declining most of 2017.  Residential spending was weak, but Hurricane Irma had a negative impact on construction projects. Construction activity will get a boost from the hurricanes, but labor constraints have dampened start activity.

U.S. manufacturing conditions remained elevated, but the ISM manufacturing index retreated from 60.8 in September to 58.7 in October. Details remained solid and point to further growth in manufacturing. New orders slipped to 63.4 from 64.6, but the index has been above 60 since June. 12 out of 18 industries reported growth in new orders, led by apparel/leather, wood products and machinery. Three industries reported declines in new orders. Production slipped by 1.2 points to 61, which is still strong. Fifteen industries reported an increase in production and only one a decline. Inventories fell from 52.5 to 48 in September. The ISM noted that the inventory contraction reflected the difficulty of the supply chain to deliver materials and services to meet production schedules. The difference between new orders and inventories came in at 15.4 in October, compared with 12.1 in September, suggesting modest gains in factory production in coming months. The employment index dipped from 60.3 to 59.8. New export orders fell from 57 to 56.6, while imports were unchanged at 54. The prices paid index fell 3 points to 68.5. Among commodities up in price were aluminum, brass, caustic soda, chemicals and corrugate. Steel-scrap and hot rolled steel were down in price. Unlike the non-manufacturing survey, labor was not mentioned as being in short supply.

Although the ISM retreated, it remains elevated and suggests manufacturing will continue to do well. The U.S. economy and the global economy are preforming well and the past depreciation in the dollar will continue to support exports. The anecdotes were generally positive, but there were mentions of hurricane effects. Machinery orders were strong and raw material prices are on the rise. Hurricanes were being blamed for resin shortages. A respondent from the nonmetallic mineral products industry said their plants are all sold out this year and can’t take any more orders. In plastics, Hurricane Harvey is being blamed for price increases. The index remains stronger than actual production data. This suggests confidence and sentiment are optimistic.

October vehicle sales remained strong in October, only falling 2.6% to 18.1 million units, down from the 12-year high of 18.6 million in September. Sales were 1.2% higher than a year earlier. Replacement vehicles and postponed purchases in the wake of Hurricane Irma helped October sales, but the damage was not as bad as Hurricane Harvey. Light trucks captured a larger market share in October, than the historic trend. Incentives stayed at a high level to help clear inventory. Auto makers are still dealing with excess inventory. According to J.D. Power, the average reached 75 days in October, the highest since July 2009. Incentives are expected to remain elevated until the end of the year. Auto sales will backtrack to a more trend rate as the effects of the hurricanes is wearing off. New vehicle sales will average slightly over 17 million in 2018.

Factory orders increased 1.4% in September, following a 1.2% rise in August. The advance was the best two-month streak since spring 2016. Orders are now 7% above year earlier levels. Orders for durable goods were revised to 2.0% from the advance 2.2% report, but August was revised up. Factory shipments advanced 0.8% and the August figure was revised upwards. Core capital goods orders rose 1.7%, the third positive reading in a row. Orders in this segment were up 8.3% from a year earlier. Despite disruptions from two hurricanes, the manufacturing sector remains on solid footing. Nondurable goods orders increased 0.8% in September and the trend has grown more broad-based. The increase in capital goods suggests good news for productivity advances. Positive signs in business investment are increasing. Sentiment has been strong, but actual production seems to be perking up. Efforts to rebuild from the hurricanes will provide additional stimulus.

The U.S. trade deficit widened modestly in September, increasing by $700 million to $43.5 billion. Even with the increase, the deficit remains below the trend of the preceding year. Total nominal exports increased for a third consecutive month, gaining 1.1% to $196.8 billion. Goods exports rose 1.4% and services 0.4%. Total nominal imports increased 1.2% to $240.3 billion. Goods imports rose 1.2%. Details from the reports were largely positive. Exports have increased for three consecutive months and are up 10% from their trough in January 2016. Gains have been broad bases. Exports of food and capital goods have posted solid gains in recent months. Only consumer goods have fallen over the past year. The depreciation of the dollar is a plus, and the stronger global economic activity. The gains in imports have been almost exclusively capital goods, which are up more than 9% from the beginning of the year. This increased bodes well for productivity. Downside risks come from policy, where NAFTA may be in danger. Many industries may see markets vanish if free-trade is curtailed.

The ISM non-manufacturing index rose to 60.1 in October from 59.8 in September. Details were largely positive. The business activity index rose from 61.3 to 62.2. Sixteen industries reports increasing business activity. New orders slipped from 63 to 62.8. Employment increased by 0.7 of a percentage point to 57.5.  Supplier deliveries were unchanged at 58, suggesting the hurricanes were still somewhat disruptive. Some anecdotes suggest that the hurricanes were still disrupting supply chains. The non-manufacturing part of the economy is doing fine. Uncertainty about health-care and taxes could weigh on business sentiment. Finding qualified workers will get more difficult. The near-term future still looks bright.

Payrolls increased by 261,000 in October, but September’s loss was revised to a modest 18,000 gain. As expected the big loss in hospitality/leisure in September was revised to 102,000 and was reversed with an October gain of 106,000. The unemployment rate fell to a post-recession low of 4.1%, largely because of a large decline in the labor force. The three-month average of 162,000 and year-to-date average of 169,000 are consistent with a tightening labor market. Average hourly earnings pulled back slightly from September, as more lower wage workers came back to work following the hurricanes. Earnings decreased by 1 cent and were up 2.4% over the year. The household survey was disappointing. The labor force contracted by 765,000 and the labor participation rate fell from 63.1% to 62.7%. The labor market will power ahead at the recent trend through 2018. There could be some upside exposure in the South because of the hurricanes rebuilding impact.

International:

China’s official factory gauge fell to 51.6 in October from a five-year high of 52.4 in September. New orders and prices led the decline, as officials are increasingly prioritizing a campaign to clamp down on polluting industries and rein in debt. The non-manufacturing PMI fell to 54.3 from 55.4 the previous month. Tighter environmental supervision has impacted the PMI in October. As winter season nears, factories in the north reduce production due to pollution restrictions. The drag will not be enough to affect growth much because manufacturing’s contribution to growth is declining. The data suggests growth will be slightly milder but provide enough leeway for the government to push ahead with its deleveraging agenda. New orders declined to 52.9 from 54.8, the biggest drop since May 2012. Input and output prices fell. Conditions for small and medium sized companies deteriorated. The steel PMI fell to 52.3. Higher end spending and general consumption drove growth.

Important Data Releases This Week

November University of Michigan’s consumer sentiment index will be released on Friday, November 10 at 10:00 EST. The index jumped 5.6 points in October to a new cycle high of 100.7. We expect a small rise to 101.1 in November. Rising stock prices and the possibility of lower taxes should lift sentiment. However, gas prices are going up, which is not generally good for the consumer.


