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.
World stocks were set to post their biggest drop since late 2016 on Friday, as talk of central bank tightening and expectations of higher inflation boosted borrowing costs globally, a move that sparked a sell=off in shares. The MSCI world equity index, which tracks shares in 47 countries, fell 0.3% on Friday. The index was set to snap its longest winning streak since 1999-10 weeks of gains-and record its biggest loss since November 2016. Global central banks have recently struck a more hawkish tone, with impressive economic data and buoyant oil prices driving up long-term inflation expectations. The yield on the 10-year Treasury jumped to more than 2.8%, its highest level since early-2014. That markedly steepened the yield curve and squeezed out investors who had feverishly bet on a tighter spread between longer-dated and short-dated yields.
Worries about the impact of a tightening job market on the prospects for inflation and a surge in bond yields sent investors fleeing equities on Friday. The Dow Jones Industrial Average lost 666 points, its biggest daily percentage in 20 months. Stock losses accelerated when the employment report was released, with the biggest wage gains in 8 and-a-half years. The picture of workers commanding higher salaries fueled expectations that inflation was on the rise, which could prompt the Federal Reserve to take a more aggressive approach in interest hikes this year. That prompted the 10-year Treasury to surge to 2.8450%, the highest since Jan-2014, which could make returns on Treasuries look more attractive relative to stocks. The VIX rose more than four points to 17.86, the highest since November 2016. Warning signs for stock have been discussed, as the market kept hitting fresh highs. The rise in bond yields is certainly beginning to concern the markets.
The jam-packed week brought good and bad news. On the good side, employment growth was solid in January and wage growth picked up. Manufacturing is also doing well. Among the disappointments included a decline in productivity and a drop in auto sales. The Fed views tightening as therapeutic and the probability of March rate hike is above 90%. The economy seems to have started on a strong note at the beginning of the year. The ISM manufacturing index ticked down 0.2 points to 59.1, but new orders remain strong and backlogs increased. Factory orders were decent, promising more activity for the factory sector. The Federal Reserve January FMOC meeting ended with little fanfare. The Fed kept policy unchanged and made few meaningful changes in the statement. The markets will get a look at the new Chair in his semi-annual testimony to Congress later this month. The January employment report came in well over expectations. Nonfarm employment rose by 200,000 and the jump in wages added to concerns the economy might be growing too fast, which sent bond yields higher after the report was released.
After a hectic week, the economic calendar is light. Keys will be the December trade deficit and the ISM nonmanufacturing index. With little economic data, the focus will be on the financial markets, as they have hit a bump. Although likely not too concerning, there is a chance an equity downturn could undermine the economy’s strength. Corrections are normal, averaging about every two years since the 1970s. Moody’s estimates that of the markets fell for a quarter and then circled around ending near the point where it began in the last three quarters, the impact of a 5% correction would be small. A 10% correction would slow GDP growth by 0.75% of a percentage over a year. A 15%-20% downturn would shave between 1.25% and 2.0% off of GDP growth. The economy can weather an equity downturn. The market has dropped more than 10% without significantly damaging the economy. The risk is that the market may think the Fed will move to support each decline. Sooner, or later, the Fed will draw a line in the sand and some investors will lose.
The U.S. Economy:
Personal income grew 0.4% in December, following a 0.3% increase in November. Income growth is accelerating. Nominal personal income grew 1.1% in the fourth quarter, a better result than the 0.6% and 0.7% increases in the third and second quarters of 2017. The growth in incomes will support spending. Personal spending grew 0.3% in December, following the hurricane-influenced 0.5% jump in November. The gain in spending was led by a 0.8% increase in durable goods expenditures. The saving rate fell to 2.4%, the lowest since September 2005. Overall, spending is growing at a healthy pace that modestly exceeds the growth of the overall economy. Real spending was up 2.8% y/y in the fourth quarter, while GDP grew 2.5%. The outlook for both incomes and spending are positive as the labor market continues to tighten. This bodes well for 2018.
