Higher Gas Prices will Be Part of the Spending Story

By | April 15, 2019

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 turned higher on Friday and Treasuries slipped with the dollar, as credit growth in China and the first major first quarter earnings beat expectations. The STOXX Europe 600 reversed earlier losses after China reported better than expected lending growth, which signaled further firming of its nascent economic recovery. The shift in sentiment solidified after JPMorgan Chase & Co. beat analysts’ estimates. The yield on the 10-year Treasury climbed above 2.54%. The rally in equities since late-December had been struggling for momentum, with a global gauge of stocks struggling the break the six-month record high reached last Monday. Traders are looking to earnings as guidance, as the reporting season in the U.S. gathers pace. Investors are concerned about global growth after central banks in the U.S. and Europe warned about risks.

U.S. stocks closed higher on Friday after a series of strong bank earnings boosted confidence in the U.S. economy. The Dow Jones Industrial Average rose 269.25 points to 26,412.30 and the S&P was up 10.09 points to 2,907.41. Analysts say that is too early to tell whether this earnings season will show that most companies will beat the low expectations set for the first quarter. This is occurring in an environment of slowing global growth. Analysts said that the challenge in coming weeks will be for investors to believe earnings growth will be more robust in the second half of 2019 after what is expected to be a weak first quarter. Economic data over the past week shows the economy is holding up but is unlikely to be on a brink of reacceleration. Inflation remains near 2%, while the labor market’s improvement is easing on balance. This suggests the Fed will stay in its current “patient” mode.

Small business optimism was virtually unchanged in March, although finding qualified workers may have slowed employment expansion plans. The lack of change suggests small businesses are feeling the economy’s slowdown. Small business expectations for sales have come down since the fourth quarter and fewer businesses feel now is a good time to expand. At the same time there are tentative signs of a slower labor market, inflationary pressures are starting to stir. The consumer price index rose 0.4% in March, the biggest gain in more than a year. Higher prices at the pump are partly to blame but consumer also saw their grocery bills climb. Consumer prices are rising a little faster on a year-ago basis and contributing to slower growth in real wages. Trend inflation is still under control. The core CPI was up 2.0% y/y. Prices for core goods weakened again, but services are holding up.

The economic calendar is a little busier in the coming week. The focus will be on retail sales. We look for a solid improvement in spending for March, but pricing will be part of the equation. Higher gas prices will be part of the spending story. Housing starts and builders’ confidence will also be featured. We expect the lower mortgage rates will help support the housing industry. Industrial production and business inventories will help shed light on a weak trend in manufacturing. The economy looks decent and first quarter estimates of GDP growth have improved from a month ago. The Atlanta Fed’ estimate of first quarter growth improved from 0.3% a month ago to 2.3%. The New York Fed’s projection is unchanged at 1.4% for Q1 from a month earlier and Moody’s projection increased from 0.6% to 2.0%. Along with the improvement of the first quarter results, recession probabilities have backtracked since the Fed froze monetary policy late in 2018. There is still danger from trade and the slowing global economy. The biggest threat of recession does not emanate from the Fed now, as it was back in December. The biggest danger now is, are we talking ourselves into a recession?

Latest Data

The U.S. Economy:

Factory orders declined 0.5% in February, the fourth decline in five months. Transportation orders, which led the decrease, fell 4.5% and were down 0.6% from a year earlier. The important nondefense capital goods excluding aircraft orders segment fell 0.1% in February, following a 0.9% surge in January. Orders in this segment were up 2.6% on a year-ago basis, but this sector has shown weakness since late-2017. Core capital goods shipments decreased 0.1%, following a 1.0% increase in January. Soft data on manufacturing have been a little more optimistic, with the ISM manufacturing index rising in March. The slowdown in the global economy presents a headwind for manufacturing. Trade is the biggest risk for the industrial sector. There seems to be progress on a trade deal with China, but President Trump is now threatening the EU with tariffs.