FTR is the leader in economic analysis and forecasting for the commercial freight and transportation equipment markets. For more information: Click here

Third quarter GDP showed a steady U.S. economy

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

Stocks in Europe advanced for a second day on Friday as the euro headed for its worst week since March. Gains in the Stoxx Europe 600 were broad-based as the European Central Bank’s slow approach to reducing stimulus encouraged equity bulls. Positive earnings from companies, including Volkswagen AG boosted confidence. However, the dollar’s three-month high hit commodity prices, with iron ore slipping and copper declining. Meantime, Spain’s stocks are underperforming as Europe’s worst constitutional crisis in decades comes to a head. Recent data shows the strengthening economic recovery in Europe with Morgan & Chase saying European companies are showing profit growth at twice the rate of their U.S. counterparts. That is helping the Stoxx Europe 600 to its best annual performance since 2013 with a year-to-date gain of 8.7%.

Technology stocks surged on stellar profit at Amazon and Alphabet Inc., sending the Nasdaq 100 to a record to its biggest gain since March last year. The S&P hit a new high as the U.S. saw its strongest consecutive quarters of growth in three years. Bonds rose on speculation about the next Federal Reserve chair. Real GDP advanced 3% in the third quarter, a sign of strength. Final sales were more sedate, rising 2.3%, more in line with the long-term trend of the economy. For the week, the Dow rose 0.5% and the S&P 500 gained 0.2%. Estimated S&P earnings growth is now 6.7%. Of the 273 companies that have posted earnings, 74% have topped expectations, compared to 72% over the past four quarters.

Last week showed a firming in the manufacturing sector. Durable goods orders rose 2.2% in September, boosted by two decent months of aircraft orders. More important, the core capital goods segment rose 1.3%, the third consecutive increase of that size. This strong puts the three-month average annualized rate of 11.6%, the fastest three-month growth rate since the eve of the steep oil drop in September 2014. With three quarters of the year in the books, the manufacturing sector is gaining strength. The strong-dollar and weak global growth has reversed itself in 2017. Manufacturers have added 104,000 workers so far this year.

Housing data was encouraging, as new home sales jumped 18.9% in September to an annual rate of 667,000, the highest level since October 2007. This economic series is volatile and has bounced around a lot because of the relatively low number of units for sale. 80% of the increase was in the South. The number of homes for sale was unchanged, but inventories fell by a full month to 5.0 months. Housing starts data has been weak and residential investment declined 6% in the third quarter. Don’t look for a boom in housing for the near-term, although constructions rebuilding will be active, as some 600,000 houses in Texas and Florida will need re-roofing.

The advance release of third quarter GDP showed a steady U.S. economy. This is the first time since 2014 that that GDP rose by at least 3% in two consecutive quarters. With the third quarter in the books, real GDP is on track to grow about 2.2% this year, in line with the average for the expansion. Final sales grew 2.3%, weaker than the 3% increase in the second quarter, but in line with the trend of the last few quarters. Personal consumption grew 2.4%, again following the trend. Real business investment had a solid, 8.6% increase, following the 8.8% rise in Q2. Exports were a plus, rising 2.3% and imports fell slightly. Residential investment saw another quarter of decline and state and local government spending held down the government sector. Year—over-year growth was 2.3%, also in lie with the trend growth since the Great Recession. The economy continues to perform well and economic prospects for 2018 are upbeat. Near-term downside risks are fairly low, barring a geopolitical event. Longer-term, there are risks, as interest rates rise and what could be major changes in trade policy. For the near-term, the sailing is smooth, but as rates rise and industries start to grow at a slower pace, more storm clouds will appear.

This will be a busy week for economic data. We get a look at personal spending, income and the GDP deflator. Also on the board are ISM manufacturing and non-manufacturing indexes, vehicle sales, construction spending, international trade, factory orders and employment.

Latest Data

The U.S. Economy:

The pace of economic activity picked up in September. The Chicago Fed National Activity Index increased to 0.17 from -0.37 in August. All four broad categories advanced during the month. The contribution of production-related indicators rose to 0.1 from -0.33. Employment-related indicators contributed 0.6 to the index. The personal consumption and housing category increased to -0.07 from -0.11.  The three-month moving average was unchanged at -0.16. The headline figure indicates economic activity is above average. Manufacturing has shown encouraging signs and industrial production will bounce back from the hurricane-affected third quarter. The U.S. economy remains solid and global economic activity is picking up. Policy changes are still a threat to trade. The hurricanes distorted employment activity, but there will be a bounce-back. Consumption appears solid. Some 600,000 houses need re-roofing in Texas and Florida. Construction activity will be healthy, but there are labor constraints that could hold down the starts numbers. Tax relief could boost the economy for a couple of quarters, but the deficit will rise, which could have long-term consequences. In all, the economy remains solid, with trend growth near 2.5%.

The advance durable goods report rose 2.2% in September, above expectations. The strength came from the nondefense aircraft segment, which advanced a robust 31.5%. There other positive data in the report. The important core capital goods component rose 1.3% and shipments increased 0.7%. Total shipments rose 1.0%. Nondefense capital goods orders including aircraft rose 5.9% and were up 11.8% from a year earlier, a strong number. Within transportation, orders for motor vehicles and parts increased just 0.1%. Orders for autos and parts are down 0.9% from a year earlier. Among manufacturing industries, the data was mixed. Orders for electrical equipment fell 0.1%, but orders for computer and other electronic products increased 1.6%. Despite disruptions from the hurricanes, factories are busy. September was the strongest advance since June. Encouragingly, the gains have become more broad-based. These gains should persist through the new-year.

The advance international trade in goods showed the trade deficit growing from $63.3 billion in August to $64.1 billion in September. Nominal goods exports increased 0.7% m/m. Industrial supply exports rose 4.8% and other goods exports gained 5.7%. This helped offset the capital goods exports dropping 0.6%. Nominal imports rose 0.9% and gains were broadly-based. Industrial supply imports rose 2.1%, while capital goods imports rose 2.2%. Fundamentals are supportive for trade, for now. The dollar has depreciated and global economic activity is picking up. There are downside risks associated with the protectionist stance by the Trump administration. The U.S.’s hard line stance on autos has emerged as the most significant obstacle to a new deal. Trade is a two-way street. While increasing exports may be good for U.S. manufacturers, a fall-off in imports could be very disruptive to supply chains and invite trade barriers.

New home sales jumped 18.9% in September, up 17% from a year earlier. Sales totaled an annual pace of 667,000 in September and the hurricanes don’t appear to have influenced the sales pace. All four Census regions advanced during the month. New home inventory was 279,000 in September, the same as in August, but the stronger sales pace drove the inventory-to-sales ratio down by a full month down to 5.0 months. The recent trend in sales has been flat for the last year-and-a-half, but we expect a more upward path to emerge. The labor market is pulling wages higher and will slowly lift demand.

International:

The European Central Bank held its regularly scheduled meeting last week and as widely expected decided to “taper” its quantitative easing program further. Specifically, the Governing Council announced it would dial back its rate of bond purchases starting in January and maintain that pace through September 2018, “or beyond, if necessary.” Data out of the region indicates that the economy needs less support. Real GDP for the euro-zone was up 2.3% in Q2-2017, the strongest rate in six years. Recent data show solid growth in the third quarter. Politics is a problem in Spain and the Brexit talks are not showing much progress. The Bank of England will likely raise rates sooner rather than later, but the pace of tightening is expected to be slow.

