Welcome to FTR’s “Monday Morning Coffee “ blog. The following article is designed to keep busy executives up to date with the latest economic data releases. Released every Monday, this blog promises to keep our clientele updated with the latest weekly economic news and developments, highlighting its impact on the transportation, freight, and equipment markets. Hopefully, this will be an informative addition to the fine body of work associated with FTR.
The global equity rally that has repeatedly shrugged off rising geopolitical uncertainty now faces a new test: the apparent certainty of higher interest rates. Bond yields are rising and signs that the increase is starting to spill over into stocks, as well as other assets from gold to silver. The last time stocks and bonds declined together was in the taper tantrum of 2013, when the Fed hinted at reduced stimulus. A rout in Treasuries and bonds intensified last week as the European Central Bank said its contemplating removing from its message to expand, or extend is bond-purchase program if necessary. Global equities are on course for a second weekly loss, while gold and silver are declining as higher bond yields pressure non-interest bearing assets. Europe’s Stoxx 600 dropped 0.1% for the week, its fifth week of decline. The MCSI Asia Pacific Index declined 0.6%, the biggest weekly drop since early March.
In the U.S., turbulence is on the rise as earnings season approaches. In the holiday shortened week, the CBOE Volatility index hit the highest level since May. Swings in the Nasdaq have averaged 1% a day since June 9, pushing its 30-day volatility relative to the rest of the market to the highest since 2002. In the past, earnings have been the reliable antidote, offering investors comfort in times of stress. However, growth in profits is forecast to slow and valuations keep widening. It’s going to be a good quarter, but any slowdown in profits will call into question the march upwards of equities. Volatility has kicked up as central banks from Asia to Europe and the U.S. have taken a more hawkish stance, while seeking to remove nearly a decade of accommodation. After a stronger than expected jobs report, the S&P ended the week up 0.1% and the Nasdaq up 0.2%. How profits play out the next few weeks, may have a lot to say where the equity markets end up for the year.
The ISM manufacturing index kicked off the fireworks a day early on Monday, with the highest reading since August 2014. The ISM non-manufacturing index also topped expectations. The trade deficit narrowed in May, as exports rose 0.4% and imports slipped 0.1%. The stabilization of commodity prices and stronger economic growth among many of our trading partners are giving a boost to American exports this year. Vehicle sales fell 0.9% to 16.51 million annualized sales in June. Vehicle sales have topped out, but sales will still stay at fairly high numbers due to solid consumer fundamentals. Non-farm payrolls increased by 222,000 in June and April and May were revised higher. Earnings remain flat, rising 0.2% for the month and only 2.5% for the year. In all, the economy still appears on a solid course.
Next week will be a busy one for economic data. Inflation data will be released and attention will be focused on the core rates, for clues of further weakness. Retail sales will advance slightly, held back by slower auto sales. Industrial production will see a modest advance and business inventories will see a normal rise in trend stocks. The economy remains on a solid course. The second quarter is in the books and growth is estimated to be between 1.9% (The New Yok Fed) and 3.0% (The Atlanta Fed). The differences being some of the weights attached to confidence. Either way, the economy has good momentum heading into the second half of the year. Downside risks are tilted to the medium term, when the rise in interest rates, start to bite.
An equity market correction is likely, as money becomes less accommodative on a global level. Possible policy mishaps are fairly high, given the history of the current Congress, but some form of budget is likely to pass, but little else. The economy appears to stay on its long-term slightly above 2% course for the next few years.
The U.S. Economy:
Total construction spending was unchanged in May. A 2.1% increase in public spending was erased by a 0.6% drop in private construction. Total residential construction saw a 0.5% decline in May, while nonresidential spending edged 0.3% higher. All told, construction spending in May was 4.5% higher than a year earlier. Of the components of private residential construction spending, new single-family construction fell 0.3% m/m, but was up 7.9% higher year-over-year. Of the largest components of private nonresidential construction spending, manufacturing structure spending decreased 1.7% m/m and is down 10.7% y/y. Construction spending should remain on a positive, but modest track. There is room to grow in the single-family market. Public construction was a pleasant surprise, driven by utility construction. Public construction has been a drag on the other two categories, holding back the headline figure.
After three months of sales below a 17 million unit annualized sales rate, vehicle sales again came in below that threshold, coming in at 16.51 million. This represents a 1.7% decline from a year earlier. Light truck sales increased from 10.46 million to 10.59 million and were up 6.9% from a year earlier. Car sales decreased from 6.20 million to 5.91 million in June. Car sales were the lowest since 2011 and down more than 13% from a year earlier. Incentive spending is hitting records, but inventories are increasing. Some of the increase in inventories can be traced to lower fleet sales. Despite the lower sales trend, consumer fundamentals are still solid. Employment growth is still healthy and wages are rising. Low gas prices are a plus for truck sales. Sales should track between 16.5 million and 17 million per month for the remainder of the year.
Manufacturing ended the second quarter on a good note. The ISM manufacturing index rose 2.9 points to 57.8, better than expected. Details generally improved as new orders rose from 59.5 in May to 63.5 in June. Fifteen out of eighteen industries reported an increase in orders. The production index rose 5.3 points to 62.4. Inventories fell 2.5 points to 49. Employment rose by 3.7 points to 57.2. Trade details improved, with new export orders increasing by 2 points to59.4, while new import orders dropped by 2 points to 53.5. The index was at the highest level since August 2014 and details were upbeat. However, manufacturing is still somewhat restrained because of autos. Midsummer is the traditional time for summer auto plant shutdowns for retooling. The fact that auto sales are retreating suggests that the summer shutdown will be extended to lower inventories. Odds are the summer shutdowns will make look manufacturing look weak for a couple of months, but don’t read too much into that. Generally, manufacturing is on a modest upturn and that trend will continue.
