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.
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.
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.
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.