The PCE deflator increased 0.1% in December, following a 0.2% increase in November. Goods prices fell 0.2% as some of the recent increases in prices of energy prices lost momentum. Services increased a trend like 0.2% and the core also rose 0.2%. On a year-ago basis, the deflator rose 1.7% and the core was up 1.5%. Energy prices fell in December, but the price of both oil and natural gas has been trending up. As the global economy gains strength, the price of other inputs are also rising. As the economy’s labor market is tightening, service prices are also increasing. Although inflation remains modest, price pressures are increasing. This will keep the Fed on track to raise rates throughout 2018.
Consumer confidence rebounded partially in January, with the Conference Board’s index rising 2 points to 125.4. The gain was driven entirely from an improvement in consumer expectations, which rose from 100.8 to 105.6. The present conditions index fell from 156.5 to 155.3. Auto purchase plans rose to a three-month high. The January improvement in the index partly made up for the 5.5 drop in December. The labor differential rose to 21.2 from 20.3. Consumers have not been so optimistic about the labor market since 2001. Business expectations did not move much. The tax law seems to have a limited immediate impact on confidence. Consumer confidence seems to be rising on consumers over the age of 35 and falling below that age. Confidence among those under 35 is down modestly from a year earlier. Rising interest rates took a toll on home buying plans, with the number of people planning to buy a home at its lowest point since June and only up slightly from a year earlier.
The pending home sales index rose 0.5% to 110.1 in December, the third consecutive monthly gain. He December increase places the index at the highest level since March. Home sales in December were up only 0.5% from a year earlier and have been on a holding pattern since early-2015. Supply-side constrains such as the lack of single-family homes for sale are limiting growth in pending home sales. Many homebuyers are unable to find the right property out of the existing houses currently for sale. Others have turned to the new hoe market. Fundamentals for housing continue to improve in terms of low unemployment and increasing wages. However interest rates are increasing and that factor will weigh on housing.
Total construction spending increased 0.7% in December, the fifth consecutive monthly increase. The advance was fueled by private construction, which advanced 0.8% from November and reached a record high. Private residential construction rose 0.5% in December and was up 6.1% y/y. Nonresidential construction advanced 1.1%. The public sector rose 0.3% in December. Residential construction remains the primary driver of outlays, with single-home construction picking up over the course of the year. Multifamily construction ended 2017 above 2016’s level, after experiencing a slowdown in the first half of 2017. Nonresidential construction remains weak, due to falling outlays in power, office and highway and street construction. Public construction is up because of rebuilding because of rebuilding from the hurricanes. President Trump urged Congress to pass a $1.5 trillion infrastructure bill. This is unlikely because neither side has laid out a viable funding strategy, so we don’t expect to see such a law.
U.S. manufacturing is doing well. The ISM manufacturing index fell from 59.3 in November to 59.1 in December. New orders fell 2 points to 65.4, with 13 out of 18industries reporting growth. They were led by textile mills, fabricated metal products and apparel. The inventory index rose 3.8 points to 52.3. Supplier deliveries increased from 57.2 to 59.1, the 16th straight month of slowing deliveries. Production slipped from 65.2 to 64.5. 11 industries reported growth in production. Employment fell 3.9 points 54.2. New export orders increased 59.8. New import orders from 56.5 to 58.4. Prices paid rose by 72.7, likely reflecting higher energy prices. Manufacturing is off to a good start and risks are tilted upwards. The global economy is strengthening, domestic business is healthy enough to add inventories and the dollar is depreciating. Adding to the demand side, energy prices are up add that will fuel more investment.
Vehicle sales equaled a seasonal adjusted annual pace of 17.2 million units in January, down 1.6% from a year earlier. Passenger car sales equaled 5.8 million units and fell by 12.2% y/y in January. Light truck sales equaled 11.4 million units, up 4.7% y/y. Fleet sales are not driving sales as much as the retail sector, both a result of the lower sales trend and strategic decisions to focus on the higher-margin areas. Incentive spending was relatively high in January, at just over $3,700, as automakers focus on 2018 models. Tightening access to credit and higher interest rates will slow sales, but wage increases will keep sales at a decent long-term pace around 17 million in the forecast period.
