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.
European stocks gave up some of Thursday’s gains ahead of the vote on health care in the United States. The STOXX 600 Index extended its weekly decline and dropped 0.3% on Friday. Japan’s Topix trimmed some losses for a week that included the biggest one-day drop since Trump’s election. The index finished the week with a 1.4% decline for the week. The MSCI Asia-Pacific Index fared better, with a 0.1% decrease.
Global stocks left March like a lamb after a blockbuster first quarter. Investors saw little reason to take shares higher amid political and economic uncertainty in the coming quarter. Investors will focus in the second quarter on political developments in the U.S. and Europe, which will cloud what appears to be a brightening global economy. In the U.S., the failure to repeal Obamacare has cast a shadow on President Trump’s fiscal agenda and in Europe, we just had the U.K. trigger article 50 and elections are looming. The Stoxx Europe 600 fell 0.3% on Friday, trimming a quarterly advance to 5%. Japan’s Topix index became one of the few gauges in Asia to record a loss this quarter despite brighter economic data. The Shanghai Composite Index added 0.4% on Friday, after the factory gauge recorded the highest reading in almost five years.
The S&P ended trading Friday down 0.23 percent to 2,362.72t, while the Dow Jones Industrial Average fell 0.31% to 20,663.22. Since the start of the year, the S&P 500 is up 5.7%, the best quarterly performance since 2015 and the Dow gained 4.9%. With the uncertainty in Washington and the fact that earnings season doesn’t start for a couple of weeks, there could be some market weakness for the first two weeks of April.
Last week saw some mixed data. Personal income was strong, rising 0.4% in February and 0.5% in January, but spending was weak, but spending fell 0.1% in February and was down 0.2% in January. Part of the weakness in spending can be attributed to weather, which lowered spending on utilities by 2.7% in February. Pricing had a role in weaker spending , as the PCE deflator rose only 0.1% in February. On a year ago basis, inflation is alive as the PCE deflator was up 2.1% and the core 1.8%, suggesting the Fed was right in raising rates recently.
The economy is preforming well, although spending has been more subdued in the first quarter. Part of the weakness can be attributed to a warmer winter and less spending on utility bills and some of the weakness can be explained is the retreat from very high numbers in auto sales. The economy ended 2016 on a solid note, rising 2.1%, down from the third quarter’s 3.5% gain. Although slower, the fourth quarter exceeded the 1.7% average of the previous four quarters. Most indicators still point to economic strength. The labor market is strong and wages are picking up. Confidence is robust among consumers, businesses and investors. The economic expansion is now approaching its eighth birthday. Recessions are caused by “events” such as asset bubbles that burst, improper Fed policy, or outside shocks. So far, there doesn’t seem to be any imbalances. There are threats, such as a potential stock market correction, bad trade policies and the impact from China’s debt problems, but for the time being, the economy is likely to keep growing on trend, slightly over 2%.
Next week is chock full of data. We look for an increase in the ISM manufacturing index, putting it at the highest level since 2011. The non-manufacturing index likely slipped by will remain at a high level. Employment will rise at a projected 175,000, lower than the 194,000 average the last six months. Vehicle sales will fall from 17.6 million to 17.3 million. This will put the first quarter in the books, with sales averaging 17.5 million, compared with 18.1 million in the fourth quarter. This is one reason the first quarter will come in weak, as consumer spending is soft and vehicle sales are harder to come by. Long-term, this is not a worry as wages are rising, job growth is well over 100,000 and confidence is strong. A weak first quarter is normal and part of the reason is seasonal. The economy will regain strength in the second and third quarters.
The U.S. Economy:
The nominal goods deficit narrowed by 5.9% to $64.8 billion in February, down from a revised $68.8 billion in January. The early Lunar New Year distorted trade figures for both January and February. Imports fell 2.1%, versing much of January’s 2.5% gain. Nominal exports slipped 0.1%, following a 0.3% gain in January. The outlook for trade will still be restrained by the high value of the dollar, although the dollar has slipped in recent weeks, as questions about the new administration’s ability to deliver on campaign promises. The dollar is still expected to strengthen this year as the Fed will likely raise interest rates two more times. Trade is also threatened by the possible border tax and renegotiation of trade deals. These policy actions would affect trade and possibly be very disruptive to U.S. supply chains.
Pending home sales rose 5.5% in February, gaining back all of January’s losses and hitting the highest level since first quarter of 2016. The index, which hit 112.3 in February, is now 2.6% above year earlier levels. Although the index has been volatile I n recent months, the February reading seems to show that sales have regained their footing after slipping for the better part of 2016. First time buyers have not had a big as impact as most recoveries, as they are finding it difficult to save for a first-time down payment. The outlook is mixed, as mortgage rates are rising and financing costs are on the way up. However, the economy is still chugging along and jobs and wages are increasing. Housing is still expected to trend upwards for a few more years.
The Conference Board’s index of consumer confidence increased from 116.1 in February to 125.6, the highest since the year 2000. The present situation index rose from 134.4 to 143.1, the highest level since 2001 and the third consecutive monthly gain. The expectations index rose from 103.9 in February to 113.8, the highest since 2000. Buying plans increased, with 14.1% planned to buy an automobile in the next six months, up from 13.7% in February. Consumers are confident and the expectations component is consistent with spending growth in excess of 4%. Confidence is closely linked to developments in the equity markets, so ant hiccup there could affect spending plans. Confidence is also closely aligned with labor market developments, which will slow as we reach full employment.