Important Data Releases This Week

September personal income and spending will be released on Monday, October 30 at 8:30 AM EDT. We expect personal income to rise 0.3% in September, after rising 0.2% in August. Wage growth is starting to improve. Nominal spending will rise 0.2%, also after falling 0.1% in August. Hurricane Harvey took a toll on spending in the last week of August. The GDP deflator is also expected to rise 0.3%, as higher energy prices followed the hurricanes.

October ISM manufacturing index will be released on Wednesday, November 1 at 10:00 AM EDT. Things are looking up for manufacturing. The ISM manufacturing index increased from 58.8 in August to 60.8 in September and we expect the index to hold on to the bulk of that increase. In September, new orders remained above the 60 mark for the fourth consecutive monthly increase and production rose from 61 to 62.2. We expect a slight slippage in the index to a still lofty 60.2.

September construction spending will be released on Wednesday, November 1 at 10:00 AM EDT. Construction spending surprised on the upside in August, rising 0.5%. Public nonresidential outlays increased 1.1%, but that increase barely broke a long trend of weak spending. Private construction rose 0.4% and we expect a smaller 0.2% rise in September. The August strength won’t last, but we still expect a 0.2% advance.

October vehicle sales will be released on Tuesday, November 1 at 12:00 AM EDT. Sales jumped from 16.1 million in August to 18.6 million in September, driven by replacement of vehicles lost in the hurricane in Texas. A smaller replacement number is expected to come from the other hurricane in Florida, with sales retreating to 17.3 million. Sales will retreat back to trend for the remaining of the year and into 2018.

September factory orders will be released on Friday, November 3 at 10:00 AM EDT. We look for factory orders to rise 2.2%.  The advance durable goods report showed a strong 2.2% jump in orders based on the second decent increase in civilian aircraft orders. Core capital goods orders were decent, rising 1.3% for the third consecutive month.  The decent trend in manufacturing activity will continue.

October ISM non-manufacturing index will be released on Friday, November 3 at 10:00 AM EDT. Service sentiment has been doing well over the last few months. Confidence is projected increased from 55.3 in August to 59.8 in September. Consumer spending is holding up and prospects in the service sector are doing well.

September international trade will be released on Friday, November 3 at 8:30 AM EDT. The advance goods report showed a widening of the trade deficit, from $63.3 billion to $64.1 billion. Both goods imports and exports posted gains and the final report will reflect this pattern.

October employment will be released on Friday, November 3 at 8:30 AM EDT. Last month’s 33,000 job decline was driven by the hurricane. This distortion will unwind in October, with employment rising by 250,000, as workers return to jobs and employers catch up on employment.


FTR is the leader in economic analysis and forecasting for the commercial freight and transportation equipment markets. For more information: Click here

Pessimists have been Wrong About the U.S. Stock Market

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

The dollar climbed and Treasuries fell on Friday after the latest developments in Washington buoyed optimism about the chances of tax reform after the Senate approved a budget blueprint that may pave the way for tax cuts. Miners led the way for the advance in the Stoxx Europe 600, as copper and other industrial metals gained ground. Investors are eyeing political developments in Spain, the decision on a Federal Reserve Chair that may sway the path of interest rates and Brexit negotiations, which are suggesting some caution. Volatility surged 17% on Thursday, but fell on Friday on the news that Trump is considering Jerome Powell or John Taylor, as well as the possibility of higher incomes.

Calm and stability were expected from Chinese economic data leading up to the important Communist Party Congress last week and third quarter national accounts data confirmed expectations. Real GDP increased 6.8% y/y in the third quarter. Manufacturing was a bright spot thanks to the upswing in the global economy, especially the tech sector. Consumer demand remains healthy. Investment slowed in the quarter on account of the slowing housing sector. Policy is not expected to change much in the foreseeable future, but the economy is still expected to proceed at a slower pace as the government slowly tries to control credit, at least for the private sector. The government is reaching its growth targets mainly through credit to large state enterprises. There is still a danger that credit growth could implode in China, unless the government successfully steers the economy towards a more sustainable path.

No matter what seems to happen politically, stocks keep on rising. Hurricanes have hurt insurance company earnings, who suffered a 63.3% fall in quarterly profits.  Excluding insurers, earnings are up 6.9% in the third quarter so far.  The storms have not stopped the stock market’s advance, up 15% in 2017. The storms caused massive disruptions to labor forces and spending, but the pendulum is going to swing the other way, as rebuilding starts in earnest. For the week, the S&P climbed 0.9% to 2,575.21, capping the longest streak of gains since the first quarter.

Economic data continues to reflect the hurricane’s impact. Both industrial production and housing starts were slowed down by the storms. On the plus side, we should see some payback in coming months. Despite the soft production and housing starts data, the Fed will be encouraged by the rise in import prices. Both fuel and non-fuel import prices continue to firm, partly justifying a December interest rate increase. Winds continue to swirl around the next Fed Chief, with Janet Yellen also in the race for Trump’s consideration. No big changes are expected under Janet Yellen and Jerome Powell and a slightly more hawkish tone is considered under John Taylor.

The modest 0.3% increase in industrial production would have been larger except for the quarter of a percentage point drag from Hurricanes Harvey and Irma. Industrial production fell at a 1.5% annualized rate in the third quarter. We do look for industrial activity to accelerate modestly for the remainder of the year. Housing starts were also unable to escape the wrath of the storms, falling 4.7% in September.  There are 600,000 homes that need reroofing in Florida and Texas. While they don’t count as starts, they will compete with a worsening labor and material situation and likely depress the starts number for a number of months. Housing starts in the South comprise nearly 50% of starts in the nation.

Next week, we get a peek at advanced durable goods and international trade in goods, plus new home sales and wholesale inventories. We also get a look at third quarter GDP. The hurricanes slowed economic activity in some sectors and pushed forward some other sectors, including auto sales. This will bring some uncertainty to the third quarter, but may spark additional activity in coming quarters. The economy remains essentially solid with little near-terms risks, except in the equity markets where some analysts say a correction is likely. So far this year, the pessimists have been wrong about the U.S. stock market. Some day they will be right, but hopefully, that day is not near.

Latest Data

The U.S. Economy:

Industrial production rose 0.3% in September, following a 0.7% decline in August. The September increase was broad based, with utility output climbing 1.5% and mining output up 0.4%. Manufacturing came in weaker than expected, rising just 0.1%, following a 0.2% decline in August. Total production was up 1.6% y/y and manufacturing 1.0%. Motor vehicles and parts output advanced 0.1% in September after a 3.6% jump in August. Excluding the auto sector, manufacturing rose 0.1%.  September was a difficult month for estimating industrial output because of the back-to-back hurricanes in different states that clouded production. These numbers could see sizable revisions in coming months. Hurricane Harvey hit in an important petrochemical producing area and halting and curtailing operations weighed on U.S. industrial production in August. A return to full production of hurricane affected areas will take a few months. Natural disasters aside, manufacturing has shown encouraging signs in recent months.  Fundamentals are solid. The U.S. domestic economy is in fine shape and the global economy is accelerating. The dollar has increased slightly in the last few weeks, but has been on a downhill slide most of the year, good for exports. Trade policies are questionable and may represent a downside risk. In balance, the outlook for industrial activity calls for a modest advance.