Factory orders took a step back in May, falling 0.8%, following a 0.3% decline in April. Orders for durable goods and nondurable goods both fell 0.8% in May. Orders for core capital goods edged up 0.2%, following a 0.3% advance in April. Core capital goods orders were up 5.5% from a year earlier. Factory shipments edged up 0.1%. Inventories fell 0.1%, leaving the inventory-to-sales ratio unchanged at 1.38 months. The data suggests that some momentum in the manufacturing sector has been lost, although conditions are much improved from a year earlier. Factory sentiment has lost some luster, but still remains at a decent level. There are some cyclical forces at play. Autos are an example. Domestic sales have peaked and production will have to be lowered in response. However, the lower dollar and stronger global economy does mean stronger exports. Domestic oil production has been on an upswing, but may have peaked until oil process start to trend at a higher level. The ISM got strong in June, after a softening in April and May. This suggests a decent rebound for production, just before the July vacation schedule slows output down. On trend, industrial activity remains on a modest, forward track, but still short of robust.
The ISM non-manufacturing index improved in June, rising to 57.4 on June from 56.9 in May. Details were mixed. New orders improved from 57.7 to 60.5, but backlogs surrendered all of May’s gains, falling 4.5 points to 52.5. The employment index dipped 2 points to 55.8, while exports weren’t overly supportive for growth at the end of the second quarter. The business activity index was little changed coming in at 60.6. The index has been above 60 seven out of the last eight months. On trend the non-manufacturing segment of the economy is doing well over the past few months. The index captures both sentiment and activity. Confidence has weakened recently as the post-election boost has faded, but June’s gain likely can be attributed to actual activity.
The U.S. trade deficit narrowed to $46.5 billion in May from $47.6 billion in April. Total nominal exports rose 0.4% to $192 billion, a 25 month high. Goods exports rose 0.2%, while exports of services increased 1.0%. Exports of consumer goods surged 5.6% after two months of declines. Total nominal imports declined by 0.1%, after climbing the previous two months. Goods imports fell 0.3%, while services gained 0.9%. Capital goods imports rose by 2.4%, while automotive imports declined by the same percentage point. The past year has seen a significant increase in the trade deficit, largely a result of the strength of the U.S. economy versus its peers. The dollar has lost roughly 5% of its value since the election and will help exports going forward. Risks to trade are weighted to the downside. The Trump administration has notified Congress of its intention to renegotiate NAFTA. While talks might bring about a small reduction in the trade deficit with Mexico, they are introducing uncertainty for near-term trade and growth. The imposition with other trade partners could cause a potentially disruptive risk with supply chains and hurt manufacturing production.
The labor market continues to show strength. Payrolls rose by 222,000 in June, exceeding expectations. Employment in April and May was also revised up by 47,000. Payroll growth averaged 193,700 in the second quarter, about twice what is needed to keep up with the expansion of the working age population. The unemployment rate edged higher because the labor force expanded by 361,000 and more workers lost their jobs. The participation rate increased from 62.7% to 62.8%, equal to the 12-month average. The usual industries drove the June expansion, including healthcare, leisure and hospitality, professional and business services. Retailers added 8,000, following four months of losses. Wage gains remain modest, rising 0.2% for the month and up 2.5% for the year. Despite full-employment, companies continue to find workers without enticing them with higher wages. We expect employment growth to slow and wages to rise as pressure from a full employment economy starts to have a more pronounced impact later in the year and into 2018. The unemployment rate will top out at 3.8% in 2019 and wages will increase at an annual rate of 3.4%.
The euro-zone’s composite PMI came in at 56.3 in June, down from May’s 56.8 reading. The index points to economic growth of 0.7% growth in the second quarter, faster than a recent 0.5% growth rate projected in a recent poll. Backlogs increased to 56 from May’s 59.9 and were the second highest rate in six years. The PMI showed broad-based growth, with Germany, Italy, Spain and France showing improved readings from May. Manufacturing looked better, with the PMI rising to 57.4 in June, up from 57 in May. Growth rates improved for most countries, including the one for Greece, which signaled expansion for the first time since last August.
Important Data Releases This Week
June NFIB small business survey will be released on Tuesday, July 11 at 6:00 AM EDT. Small business optimism was unchanged in May and expectations for the economy also didn’t change. We see a small drop in the index from 104.5 to 104.
June PPI index will be released on Thursday, July 13 at 8:30 AM EDT. We look for index to increase 0.1%, following the 0.3% jump in May Energy fell in June but other inputs gained in price.
June CPI index will be released on Friday, July 14 at 8:30 AM EDT. We look for index to rise 0.2% in June following the 0.1% decline in May. Oil and gas prices fell in June, but food prices have firmed lately. Core prices have been weak lately, but we expect a return to trend, driven by rents and medical care.
June retail sales will be released on Friday, July 14 at 8:30 AM EDT. We look for retail sales to rise 0.2% in June after May’s 0.3% decline. Auto sales will be down and non-auto sales will see some upward swing in activity, except for gasoline.
May business inventories will be released on Friday, July 14 at 10:00 AM EDT. We project that business inventories will rise 0.3% in May after the 0.2% decline in April. The I/S ratio will remain unchanged.
June industrial production will be released on Friday, July 14 at 9:15 AM EDT. We look for industrial production to rise 0.2% in June after being unchanged in May. Manufacturing will remain bumpy the next few months as auto makers retool and try and reduce inventories. Manufacturing remains positive, but actual production will be short of survey promises.