Personal income rose 0.4% in February following a revised 0.5% gain in January. Income is advancing modestly as the labor market has tightened to spur stronger wage growth. The increase suggests that stronger spending will follow in its wake. Meantime, personal spending fell 0.1% in February, after dropping 0.2% in January. The decline does suggest that the first quarter may come in a little weaker than anticipated. However, the trend may be overstated as warm weather allowed spending on utilities to decline 2.7%, a significant decline. Spending is suggested to remain healthy, as incomes are rising and job growth is healthy. Pricing was weak in February, increasing 0.1%, following a 0.4% rise in January. Excluding food and energy, the PCE rose 0.2% in February. On a year ago basis, the PCE deflator was up 2.1%, the first time since 2012, the index has been above 2%. The core PCE deflator was up 1.8% y/y. The indexes do suggest that the Fed is correct in raising rates. Fed statements suggest the Board will be tolerant with inflation slightly above, or below 2%,
Prime Minister Theresa May kick started the formal withdrawal from the European Union on March 29, leaving businesses and consumers facing the realities of Brexit and changes from regulations to the movement of jobs and people. While the economic impact so far has been far less pessimistic as some forecasters thought, the reality will come when the trade barriers come into reality. Brexit is certainly a factor in some company investment plans, while stronger inflation is a result of the sterling’s depreciation. While economists are projecting an economic slowdown this year, the consensus is for a 1.7% drop from 1.8%. The economy still has momentum, but that pace may slow as negotiations are expected to take two years. Also, there is the possibility that no agreement might be reached. Leaders from the bloc won’t meet formally until April 29 and the shape of the future trading relationship won’t progress until progress has been reached on issues such as the cost of exit and rights of EU workers in the U.K.
China’s purchasing manager’s index climbed to the highest level in almost five years, rising to 51.8. The non-manufacturing index increased to 55.1 in March from 54.2 in February, a two year high. The new strength follows a factory rebound that started in mid-2016. The strength in the manufacturing sector can be traced to the stimulus efforts China provided last year. That strength can be called into question as authorities continue to tap the brakes to cool the property sector. However, growth is broadening beyond the original stimulus to the service sector, a good sign for the general economy. New orders hit a three year high of 53.3 in March, up from 53. New export orders rose to 51, the highest in almost five years. Input prices fell to 59.3 after hitting a five-year high in December. Among gauges for firms, the gauge for large enterprises was strongest at 53.3, while medium-sized firms stood at 50.4 and small firms at 48.6.
Important Data Releases This Week
February ISM manufacturing index will be released on Monday, April 3 at 10:00 AM EDT. We expect that manufacturing will continue to show progress, rising from 57.7 in February to 58.6 in March. The ISM captures both hard data and takes into account confidence and sentiment. The ISM has been robust, but actual data has been more subdued. There is a marked difference between actual output and the ISM, but both are pointing in the right direction. Sentiment for manufacturing remains strong in March and actual data will be less so, but still on a positive trend.
January construction spending will be released on Monday, April 3 at 10:00 AM EDT. Construction spending should resume its positive trend, rising 1.1% in February after the public sector led to a 1.0% decline in January.
February vehicle sales will be released on Monday, April 3 at 4:00 PM EDT. We expect sales to decrease to 17.3 million in March after equaling 17.6 million in February .Auto sales are slowing a bit as the pent-up demand left from the recession is fading. Sales are good, but down from the robust fourth quarter. Sales will follow a demographic trend of between 17.0 million and 17.5 million the next few years.
February trade deficit will be released on Tuesday, April 4 at 8:30 AM EDT. We look for the deficit to narrow from $48.5 billion in January to $44 billion in February. The early Lunar New Year distorted trade figures in both January and February, pulling forward some imports into January from February. The advance February report showed goods imports falling 2.1%,, while exports slipped 0.1%. Net exports will be a small drag on growth in the first quarter.
January factory orders will be released on Tuesday, April 4 at 10:00 AM EST. We look for factory orders to rise 0.9% on continuing strength in aircraft orders, which have held up the last two months. Manufacturing is doing better, but the road is still rocky. On trend, manufacturing is turning more positive, but the pace of actual output is a little more restrained.
March ISM non-manufacturing index will be released on Wednesday, April 5 at 10:00 AM EST. We expect that the non-manufacturing index to decrease from 57.6 to 57.3 still a solid reading. Fundamentals remain supportive for the non-manufacturing component of the economy, with wage and employment gains a meaningful support.
February employment will be released on Friday, April 7 at 8:30 AM EDT. We look for employment to rise by 175,000, stronger than the 194,000 average over the prior six months. Weather helped boost construction payrolls in January-February, so there will be some payback in March. Also, a winter storm hit the Northeast during the survey week. Job growth is being hurt by Mr. Trump’s federal government hiring freeze. Average hourly earnings are projected to rise 0.2%, up 2.7% from a year earlier. The economy is growing ever nearer to full employment, where job growth will average a lot closer to 150,000 than the near 200,000 we’ve seen the last few months.