Homebuilder sentiment rose from 64 in September to 68 in October, suggesting the housing market is starting to rebound from the hurricanes. All three subcomponents posted gains. Additionally, the three-month moving average four all four regions either rose or held steady. On a regional level, the South had the biggest jump in confidence. Texas had significant property damage from Hurricane Harvey and will be rebuilding in coming months.

Although builder confidence rose in October, housing starts continued to slide in September. Starts fell 4.7% in September to an annual pace of 1.217 million. Housing permits also fell sharply, dropping 4.5% to a 1.215 million units annualized pace. The damage from the hurricanes had a hand in the September slowdown, but the Northeast and Midwest also saw slowdowns because of the multi-family weakness.  Single-family starts fell 4.6%, while the multi-family sector saw a 5.1% drop. Over the year, the decline in the multi-family sector is faster than the single-family component is increasing. Residential single-family construction has been mostly flat this year. The multi-family sector has a serious backlog, with the ratio of units under construction but not yet completed is above 20 months, near a record high. Sales of single-family homes have increased slowly over the past seven years, but it is still far below the numbers of the last decade.

Existing home sales regained some of the ground lost the previous three months, but remain down year-over-year. Total sales increase 0.7^ from August to a 5.39 million annualized pace. However, they remain down 1.5% from September 2016. Hurricanes Harvey and Irma dragged down sales in the South. The increase was led by single-family homes, but condo and co-op sales continue to fall. Single-family listings came in at 1.68 million, up 1.8% from August, but down 6.1% y/y. The inventory-to-sales ratio equaled 4.2 months for single-family homes, down 0.2% from a year earlier. The market remains tight. Market drivers are favorable in terms of incomes and jobs, but home prices are increasing faster than incomes. This makes the environment unstable. Only more home construction will bring down price, barring a recession. Any change in the market appears to only happen slowly. We still expect sales to perk up for the remainder of the year.

International:

China’s robust expansion is boosting the global economy that is having the best performance in a decade. China’s GDP increased 6.8% in the third quarter from a year earlier, following growth of 6.9% in the first half of the year. Retail sales jumped 10.3% in September and industrial production rose 6.6%. Fixed asset investment climbed to 7.5% in the first nine months of the year. Consumption is the stabilizing factor in the Chinese economy and industrial production quickened in September, which was reflected in the PMI reading. The fourth quarter should moderate a bit due to slower investment, but in general the economy is stable this year. For 2018, the economy should cool a bit amid less accommodative monetary policy. Demand should ease in the next six months and cooling import growth in Asia should offset stronger demand growth in Europe and the U.S.

Important Data Releases This Week

September advanced durable goods will be released on Wednesday, October 25 at 8:30 EDT. Durable goods indicate continues strength in the manufacturing sector, by rising 2.0% in August. Aircraft orders led the charge, rising 44%. The encouraging part has been in nondefense capital goods orders, which grew 0.9%. Aircraft orders are volatile, so total orders are projected to only rise 0.2%, but the core capital goods sector will still exhibit strength, rising 0.5%.

September new home sales will be released on Wednesday, October 25 at 10:00 AM EDT. New home sales slipped in August to an annual rate of 560,000. Much of this drop can be attributed to Hurricane Harvey, which impacted about 14% of single-family permits. This suggests a further slight reduction in September to 550,000.  However, we project some make-up in sales for the remainder of the year.

September advanced goods deficit will be released on Thursday, October 26 at 8:30 AM EDT. We project the goods trade deficit to widen from $64.4 billion in August to $65 billion in September. The lower dollar has been favoring exports but the dollar has firmed a little lately in recent weeks. Import prices rose in September and supply chains have been preparing for the holidays.  We look for stronger imports and still healthy exports.

GDP (2017-Q3 first estimate will be released on Thursday, September 28 at 8:30 AM EST. GDP was soft in the first quarter, rising just 1.2%, but rebounded in the second quarter by 3.1%. There is heighted uncertainty in the third quarter because of the hurricane effects. We project third quarter GDP to come in a little weaker than trend, at 2.3%, but rebound in the last and first quarter of 2018, as rebuilding picks up.  Trend will remain near 2.5%. Tax cuts could boost growth to near 3%, but only for a couple of quarters and then revert to trend. The deficit will rise quite substantially under the new tax plans.


FTR is the leader in economic analysis and forecasting for the commercial freight and transportation equipment markets. For more information: Click here

The Jump in Retail Sales Won’t Last

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

Bonds in Europe gained after a report that the European Central Bank may continue asset purchases for at least nine months after it starts tapering in January. Global stocks advanced after Chinese trade data underscored the strength of the global economy. The Stoxx Europe 600 gained 0.3% on Friday to the highest level in more than 16 weeks. The British currency rallied earlier when a report surfaced that the EU may offer the U.K. a two-year transition to stay in the union. ECB officials are considering reducing quantitative easing to 30 billion euros a month from the current pace of 60 billion euros. While the central bank’s governors are split on the need to identify an end date for purchases, they pledged to keep buying bods through September 2018.

The equity rally continues to surprise even the most optimistic equity forecasters. The S&P continues to pile on gain after gain, including five straight weekly gains. At 2,553, the index sits over 50 points higher than the most optimistic predictions Bloomberg compiles at the start of 2017. The rally has added more than $3 trillion to U.S. prices this year. It’s hard for even the optimists to keep up. The test comes this week, as third quarter earnings kick into high gear. Although the domestic and global economy, are doing well, are they doing enough to justify the stock market valuations?

Higher gasoline prices and replacing storm-damaged property put upward pressure on inflation figures this week. Core CPI came in softer than expected, adding more mud to the waters and did little to clarify the inflation the Fed is trying to understand. The hurricanes also boosted retail sales, up 1.6%, on higher gasoline prices and strong sales of building supplies. Excluding gas and food, sales were decent, up 0.5%, but not all sectors advanced. Spending remains modest on trend, supported by a healthy economy that still is only exhibited sluggish income gains.

The latest minutes of the FMOC meeting touched on the impact of the hurricanes on the economy and the group had a lively debate on whether the recent weakness inflation was attributed to transitory factors, or more persistent longer-term factors. The minutes noted that the participants thought that the hurricanes would reduce growth in the second half of the year but that growth would pick up as rebuilding accelerates in early 2018. Several participants commented of the lack of labor wage pressures and that the sustainable level of unemployment could be lower than anticipated. At the meeting the FMOC kept interest rates unchanged but announced the balance sheet would begin to decline. Although not discussed at the meeting attention is picking up to whom will serve as Fed chair next year. Mr. Trump has stated he may name the chair, as early as the end of the month.

