The Economy Has a Solid Footing

By | May 1, 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

Concern about global trade and U.S. President Donald Trump’s “America First” policies kept appetite for riskier assets in check on Friday, setting global stocks on a sluggish end to what was still the sixth straight week of gains. Markets were in flux as Donald Trump fights an uphill legislative battle to turn his words into action amid mixed signals of NAFTA and statements concerning trade renegotiation with South Korea. Trump’s comments stunned South Korea’s financial markets, sending stocks and the won into reverse. The Stoxx Europe 600 slipped 0.18 on Friday, dropping for second day, after reaching the highest level since August 2015. That index remains up 7% for the year.

U.S. stocks finished near an all-time high on Friday, Treasuries gained and oil closed in near $50 a barrel as the world’s biggest economy reported its slowest pace in three years. The S&P closed down 0.19% on Friday at 2,384.20, while the Dow Jones Industrial Average dropped 0.19% to 20,940.51. Bond traders were looking at the Bureau of Labor’s employment cost index, which climbed 8% in the first quarter, its biggest gain since 2007 and a sign wage growth is accelerating.

The first quarter came in at a weak 0.7% in the first quarter. Residual seasonality and weather had some effect on the first quarter’s weak numbers. The slowdown in personal consumption was a major factor. Inventories were a sizable weight on Q1 growth, but it does set the stage for better growth in the second quarter. Business investment was encouraging. Equipment spending increased at a 9.1% annual rate in the first quarter, significantly better than the last few quarters. Warm weather and delayed tax refunds did slow spending. Residual seasonality likely reduced growth by 0.75% to 1.0%, keeping the economy still near a 2% growth rate. The economy’s fundamentals remain intact and the economy is still projected to grow 2.4% this year. This is without the administration’s stimulus measures. The Trump administration unveiled its tax outline, unlikely to get through Congress and would cost trillions. Lawmakers did pass a one-week funding bill to buy them time to avoid a government shutdown.

Other government economic data point to an economy on solid footing. The housing market had a good start to the year, but is constrained by strong inventory. Consumers remain in high confidence and job surveys looked strong last week. Data is strong next week, with the PCE deflator, personal income and spending. Construction spending, vehicle sales, both ISM indexes, international trade, factory orders and employment rounds out the week. We look at job growth to bounce back and auto sales to make up for some of the ground lost in March. Economic activity is continuing to be modest and the first quarter slowdown will be viewed as temporary by the Fed. March’s personal spending will be important for clues to second quarter consumption. The consumer stepped back in the first quarter, but is expected to step up to the plate in the second quarter.

Latest Data

The U.S. Economy:

The pace of economic activity ebbed in March. The Chicago Fed National Activity Index dropped to 0.08 in March from 0.27 in February, largely because of a decrease in employment related indicators. Two out of the four broad categories declined during the month. However, only one made a negative contribution to the index. The employment indicator contributed 0.02 to March’s CFNAI, compared with 0.2 in February. The production indicator was unchanged in March. The personal consumption and housing category contributed -0.05, up slightly from -0.06. The three-month moving average dipped to 0.03 from 0.16 in February. The shift from a relatively warm January-February to a more normal colder March had an effect on the economy. Consumer spending, housing and employment were affected.  There were some cross currents in the details of the CFNAI. April numbers should give a clearer picture, as the weather impact will fade.

New single-family homes sales gained ground in March. Sales increased 5.8% from February and were up 15.6% from a year earlier. Annualized sales came in at 621,000, up from 587,000 in February. Three out of four Census regions registered increases in March. New homes for sale increased modestly by almost 270,000 units, but that wasn’t enough to keep up with demand. The inventory-to-sales ratio fell to 5.2 months, down 0.2 m/m and 0.3 y/y. Sales likely received some support from better weather in the West. The mixture turned to homes with greater value. Home sales have been slowly trending upwards. In order to reach stronger numbers, demand would have to increase and also construction capacity. Capacity has been tight, as construction companied wind it more difficult to find workers and immigration standards have tightened significantly since Donald Trump took office.

The goods deficit widened in March to $64.8 billion from $63.9 billion in February.  Nominal exports declined 1.7%, following a 0.4% gain in February. The Lunar New Year added some volatility to first quarter trade figures. Nominal imports fell 0.7%, following a 2.1% decline in February. The appreciation of the dollar will be a drag on trade, favoring imports versus exports. The dollar will likely strengthen this year as the Fed raises rates. However, the divergence in rates from the rest of the world will be less glaring, as the Bank of England and European Central Bank are reaching inflection points where the removal of stimulus will start fairly soon. Risks to trade are threatened by tariffs and possible sanctions that could disrupt global supply chains.

