The Economy will Accelerate in the Second Quarter

By | April 17, 2017

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

Overview

Coffee and Economic Review

Stocks from Tokyo to Moscow dropped on Friday, amid an uptick in political tension after a U.S. bombing in Afghanistan and comments from North Korean official. Trading in many markets were closed Friday for a holiday. The Topix fell 0.6% on Friday to the lowest level since Nov. 22. The index dropped for a fifth straight week, the longest losing streak since December 2015. South Korea’s Kospi index dropped 0.6% on Friday, down 0.8% for the week ahead of a birthday of Kim II Sung, North Korea’s long dead founder. The S&P lost 0.7% on Thursday, the third straight loss.

The calm in stocks is giving away to concern, with investors and Europe rushing in to hedge against declines. The Credit Suisse Fear Barometer, which measures the cost of buying protection against declines in the S&P index, neared an all-time high last week. The rally in global stocks stalled in recent weeks amid growing skepticism about Donald Trump’s ability to carry out promised infrastructure spending and tax reform after a failure to replace large parts of the Affordable Care Act. The S&P has lost 2.1% since March 1. Anxiety has jumped in Europe from concerns that political events will dominate market movements. The benchmark 10-year U.S. Treasury is starting to behave as it did in the run-up to Brexit, as yields fall while volatility climbs in one-month options.

Asian countries escaped the currency manipulator label in the latest U.S. Treasury report but remain wary of possible trade friction as President Trump maintains his administration will address trade imbalances. China, South Korea and Taiwan remain on a list for special monitoring of currency practices. Trump has softened his rhetoric against China’s trade practices as Beijing has intervened to prop up the value of the yuan and seeks help with dealing with North Korea.

Retail sales fell for a second straight month and consumer prices dropped for the first time in just over a year, suggesting the first quarter will come in soft. Automobile sales continue to weigh in on overall sales, falling in four out of the last five months. Retail sales have held up fairly well over the course of the past year. Fundamentals suggest that spending will continue to hold up.  Income growth is modest, but still growing and the low number of layoffs, suggest that the weak employment numbers in March might be just a one-month phenomenon. The CPI took a step back in March, falling 0.1%. Energy was a factor, but gasoline prices are on the rise in April. Core inflation is still alive and is tracking towards the Fed’s target.

Next week, weather will be an influence on the incoming economic data. Industrial production will be positive, helped by a boost from utilities. The weak auto sales pace will catch up with production and weaken overall manufacturing. Weather likely weighted in on housing starts. The East Coast snowstorm likely restrained housing starts. We will also see some existing home sales data for March this week.

The underlying economy is still fairly solid, despite some softening in sales. Mainly due to weak auto sales, the first quarter is going to come in soft. The stock market is struggling as the weaker pace of sales coincides with the growing realization that little, or no stimulus will emerge from Washington. The economy is still in fine shape, stimulus, or not. The underlying strength is still well north of 2%. Like the seasonal pattern of the last few years, the first quarter will start slow and then is projected to accelerate in the second and third quarters. There is a risk of a bigger stock market correction as the realization that the idea of additional stimulus may not emerge and the weak first quarter limits profits. Small stock market corrections do not harm the economy. Big ones do. In a world of growing geopolitical tensions and possible conflicts with North Korea and in the Middle East, a bigger correction may emerge.  Barring these dark outcomes, the real economy is solid, but growth will track only a few tenths above 2%.

Latest Data

The U.S. Economy:

The U.S. small business optimism index fell from 105.3 in February to 104.7 in March and was the second monthly decline. Despite the March decline, the index remains at an elevated level.  The index is down from its January peak, but is up 6.3 points since the election. March puts the first quarter in the books and the NFIF index averaged 115.3, compared to 99.7 in the fourth quarter. This is consistent with GDP growth of 5% in the first quarter and that is highly unlikely. Expectations for the economy to improve in the next six points fell 1 point to 46%, the third monthly decline. A net 16% of firms plan to expand employment, up from 15% in February. Small companies added twice as many workers in March as the average of the last twelve months. Small business are still finding it hard to find qualified workers and those planning to raise pay rose to 28% in March from 267% in February. Small businesses remain confident, but the differences between “hard data” and “soft data” are striking.