The hurricanes clouded monthly data and the trend is muddied but not impossible to discern. Most of the economy was on solid footing before the hurricanes and large swings in data will be transitory. The drop in payrolls will reverse in October, as we know the labor market is solid. The jump in retail sales won’t last. The spikes in inflation the last two months also won’t hold up. In the upcoming week, we look for industrial production to be decent, rising 0.3%. Utility output may come in weak because of the storms. Next week, we get more insight on housing and the odds are that the hurricanes didn’t help an already precarious housing market. Lumber prices are up nearly 30% this year, a result of the U.S.-Canada lumber dispute. Also, there are labor constraints on housing. Although the single-family market is advancing slowly, the multi-family sector has made its run. The end result is that housing is not moving anywhere fast.

Latest Data

The U.S. Economy:

The NFIB small business optimism index edged back from 105.3 in August to 103.0 in September. The index remains at an elevated level and consistent with solid GDP growth in the third quarter. The index is slightly below the first quarter average of 104.7. Expectations for the economy to improve in the next six months fell from 37% to 31%, the lowest since November 2016. Capital expenditure plans dropped from a net 32% to 27%, the lowest since February, but the index remains in the range we’ve seen in the last few years. Meantime, 17% of respondents believe now is a good time to expand a business, down from 27% in August. A net 19% of firms plan to expand employment, compared with 18% in August. Small businesses are likely cutting expectations that healthcare reform will get done soon, but are maintaining support for tax relief. That plan looks increasingly uncertain in Congress, as deep divisions remain between those whom support tax cuts versus deficit hawks. The biggest problem small businesses face is finding qualified workers, a situation that is unlikely to change in the near term.

Higher energy prices following the hurricanes boosted producer prices, but this is likely to prove temporary. The PPI for final demand rose 0.4% in September, following a 0.2% advance in August. Goods prices rose 0.7%, largely driven by a 3.4% rise in energy prices. Excluding food and energy the PPI rose 0.3%. On a year ago basis, the PPI was up 2.5%. Inflation has picked up but transitory factors are at play. The depreciation of the dollar has boosted the price of goods in recent months. The Fed remains puzzled by the weak inflation in what is rapidly approaching a full employment economy, but is still likely to move in December, although the three increases scheduled in 2018 are still in question.

The CPI rose 0.5% in September, following a 0.4% increase in August. Like the PPI, energy was the driving force, with the energy CPI rising 6.1%, as gasoline process rose 13.1%. Food prices rose 0.1% in both September and August. Excluding food and energy, the core CPI rose just 0.1%. The Bureau of Labor Statistics said that Hurricane Irma had a small effect on data collection. Data collection was affected in some areas in Florida. The weak core reading suggests that a December interest rate increase isn’t inevitable, but we still think the board will still move. If the unemployment rate still in in the low 4% range, the Fed thinks higher inflation will start to show up. In this atmosphere, the Fed wants to be ahead of the game.

Retail sales surged in September, posting the largest gain since March 2015, but the growth was dominated by special factors. Sales rose 1.6% in September, following a 0.1% decline in August. Motor vehicle and parts sales surged 3.6% as a result of postponed sales and replacement sales generated by Hurricane Harvey. Building supply sales jumped 2.1%, also driven by reactions to the storms. Excluding autos and gas, sales increased a respectable 0.5%. Results were mixed across product lines, with many including electronics and appliance, department stores and drug and furniture stores posting declines.  Gas sales were strong, rising 5.8%. Most of the strength in the September report is unlikely to be repeated and future gains will follow trend. The outlook calls for modest gains. Sales growth is healthy despite little retail inflation and sluggish income gains. Wages will be the main driver going forward.

Inventory build shifted to a higher gear in August. Business inventories increased 0.7% in August, following a 0.3% rise in July. Wholesalers led the way, with a 0.9% rise, retailer stocks increased 0.7% and manufacturers saw a 0.4% increase. Business sales also accelerated, rising 0.7%, but that held the I/S ration flat at 1.38 months. The report has encouraging signs. Retailers, excluding autos and parts made a strong build, led by food and beverage stores. Wholesalers also posted an impressive performance, with widespread gains in both durable and nondurable goods. Manufacturers are benefitting from a healthy domestic and a improving global economy. The most encouraging sign was the strong sales report. The hurricanes may affect September data, but rebuilding is a plus for producers.

International:

China’s overseas shipments increased 8.1% in September, less than expected, but showing that Asian trade is holding up amid a strengthening global economy. Imports rose 18.7%, exceeding estimates and the fastest growth since March. Demand for Chinese products has proven robust as growth in major trading partners is perking up, but is also reflecting a weak point a year earlier. The official factory gauge was at a five-year high in September. The global economy is picking up and the U.S., Japan and Europe is doing better. Not only export demand is picking up, but domestic business activity is also strengthening since the beginning of the year. For China’s leadership, who are preparing for the 19th Party Congress, the September data shows robust growth. Looking forward, China is still forecast to slow down as the country tries to reel in its credit fueled boom.

Important Data Releases This Week

September industrial production will be released on Tuesday, October 17 at 8:30 AM EDT. We look for industrial production to rise 0.3% in September after the 0.9% decline in August. The August decline was attributed to Hurricane Harvey and unseasonable cooler weather, but we expect production to have bounced back in September. Power outages likely did affect utilities.

October NAHB homebuilder’s optimism index will be released on Tuesday, October 17 at 10:00 AM EDT. The NAHB index equaled 64 in September, down two points from August. We expect the index to fall another 2 points, reflecting the weak housing market and the impact of the hurricanes.

September housing starts will be released on Wednesday, October 18 at 10:00 AM EDT. We expect housing starts to fall from 1.18 million annualized units in August to 1.13 million in September. The multi-family sector remains weak, but the single-family sector is inching forward. The hurricanes likely put a damper on already weak housing.

September existing home sales will be released on Friday, October 20 at 10:00 AM EDT. We expect existing home sale to fall from the current 5.35 million in August to 5.28 million in September. Hurricane Irma likely slowed sales at the end of the month, but will rebound in coming months.


FTR is the leader in economic analysis and forecasting for the commercial freight and transportation equipment markets. For more information: Click here

Retail Sales Will Be Strong, Driven by Car Sales

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

There is a widely held theory that stocks anticipate profits. If that theory is correct, investors expect some big results on companies’ profits for the third quarter. The S&P rose 1.2% last week, hitting a sixth consecutive record high before falling on Friday. At 19 times forecast earnings, the index trades near the highest valuation since the dot.com era. Some analysts have cut their earnings estimates for S&P income growth by more than half for the third quarter. At 3.6%, they are predicating the biggest slowdown since 2011, since profits expanded about 11% in the second quarter. The hurricanes have messed with the numbers. Insurers are likely to report a 41% drop in profits as costs surged in the hurricane season. Automakers and airlines also may report lower profits because of lost business during the natural disasters. Analysts say that it doesn’t matter so much how big profits are, it’s the direction that counts.  It’s when profits are falling that stocks get into trouble. Analysts say that they aren’t concerned about a profit slowdown. They expect a rebound in the fourth quarter. They could be correct, but some analysts are getting worried as the relentless upward march of equities continues.