Durable goods orders rose 0.7% in March, the third consecutive monthly increase. In addition, orders were revised upwards for a 2.3% advance in March and a 2.4% increase in January. The topline number was boosted to a 26.1% increase in defense aircraft and part orders. Nondefense capital goods orders excluding aircraft rose 0.2%, the sixth consecutive monthly increase. Total shipments rose 0.2% and inventories increased 0.1%. Manufacturing conditions are slowly improving, although gains are falling short of expectations. After dragging on GDP growth in the final quarter of 2016, manufacturing is in the best shape in two years, based on orders and shipments data. Survey data shows a stronger manufacturing sector, but actual output data has fallen short. Businesses confidence has back-tracked a little as the realization sinks in that the stimulus promised by the new administration is likely to be delayed and perhaps” watered down” before final passage. Still, manufacturing conditions are improving and demand is sturdy. Trade is a wild card, but manufacturing should be positive over the next couple of years.

U.S. GDP growth started 2017 on a weak note, rising only 0.7% annual rate, according to the BEA’s first estimate. Consumer spending slowed dramatically, contributing only 0.2 of a percentage point to growth. Fixed investment contributed 1.6 percentage points. Trade made a small contribution and inventories are a large drag and government a smaller drag. Real disposable income slowed to 1%, the slowest in three years. Final sales advanced 1.6%.  Some of the weakness in the first quarter can be attributed to weather. Warmer than normal weather in January and February, depressed spending on utilities. Late tax checks and a seasonal problem in measuring the first quarter contributed to weak first quarter spending. The underlying strength of the economy is still well north of 2% and a rebound to stronger activity is expected in the second quarter.

International:

The Euro-area’s economic confidence jumped to the highest level in almost a decade this month, a testament to a recovery that may prompt a policy shift at the European Central Bank. The index of executive and consumer sentiment surged to 109.6 in April from a revised 108 in March, the European Commission reported in Brussels. That was the strongest reading since August 2007. The report could sway the ECB assessment of the 19-nation economy. The Euro-area economy appears to be getting stronger and political risks have diminished after the first round in France’s presidential election. Manufacturing sentiment rose in France to a six-year high. In Germany, business confidence has surged.  The survey showed improvements across all sectors. In industry, managers were more upbeat about the current state of orders, while there has been a pickup in consumer confidence. Gauges for employment saw significant increases in construction, retail trade and services recently.

Important Data Releases This Week

March personal income and spending will be released on Monday, May 1 at 8:30 AM EST. We expect personal income to rise 0.3% in March, a little slower than the 0.4% rise in February and 0.5% increase in January. Nominal spending will also rise 0.3%, but there is uncertainty with spending on utilities. Spending was weak in the first quarter, but that should be a temporary factor. The GDP deflator is expected to remain unchanged.

April ISM manufacturing index will be released on Monday, May 1 at 10:00 AM EST. We expect that manufacturing will back-track a little, falling from 57.2 in March to 56.1 in April. This is still a good reading, but reflects a turn towards actual output, which is positive, but slows less strength than recent surveys have reflected. Confidence remains higher than real output, fueled by stimulus hopes by the new administration. Manufacturing is still doing well, as the first quarter jump in business equipment investment alludes to. However, recent surveys are in robust territory, not supported by actual output.

March construction spending will be released on Monday, May 1 at 8:30 AM EST. Construction spending should resume its positive trend, rising 0.8% in March after a 0.4% rise in February. Public spending remains weak, but nonresidential and residential construction is moving upwards at a slow pace.

April vehicle sales will be released on Tuesday, May 2 at 4:00 PM EST. We expect sales to increase to 17.2 million in April from 16.5 million in March. Weather likely was a factor in March’s weakness and some rebound is expected. Incentives made a come-back in April, which will help sales.

April ISM non-manufacturing index will be released on Wednesday, May 3 at 10:00 AM EST. We expect that the non-manufacturing index to increase from 55.2 to 55.9. Fundamentals are supportive for the non-manufacturing component of the economy. The survey got ahead of itself following the election and back-tracked in March.

March international trade will be released on Thursday, May 4 at 8:30 AM EDT.  We project the trade deficit to widen from $43.6 billion to $44.9 billion. Already released goods data showed the deficit widening from $63.8 billion in February to $64.8 billion. Both imports and exports fell during the month.

March factory orders will be released on Thursday May 4 at 10:00 AM EST. We look for factory orders to rise 1.o% on the strength of the big leap in aircraft orders. The capital goods orders were positive in the first durable goods release. Excluding aircraft, we expect capital goods to rise 0.2%.

April employment will be released on Friday, May 5 at 8:30 AM EDT. We look for employment to rise by 190,000. Weather likely helped lower construction employment in March and will boost job chances in April.


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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.

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