Factory orders increased 1.7% in December, the fifth consecutive positive advance. In addition, November was revised up to a 1.7% advance. Orders for durable goods advanced 2.8% and were up 11.5% y/y. That strength was concentrated in the nondefense aircraft and defense sector, but there were gains elsewhere. Factory shipments rose 0.6%. Top-line shipments have been trending up the last nine months. Core capital goods orders fell 0.6% but were up 8% y/y. The volatile transportation sector made a positive contribution in December, rising71% on strong Boeing orders. Unfilled durables orders rose 0.6% and inventories up 0.5%. The I/S ratio was flat at 1.35. Manufacturers are feeling good, now that the corporate tax overhaul is law. The deficit-financed legislation may not help sustain long-term growth, but it will help 2018-19. Companies will benefit from the lower tax rate and also the ability to expense the cost of new equipment. Both construction and energy companies will benefit. Capacity is tight in some industries and the need to invest in equipment is becoming stronger.
Employment growth started the year on a strong note with payrolls rising by 200,000. In addition December was revised upwards to 160,000. The January strength came from a partial reversal of December’s losses in retail and government payrolls. Most other industries saw gains near the year-end report. Labor force participation barely moved at 62.7%. The most notable aspect of the report was the 0.3% gain in average hourly earnings, bringing the yearly increase to 2.9%. The unemployment rate was unchanged at 4.1%. Benchmark revisions brought the payroll employment total up by 230,000 at year end, from 147.38 million at the end of 20-17 to 147.61 million. Employment growth remains strong for this late in the business cycle. Wages should accelerate over the course of the year. The Fed will be alert, but is likely to stay on its slow tightening course.
Factories across the globe got off to a strong start this year, with manufacturing activity in most countries gaining momentum and hitting multi-year highs. The 19-nation euro-zone’s manufacturing PMI equaled 59.6 in January, down slightly from the 60.6 reading in December. Among the biggest four economies, PMI’s were close to record highs in Germany and Italy and among the best for 17 years in France and Spain, respectively. The biggest outlier in Europe is Britain, where manufacturing lost momentum. Uncertainties over its path to leave the European Union curtailed business investment, following one of the steepest jumps in the cost of raw material in years. The U.K economy looks set to grow at half the pace of the U.S. and a full percent behind the European Union in 2018. It should be doing better given the global upturn in demand and the competitive exchange rate. The U.K. factory PMI dropped to the lowest level since June and prospects for 2018 do not look bright. In Japan, the PMI rose to the highest level in four years. Taiwan’s PMI is the highest since April 2011 and South Korea’s PMI bounced back into expansion territory as domestic and export orders picked up. The private Caixin PMI was steady at 51.5, despite authorities cracking down on air pollution and excessive financial risk. A clearer picture of China’s manufacturing conditions and demand may have to spring when winter smog restrictions are lifted and construction revives.
Important Data Releases This Week
December industrial production will be released on Wednesday, January 17 at 8:30 AM EST. We look for industrial production to rise 0.3% in December after the 0.2% increase in November. Utility output will be a plus in December. Manufacturing is also projected to rise 0.3%. Inventories are low and sales are strong, a near-term support for production. The manufacturing sector is solid, boosting by a healthy domestic and global economy.
January ISM non-manufacturing index will be released on Monday, February 5 at 10:00 AM EST. The nonmanufacturing index softened in December from 57.4 to 55.9, but didn’t raise any red flags. We believe the index will rise to 56.7 in January, aided by decent consumer spending and the rise in confidence from the tax cut.
December international trade will be released on Tuesday, February 6 at 8:30 AM EST. The trade deficit is likely to widen from $50.5 billion in November to $52.5 billion in December. The advance goods report showed the deficit had increased by $1.59 billion. Both exports and imports improved during the month.