The recent hurricanes continue to leave a trail on U.S. economic data. This makes the job of separating noise from trend more difficult. Hurricanes usually add uncertainty to data. Retail sales are lost during storms, but post a bounce right before and after a storm. Certainly, car sales benefited from the storm. Vehicle sales jumped from 16.14 million in annualized units in August to 18.57 in September. This likely means a decent jump in retail sales for September. On the other hand, the storms depressed employment. Payrolls fell be 33,000 in September. Leisure/hospitality lost 111,000 jobs, a large part of them in Florida. Earnings jumped from 0.3% to 0.5%, in part because the lower paying hospitality jobs were lost. Elsewhere, data came in better than expected. The ISM manufacturing and non-manufacturing indexes jumped in September. The trade deficit narrowed more than expected and construction made a slight bounced-back after two months of weakness. All told, third quarter growth is likely to come in near 3% annualized rate.

This week, we will get a peek at small business confidence and the FMOC notes for September. There is unlikely few surprises in the notes and a December interest rate increase is likely in the cards. Producer and consumer inflation will see a fairly decent jump, due to energy prices that spiked following the hurricanes, but core and overall trend inflation will be restrained. Retail sales will be strong, driven by the jump in car sales. The path of interest rates will be determined by who is picked for Fed chair. Changes would be minimal under a Yellen/Powel run central bank.  Kevin Warsh/Taylor could represent a regime shift. A quicker pace of interest rate increases and changes on the balance sheet could raise downside risks in the middle-to-long term, under Warsh/Taylor. There are still downside risks associated with normalizing monetary policy, but a slower pace could mean a longer expansion.

Latest Data

The U.S. Economy:

Construction spending increased 0.5% in August, following two months of declines. The increase was powered by gains in both public and private construction. Private construction rose 0.4% in August, up 0.4% from July and up 4.7% from a year earlier. Of the three components of private construction, spending on single-family structures rose 0.3% and was up 11.3% from a year ago. Spending on multifamily structures increased 0.9% and was up 2.3% from a year earlier. Private nonresidential spending rose 0.5% and was up 2.5% y/y. Of the largest components of private nonresidential construction, spending on utilities rose 0.5% but id down 7.4% y/y. Spending on manufacturing structures fell 4.3% m/m and is down 20.8% y/y. Spending on commercial structures increased 0.1% in August and is up 10.4% from a year ago. Public construction spending rose 0.7% from July and was down 5.1% year-over-year.  The industry scored an increase in August, but trend growth remains slow. The labor shortage will hurt rebuilding efforts from the hurricanes, but rebuilding will boost construction in coming quarters.

U.S. manufacturing conditions are improving. The ISM manufacturing index increased from 58.8 in August to 60.8 in September, the highest reading in 13 years. Details were solid. New orders rose from 60.3 in August to 64.6. Fourteen out of eighteen industries reported growth, led by apparel, plastics and nonmetallic mineral products. There were declines in three industries, including textile mills, furniture and printing. Production rose from 61 to 62.2. 13 industries reported an increase in production, compared with 11 in July. Inventories fell by 3 points to 52.5. Employment was solid, increasing from 59.9 to 60.3. New export orders increased from 55.5 to57. New import orders fell from 54.5 to 54.  The prices paid index jumped from 62 to 71.5.  Among commodities up in price were aluminum, caustic soda, brass, copper, freight and gasoline. The report suggests manufacturing conditions continue to strengthen. The survey captures both sentiment and actual production, so this report could be weaker than actual production data. Manufacturing is being helped by the lower dollar and a stronger global economy. Generally when the price index is above 65, the Fed is tightening monetary policy. But since actual inflation has been weak, they can afford to be patient. The bulk of the increase in the index early this year can be attributed to sentiment. Actual production data was positive but short of expectations.  Production data does appear to be getting stronger, giving more support to the sentiment components.

September new vehicle sales surged to a seasonally adjusted annual pace of 18.6 million units. Sales were the strongest since July 2005. Sales were boosted by replacement vehicle demand from Hurricane Harvey, which was the costliest storm ever in terms of vehicle damage. Momentum from the storms should continue into October because of Hurricanes Irma and Maria, though to a lesser effect. Light truck sales jumped to the highest of the expansion, rocketed from 10.11 million units in August to 11.76 million in September, up 11.6% y/y. Car sales increased from 6.03 million units in August to 6.81 million. As a whole, the hurricanes were a blessing for the auto industry as they reduced auto inventories, which had reached the highest level in more than 13 years, before the September sales surge. IHS Markit estimates that there were 500,000 to 600,000 more vehicles in stock than needed to meet demand. The sales surge came just in time to reduce inventory just before new model years are rolled out in the last quarter of the year. Even so, incentives remain strong to help clear out inventory. Production has been on a slower trend, falling from 12 million SAAR over the past two years to 10 million in August. The sales surge indicates a stronger than expected 2017, but the pace will revert back to the pre-storm trend in a couple of months.

The non-manufacturing ISM index jumped in September, rising from 55.3 to 59.8. The September increase placed the index at the highest level since August 2005. Details were impressive, as new orders increased from 57.1 to 63. There was a sizable gain in supplier deliveries, rising from 50.5 to 58. The business activity index rose from 57.5 to 61.3. Employment was more sedate than the other indexes, rising from 56.2 to 56.8. The prices paid index jumped from 57.9 to 66.3. The strength of the index suggests that growth was solid in the third quarter. Some of the rise in the supplier delivery index can be attributed to the impact of the hurricanes. The anecdotes were mixed, with several mentions of the recent hurricanes, with some saying revenue was down in affected areas. Also, there was mention of disruptions in the oil/gas industries. In all, the fundamentals for the service sector remain intact. Consumer spending is decent and prospects for construction are improving.

The U.S. trade balance had the smallest deficit in nearly a year. The deficit narrowed by $1.2 billion in August to equal $42.4 billion. Total nominal exports increased 0.4%, with goods and services exports both rising 0.4%. Exports of consumer goods surged 6.4%. Capital and automotive exports increased 0.9% and 0.5%, respectively. Imports decreased by 0.1% to $237.7 billion. Goods imports fell 0.2%, while services dropped 0.1%. The goods deficit has trended lower since April and the services surplus is at a 26-month high. Even so, the deficit is still more than $300 million higher than all of 2016. Hurricane Harvey weighed on August’s result, but the impact on trade seems to be fairly small, as inbound container traffic was diverted to other ports. Exports of petroleum fell by $1 billion, in part hurt by the storms. Global conditions are supportive for trade over the coming year. Further moderation in the dollar is a big help. The stronger global economy is a plus. The protectionist stance of the Trump administration may cause the government to disrupt existing trade agreements. Any disruption would negative implications for the manufacturing supply chain.

