The Economy in the Next Two Years Will Be Good

By | February 19, 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

Global markets had a terrible week, following the drop in U.S. equities that started on February 2. The World shares were set to post their best week of gains in six years, following two weeks in the red. The MSCI World Index, which tracks shares in 47 countries, as up 0.4% after European bourses opened. The index has now reclaimed more than half of the 10.7% plunge from a record high on Jan.29 to a four-month intraday low a week ago. Investors have been puzzled at this week’s quick rebound in stock markets, which nave coincided with a rise in bond yields on evidence inflation is starting to creep up globally. Most markets in Asia have been closed for the Lunar New Year.

The S&P rose marginally on Friday to mark the biggest increase in five years, although earlier gains evaporated after the indictment of Russians for meddling in the 2016 presidential election sent investors into a defensive mode before a long weekend. The former correction sparked by inflation fears raised concerns among investors earlier in February raised fears the bull-market had ended, but data this week on retail sales and consumer prices made investors less worried and returned the stock market to an upward trajectory. A strong wave of fourth quarter earnings and deep corporate tax cuts led analysts for 2018 S&P earnings growth to 19% from 12% in early January.

It was a busy week for economic data. The leading story was the stronger-than-expected 0.5% advance in the CPI, a 2.1% year-over-year advance. While energy prices played a large role in the January advance, core CPI was up 0.3%, the biggest gain in a year. Both headline and core PPI rose 0.4%. Core PPI was up 2.5% y/y, the strongest since 2014. This indicates that inflation is trending upwards and as prices firm, the Federal Reserve will continue its tightening mode, with three and perhaps four moves.

Retail sales were disappointing, falling 0.3% in January. The main culprit was a 1.3% drop in autos and parts sales, a 0.4% drop in furniture sales and a 2.4% decline in building supply sales. It appears there is some seasonality in January sales as retail sales have been weak in Q1 since the Great Recession. The weak retail sales and stronger inflation raises some concerns. Consumer purchasing power could be slashed as inflation picks up, something to watch in coming months.

Industrial production underwhelmed in January, falling 0.1%, mainly due to a 1.0% drop in mining output. Manufacturing was flat for the second consecutive month. Despite the January weakness, we expect a decent trend for industrial activity. Both hard and soft survey data are pointing to an active industrial sector in coming months.

Housing starts were strong in January, rising 9.7%. However, the multifamily sector was the chief driver. Permits were up 7.4%, pointing to some decent advances in homebuilding activity in coming months. Confidence is high among builders and inventory low. Builders are selling homes as fast as they can be built. Labor is a constraint.

The economic calendar is very light for the upcoming week. The key will be existing home sales and they likely fell in January. The minutes from the January FMOC meeting are likely to be uneventful. The economy is doing well. The big GOP deficit financed tax cuts and fiscal stimulus will accelerate growth over this and next year. Unemployment is likely heading for the low 3% range, close to a record. In this environment, the economy is likely to overheat. Price pressures will intensify and interest rates will rise. Volatility will rise in financial markets, as investors adjust to higher rates. Once the stimulus is done in 2020-21, growth will revert to low rates. A recession is possible, depending on how the Fed adjusts to the new reality. The economy rarely lands softly after a period of overheating. That will make for some tricky policymaking. The time for stimulus is when exiting a recession, not at the tail end of a long expansion. The next two years will be good, but what follows is indeed scary.

Latest Data

The U.S. Economy:

Small businesses are optimistic in the first quarter of 2018. The NFIB small business confidence index increased from 104.9 in December to 106.9 in January. The increase placed the index just shy of its cyclical peak of 107.5. Details were somewhat mixed as plans to raise workers compensation increased while capital expenditures plans continue to underwhelm and showed little impact from the tax legislation. Expectations for the economy to improve increased from 37% to 41%. Capital expenditure plans inched higher to 29% from 27%. The net percent hat plan on raising compensation rose from 27% to 31%, a cyclical high. Small business leaders are generally optimistic about the future, but plans have not changed much in the last few months.

Retail sales came in weaker than expected and prior sales were revised lower. Sales fell 0.3% in January but were essentially unchanged excluding autos. Growth was revised in December to unchanged, following the big 0.8% surge in November. Building supply stores and restaurants suffered from bad weather. Growth leaders included gasoline stations, apparel stores and department stores. Sales in January were 3.6% above year earlier levels, down from 5.2% in December. Despite the January weakness, prospects for spending are better because of lower taxes and anticipated higher wages. Rising wealth from higher house prices and stocks are supports for spending. Spending will continue to rise at a modest pace.