The PPI for final demand fell 0.1% in March.  Final demand for goods also fell 0.1%, held back by energy.  Excluding food and energy, final demand goods prices rose 0.4%. Within goods, the gasoline PPI dropped 8.3%.  On a year-ago basis, the final demand PPI was up 2.3% and the core goods PPI was up 4.0%.  Inflation is gradually moving towards the Fed’s target. The reduction of slack is putting upward pressure on prices, but there is no evidence that inflation is going to suddenly accelerate.

The CPI took a step backwards, falling 0.3% in March. This followed a 0.1% gain in February. Energy prices fell 3.2%, in part leading the March decline. Excluding food and energy, the core CPI decreased 0.1%.  On a year-ago basis, the CPI was up 2.4%, while the core index was up 2.0%. This keeps inflation moving towards the Fed’s target despite the March weakness. Year-over-year growth in the core CPI has been running about half a percent higher than the core personal consumption deflator. The Fed is still concerned that as we blow past full employment, it will place significant pressure on wages and translate into higher inflation. However, we think that would take several quarters before we would see any significant increase in inflation emerging, and the Fed will stay on its existing track towards normalizing rates.

Business inventories rose 0.3% in February, showing that the momentum in inventory build is continuing after a strong showing at the end of last year. Retailers posted a 0.3% gain, but excluding autos retail inventories were virtually unchanged. Wholesale stocks also gained 0.3% and manufacturer’s added 0.2% in February. Sales increased 0.2%, following January’s 0.3% increase. The I/S ratio held steady at 1.35 months. For reference, the I/S ratio a year earlier was 1.41 months. Inventories are coming in lighter in the first quarter and in the fourth quarter of last year, but that was expected. Sales growth has moderated, reducing incentives for businesses to build stocks. Final demand is expected to remain firm as consumers have a full wind in their sails. Manufacturing is improving with five straight months of gains. The greenback is retrenching to pre-election levels, easing conditions for exports. Hopes for a fiscal boost are fading, but the economy is healthy. Stock-building is continuing on a modest course.

Retail sales were weak in March, falling 0.2% after a 0.3% decline in February. Auto sales were a major drag, accounting for the decline in March and much of the downward decline in February. Excluding autos and gas, sales increased 0.1% in March, the same rise as in February. Year-over-year growth was 5.2% in March, not much moved from February’s 5.1% reading. Large declines were reported in March at building supply stores, vehicle dealers, gasoline stations, sporting goods stores and restaurants. Electronic and appliance stores, apparel stores and miscellaneous retailers saw gains during the month. The outlook for the consumer is still optimistic. Sales have held up over the course of the year and some items did see softness in prices. This supports real spending growth, but not necessarily nominal growth.  Wage growth is accelerating. Fundamentals suggest decent spending, but there are some upside risks that would be scaled back if no stimulus emerges from Congress.

Important Data Releases This Week

The April NAHB housing market index will be released on Monday, April 17 at 10:00 AM EDT. The index is expected to fall from 71 to 70 in April. The index remains elevated and builders remain optimistic.

March housing starts will be released on Tuesday, April 18 at 8:30 AM EDT. Housing starts got some boost from warm weather in January and February, but a snowstorm in the Northeast likely slowed activity in March. This suggests starts dropped from 1.288 million in February to 1.50 million in March. Single-family starts have been running ahead of permits, suggesting some slower activity in coming months.

March industrial production will be released on Tuesday, April 18 at 9:15 AM EDT. We look for industrial production to rise 0.4% in March after being unchanged in February. The weather was colder in March, boosting utility output. Mining will remain positive, but manufacturing will weaken as auto production will slow along with sales.

March existing home sales will be released on Friday, April 21 at 10:00 AM EDT. Existing home sales are projected to rise from the 5.48 million units pace to 5.58 million. Pending home sales usually lead existing home sales by one or two months. Inventories remain lean.


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About Steve Graham

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