Hurricanes Harvey and Irma distorted the employment situation in September. Payroll employment dropped by 33,000 jobs in September.  Leisure/hospitality, most likely in Florida, created most of the drag, declining by 111,000. The unemployment rate declined to 4.2%, but that was because of the surveyors could not access all the sample group in the affected areas. Based on the experience of past hurricanes, the September numbers will see dramatic revisions. The Bureau of Labor Statistics did not adjust the estimation procedures. Weekly hours worked remained steady at 34.4. Hourly earnings increased by 0.5%, bringing the year-over-year gain to 2.9%. This may have been caused by a large decline in the lowest paid jobs. The participation rate increased to 63.1%, a welcome development. While payrolls were slowing prior to the hurricanes, recent indicators from the ISM and unemployment claims suggest that job creation will bounce back quickly. Rebuilding will drive demand in affected areas and payroll growth will be healthy well into 2018.

International:

The euro area economy picked up in September as services performed better than expected and new orders rose at the fastest pace in more than six years. The PMI climbed to 56.7, the highest in four months. The services index increased to 55.8. The brighter economic outlook has pushed up the euro almost 12% against the dollar and almost 6% on a trade weighted basis, but has stabilized in recent weeks. For every 10% jump in the trade weighted euro, exports fall by about 5%. The ECB projects GDP growth at 2.2% this year, 1.8% in 2018 and 1.7% in 2019.

German factory orders rebounded in August, a sign that Europe’s largest economy is sustaining its rate of growth. Orders rose 3.6% in March, after a 0.4% decline in July. It was the biggest increase since December. German exporters are benefitting from a global recovery. The German economy will continue its course of strong growth in the third quarter, with only a slightly slower pace of growth than in the first half of the year. Domestic orders rose 2.7% and export orders by 4.3%. The solid up-swing in manufacturing activity should continue for the next few quarters.

Important Data Releases This Week

September NFIB will be released on Tuesday, October 10 at 6:00 AM EDT. We look for the survey to fall from 105.3 to 104.5. The hurricanes likely lowered confidence a bit, consistent to what followed after Hurricane Katrina. Political developments were neutral. The administration didn’t repeal the Affordable Care Act, but the government didn’t shut down.

September PPI index will be released on Thursday, October 12 at 8:30 AM EDT. We look for index to increase 0.4%, following the 0.2% rise in August. Energy prices spiked following the hurricane, but settled down. Other industrial commodities have trended upwards as the global economy is shifting to a higher gear.

September CPI index will be released on Friday, October 13 at 8:30 AM EDT. We look for index to rise 0.6% in September following the 0.4% rise in August. Gas prices jumped in September, following the hurricanes.  Core inflation will rise 0.2%.  Energy prices will settle down and inflation will resume its positive, but still weak advance. The Fed will still move in December.

September retail sales will be released on Friday, October 13 at 8:30 AM EDT. We look for retail sales to rise 2.0% in September after August’s 0.2% decline. Hurricanes add uncertainty, but auto sales and gas prices increased strongly in September. Excluding autos and gas, we expect a still decent 0.8% advance.


FTR is the leader in economic analysis and forecasting for the commercial freight and transportation equipment markets. For more information: Click here

Vehicle Sales have Rebounded Following Hurricane Harvey’s Impact

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

The dollar looked poised to finish the best weekly gain of the year and equities headed for the best month this year, as investors weigh the prospects for tax cuts in the world’s largest economy. Trump’s tax plan, which still needs approval from Congress, currently lacks detail, leaving investors guessing which parts of the package will win passage in Congress. The chances of higher interest rates at the end of the year have increased to 65%, driving equities higher and taken money out of gold, which is on track for the worst month this year. The S&P Index, the Nasdaq Composite Index and the Russell 2000 all set records on Friday. Treasuries slumped when word leaked out that Treasury Secretary Steven Mnuchin met with former Fed Governor Kevin Warsh to discuss the role of Fed chair. Financial shares, which would stand to gain on Warsh’s views on deregulation helped spearhead the market’s gains. Other investors said Warsh’s nomination would not bring confidence to the Fed and expect equities to fall if he is announced.

Meantime, data out of Europe underscored the region’s economic progress. German unemployment fell to a record low in September providing encouragement for the European Central Bank as it contemplates reducing asset purchase in coming months. The Stoxx Europe 600 ended the quarter up 1.9%. The MCSI All-Country Index increased 0.1% on Friday for an eleventh straight advance.

Housing data kicked off a relatively light week for economic data. New home sales fell 3.4% to a 560,000 annualized pace in August. The Houston metro area accounts for about 5% of new home sales, providing an indication of the magnitude of the hurricane-related disruptions we will see in economic reports for both August and September. Consumer confidence was only dinged by hurricane effects, falling 0.6 points, according to the conference Board. Durable goods orders were the only bright spot in economic activity this week, rising 1.7%, helped by rising aircraft orders. New orders for core capital goods orders increased 0.9%, a good sign for business investment plans going forward.

The economy expanded a bit faster in the second quarter than previously estimated, rising at a 3.1% annual pace. Economic growth in the second quarter was the strongest since the first quarter of 2015, but followed a 1.2% increase in the first quarter. Momentum likely slowed the third quarter, in part due to the impact of the hurricanes Irma and Harvey, which probably reduced growth by half-a-percent. Rebuilding efforts are expected to boost GDP growth in the final quarter and into 2018. Hurricane Harvey was blamed for the weakness in retail sales, industrial production and weaker home-building in the August reports. Hurricane Irma will have an effect on September data. The economy’s growth rate for Q3 might dip below the trend 2.5% rate because of the hurricanes, but is likely to gain that ground back. The economy remains on solid ground for the near-term, but does face challenges in the long-term as interest rates rise and central banks withdraw stimulus.

Mr. Trump proposed the biggest tax overhaul in three decades including reducing the corporate tax rate to 20% and implementing a new 25% tax rate for pass-through businesses such as partnerships to boost the economy. The plan was short on details on how the tax cuts, which would cost about $1.5 trillion over a decade, would be paid for without raising the budget deficit. That sets up a situation where it would be difficult to pass as it is.

Next week will be relatively heavy for economic data and reports will reflect the disruption of the hurricanes. Construction spending is expected to post a small gain and the ISM manufacturing index will reflect a stronger industrial sector. Vehicle sales may have rebounded following Hurricane Harvey’s impact at the end of August. Employment will come in weak, likely near 100,000, and was also affected by hurricanes. Geopolitical tensions remain on the radar, with tensions growing between the U.S. and North Korea. There could be an economic impact if confidence begins to waver. So far, business and consumer confidence has held up well, despite tensions and brinkmanship emanating out of Washington.