The PPI rose 0.4% in January after being unchanged in December. Final demand goods increased 0.7%, while service prices rose 0.3%. The gain in goods was largely driven by higher energy prices, where gasoline prices rose 7.1%. Inflation will continue to gain ground. The labor market is tight, demand is picking up, energy prices are trending up and the dollar has depreciated. Bigger inflation issues should come in 2019 as the fiscal stimulus kicks in. However, inflation has been too low for several years and the Fed is moving to tame inflation. Odds are now, the Fed will move four times this year, instead of three.

Consumer prices increased at a strong 0.5% rate in January, more than expected. The core increased 0.3%, also stronger than expected. On a year ago basis, the headline number was up 2.1% and the core 1.8%, respectively. The energy CPI rose 3% in January, but that boost is temporary as oil prices fell in February. After falling in each of the previous two months, apparel prices rose 1.7%. All told, the monetary policy implications are straightforward as the Federal Reserve will move in March, the first of what is expected to be four interest rate increases.

Stockpiles closed 2017 on a decent note. Business inventories increased 0.4% in December, following November’s 0.4% rise. Manufacturers took the lead with a 0.5% increase, while wholesales clocked in with a 0.4% increase and retailers logged in with a 0.2% lift. Business sales moderated to a 0.6% gain. The I/S/ ratio held flat at 1.33 months. New vehicle and parts dealers saw a 0.4% decline, despite weaker sales. However, retailers excluding the auto industry advanced 0.5%.  The outlook for inventories is upbeat. Sales are holding firm and both domestic and overseas demand are healthy. Corporate tax cuts will add a shot of adrenaline in 2018-19. Chances of an infrastructure bill are fairly low, but business investment is accelerating. Inventories will continue to build, at least in the short-term.

Industrial production fell 0.1% in January, following a 0.4% advance in December. Mining retreated 1% in January and was the main reason for the topline weakness. Manufacturing remained flat for a second consecutive month. Auto sales lost ground and were 1.6% below year earlier levels, but auto production increased 0.6% in January. Non-auto manufacturing fell 0.1% during the first month of the year. Business equipment production rose 0.9%, but December was revised lower. Utility production advanced 0.6%. Industrial production disappointed in January, but the trend remains decent by the prior streak if healthy gains. Survey results remain positive. Prospects remain bright for the remainder of the year. The GOP deficit-financed tax overhaul will serve as fiscal stimulus this year and next. Companies will invest in more machinery as the labor market tightens. The dollar is depreciating and global business activity is accelerating. Overall capacity utilization is trending higher. This anecdotal evidence points to a positive advance in industrial activity.

U.S. homebuilding increased to a more than one-year high in January, boosted by a rebound in multifamily units. Further gains are likely as building permits soared to their highest level since 2007. Housing starts jumped 9.7% to a seasonal adjusted annual rate of 1.326 million units, the highest level since October 2016. Building permits surged 7.4% to a rate of 1.396 million. Demand for housing is being driven by a tightening labor market, but rising interest rates and house prices are likely to slow the momentum. Single-family permits fell 1.7% in January. Starts for the multi-family segment surged 23.7% to a rate of 449,000 in January. Permits for the multi-family sector soared 26.5%. The report suggests that house building will continue to edge up the next few months Single-family permits fell, but are up at a decent pace year-over-year. The permit backlog totaled 158,000, up 0.6% and up 10.5% year-over-year. The construction industry is still expanding. Employment is growing at a fast pace. Residential construction is still disproportionately concentrated in multi-family structures and home ownership is near a cyclical low and unlikely to turn around quickly. Labor supply is a constraint. We look for a steady increase in building activity, but not a quick acceleration.

International:

The euro-area economy maintained its robust growth at the end of last year. Real GDP expanded 0.6% in the final quarter of 2017. Growth slowed in Germany and Italy, but accelerated in Portugal and the Netherlands. The European Commission said that the economic expansion in the 19-nation region is now more balanced than at any time since the financial crisis. Germany continues to be a key ingredient for growth in the euro-area, despite a slowdown in the fourth quarter. Momentum in that country continues to be driven by exports. The Dutch economy also benefited from buoyant global trade, with GDP increasing 0.8% in the fourth quarter. Italy’s economy slowed to 0.3% growth. Going into next year, growth is expected to broaden further.

Important Data Releases This Week

January NFIB will be released on Tuesday, February 13 at 6:00 AM EST. The survey declined from 107.5 in November to 104.9 in December. Despite the retreat, the survey remains elevated. Passage of the tax cuts will likely lift confidence to 106 in January.

January existing home sales will be released on Wednesday, February 21 at 10:00 AM EST. We look for existing home sales to fall from a 5.57 million annualized units in December to 5.53 million in January. Weather was bad in many parts of the country and other data on home sales have softened recently.


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Category: Monday Morning Coffee

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.