Latest Data

The U.S. Economy:

Consumer confidence edged down in September, but remains solid. The Conference Board’s index of consumer sentiment fell from 120.4 in August to 119.8 in September. The index of current conditions fell from 148.4 to 146.1, while the expectations index rose from 101.7 to 102.2. The recent hurricanes have created some uncertainty and likely helped lower the index. Rebuilding efforts will help offset the decline in economic activity ad help shore up confidence. Economic data in August came in weaker than expected and September’s reports also will show some impact from the storms. Generally, the rebuilding from natural disasters offsets the losses, but that could take several quarters.

The pace of U.S. economic activity slowed in August. The Chicago Fed National Activity index slipped to -0.31 from 0.03 in July. Two out of four broad categories contributed to the decline. The contribution of production-related indicators dropped to -0.36 from 0.03. Employment-related indicators contributed 0.05 to the index, compared to 0.09 the previous month. The 3-month moving average moved down to -0.04, compared to a neutral 0.00 reading the month before. Some of the weakness in consumption can be attributed to Hurricane Harvey, which hit in the last week of August. The flood will be felt for months in the utility sector. The hurricane hurt auto sales in August, although there should be a pick-up in coming months. The hurricanes will have an impact on September sales and production, before rebuilding efforts start to kick in.

Sales of new homes slipped in August, falling 3.4% m/m and was also down 1.2% from a year earlier. Unlike the existing hoe market, the supply of homes does not appear to be a binding restraint. The total of new homes has been increasing steadily over the past year and the I/S ratio is above that for the existing home market. Sales fell to an annual pace of 560,000 in August. With the market starting to slacken, the median new house price also fell to $302,059, down 7.5% in August, but still up 0.5% from a year earlier. Hurricane Harvey had a hand in slowing August sales, but the sales pace likely would have fell anyway. The industry appears to have slowed just as the supply is increasing. The market for existing homes is still tight.

Pending home sales declined 2.6% in August, giving back all its gains for the year and falling back to early-2016 level. The index fell to 106.3 in August, down 2.6% from a year earlier. Aside from temporary weather-related disruptions to home buying in the South, pending home sales have been hurt by rising and persistent affordability issues in certain locations. Exceeding tight inventories have put upward pressure on prices, in turn preventing may first time homeowners from buying a home. Greater wage growth will help the affordability issues. Tighter monetary policy and higher interest rates will present greater headwinds to home sales in coming months.

New orders for durable goods increased 1.7% in August, larger than expected. August marked the second increase in orders this summer. Total orders are up 5% higher than a year earlier. Excluding transportation, orders rose 0.2% in August and are up 5.9% y/y. Core capital goods orders rose 0.9% excluding civilian aircraft and shipments rose 0.7%. Autos and parts orders rose 1.5%, but the road ahead for autos is soft. Among manufacturing industries, orders were generally positive. Orders for electrical equipment lost 0.3%, but orders for computer and electronic products increased 0.7%. Orders for primary metals were up 1.7% are up 11.9% from a year earlier. New orders for machinery advanced 11%.  Fundamentals for business investment remain solid. Production of core capital goods is trending in the right direction. There are some risks as the lack of action in Washington to pass any legislation related to stimulus and lower taxes for businesses could undermine confidence and affect investment decisions.

Personal income rose 0.2% in August, following a downwardly revised 0.3% advance in July. Meantime, personal spending fell 0.1% in the same month.  It was the first decline in since January. There is little doubt that Hurricane Harvey had a hand in the lower spending and income reports. Looking through the hurricanes, spending growth is growing at a pace that modestly exceeds GDP growth.  Growth is averaging between2.5% and 3% annual rate. Personal income grew 3.2% in 2016, but that wasn’t as fast as in 2015. The share of income going to the top 5% hit a record high in 2016 of 22.6%.  The bottom quintile fell to 3.1%, a record low. The middle quintile took in 14.2% of income, also a record low. Inflation remains weak, with the PCE deflator increasing just 0.2% in August, up 1.4% from a year earlier.  The core PCE was up just 1.3% y/y. The weak readings won’t hinder the Fed, which is expected to raise rates one more time this year.

International:

China’s manufacturing activity grew at the fastest pace since 2012 in September, easing worries of a slowdown before a key political meeting next month. The official PMI rose to 52.4 in September.  Production, new orders and output prices all improved to the highest level in a year. It marked the 14th consecutive month of expansion and come ahead of the Communist Party Congress in mid-October.  Indexes for raw materials including paper, wood processing and furniture and Chemicals were all above 75, indicating large price increases. Output prices rose at a slower pace, indicating lower profit margins further along the supply chain. A separate PMI for steel fell to 53.7 in September, down from 57.2 in August, as that industry faces production restrictions aimed at reducing air pollution in the winter. The Caixin/Markit PMI fell to 51 in September from 51.6 in August, as new export orders growth slipped. The S&P recently downgraded China’s sovereign credit rating, saying the government’s deleveraging drive has progressed slower than expected, leading to higher economic and financial risks.

Important Data Releases This Week

August new home sales will be released on Tuesday, September 26 at 10:00 AM EDT. New home sales fell 9.4% to 571,000 in July and we look for an increase to 590,000 in August. A jump in prices slowed July sales, so a small bounce-back is expected.

August ISM manufacturing index will be released on Monday, October 2 at 10:00 AM EDT. Things are looking up for manufacturing. The ISM manufacturing index increased from 56.3 in July to 58.8 in August and we expect the index to hold on to the bulk of that increase. In August, new orders remained above the 60 mark for the third consecutive monthly increase and production rose from 60.6 to 61. We expect a slight slippage in the index to a still lofty 58.2.

August construction spending will be released on Monday, October 2 at 10:00 AM EDT. Construction spending should resume its positive trend, rising 0.3% in August after falling 0.6% in July. Public spending was weak in July and the multifamily sector held back the residential component. The August report should return to the normal weak but positive trend.

September vehicle sales will be released on Tuesday, October 3 at 12:00 AM EDT. We expect sales to increase from 16.1 million in August to 16.8 million in September. Sales will get a boost in August-September as consumers replace the vehicles lost in the hurricanes. Following the artificial boost, vehicle sales will resume their long-term trend of roughly 16.6 million vehicles.

May factory orders will be released on Wednesday, August 3 at 10:00 AM EDT. We look for factory orders to rise 2.8%.  The advance durable goods report showed a strong 6.5% jump. Orders should advance but the nondurable sector won’t show that much strength. Core capital goods orders will be unchanged.

August ISM non-manufacturing index will be released on Wednesday, October 4 at 10:00 AM EDT. Service sentiment has been doing well over the last few months. Confidence is projected increased from 55.3 in August to 56 in September. Consumer spending is holding up and prospects in the service sector are doing well.

August international trade will be released on Thursday, October 5 at 8:30 AM EDT. We project the trade deficit to narrow from $43.7 billion in July to $42.4 billion in August. Already released goods data showed goods exports increasing 0.2% and imports slipped 0.3% during the month. A slightly weaker dollar should help exports going forward.

April employment will be released on Friday, October 6 at 8:30 AM EDT. We look for employment to rise by 100,000, slowed down by the hurricane. The storms will also slow employment growth in September, but rebuilding will add to jobs in coming months.


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