The NFIB small business Optimism Index increased slightly in March to 101.8, up from 101.7 in February. Hiring plan advanced to 18% from 16% but remain lower than levels seen at the end of last year. Details were a little better than in February. Hiring plans edged higher to 18% from 16% but remain at levels seen at the end of last year. Plans to increase worker compensation.  Also increased in March consistent with evidence that there is gradual improvement in worker’s compensation. Expectations for the economy to improve were unchanged in March. The lack of improvement in the index suggest that the economy is not speeding up to the 3% range. Growth has slowed and is running much closer to 2% than 3% but is maintaining its velocity.

Higher global energy prices have provided a boost to import prices, which rose 0.6% in March, following a 1.0% advance in February. Imported oil prices were up 4.8% in March, following a 13.7% gain in February. Excluding petroleum, import prices were up 0.2% in March for a second consecutive month. Nonfuel import prices fell 0.2% for the month. All told, the Federal Reserve will look beyond the temporary spike in oil prices. No more moves are expected from the Fed through the remainder of this year.

U.S. producer prices posted a solid gain in March, rising 0.6%, following a 0.1% advance in February. The PPI for energy jumped 5.6% in March and comes on a 1.8% gain in February. Rising global energy prices have put some upward pressure on U.S. measures of inflation. Excluding food and energy, the core PPI was unchanged, weaker than it has been the previous two months. Headline PPI for final demand was up 2.2% from a year earlier Goods PPI was up 1.3% y/y and services was up 2.5%. The push in energy prices was apparent in consumer prices.

The CPI increased 0.4% in March, following a 0.2% increase in February. The CPI for energy increased 3.5% in March, following a 0.4% gain in February. The core CPI came n light, rising 0.1%. On a year ago basis, the CPI was up 1.9% and the core was up 2.0%. The increase in inflation will be viewed by the Fed as a temporary factor. It would be hard for the Fed to raise rates now after priming financial markets to a “pause” in rate increases. Still, with a tight labor market and if energy prices rise much further, some bleed-through to consumer prices is possible. That would set the stage for a rate increase in 2020. In the long term, the Fed would like to see rates at 3.0% to 3.25%, implying two more rate increases in 2021. That will depend on a lot of other data. For right now, markets think the next move by the Fed is downwards, but only time will tell.

International:

China’s exports rebounded in March, but imports shrank for a fourth straight month and at a sharper pace, painting a mixed picture of the economy as trade talks with the United States appear to have reached their endgame. March exports rose 14.2% from a year earlier, the strongest gain in five months. Shipments picked roughly 3% month-on-month, suggesting some improvement in foreign demand. Imports fell 7.6%, widening From February’s 5.2% drop. In the first quarter, exports were up 1.4% from a year earlier and imports were down4.8%. Despite the March pick up n exports, they have not recovered from the steep drop at the end of 2018. The decline in imports suggest weakness in domestic demand. Other data from China is showing some signs of improvement. Chinese banks extended 1.69 billion yuan ($251.29 billion) in net new yuan loans in March, up sharply from February. Total bank lending in the first three months of the year hit a record tally of 5.81 trillion yuan, suggesting months of policy loosening is starting to bear fruit. Even if a trade deal with the U.S. is reached, few analysts expect a quick turnaround in freight volumes. Chinese manufacturers will still have to contend with slowing global demand. Some U.S. firms have shifted purchases to other countries, such as Vietnam, South Korea, Taiwan and Mexico. The Chinese will have to win back market share. The Chinese government is looking for stabilization, but that will come at the price of slower growth.

Important Data Releases This Week

April NAHB housing market index will be released on Tuesday, April 16 at 10:00 AM EDT. A rebound after a flat March is called for this month’s report. The index is projected to rise to 63 in March, up from last month’s 62 reading.

March retail sales will be released on Thursday, April 18 at 830 AM EDT. We look for a strong headline recovery in March, boosted by sales of autos and rising gasoline prices. Sales are projected to rise 0.8% in March, following the 0.2% decline n February. Sales excluding autos, will rise 0.7% and excluding autos and gas, up 0.4%.

February business inventories will be released on Thursday, April 18 at 10:00 AM EDT. After a large 0.8% increase in January, we look for inventories to rise a more modest 0.3%. Inventories relative to sales have been increasing at an accelerated pace.

March leading economic indicators will be released on Thursday, April 18 at 10:00 AM EDT. We see the index advancing by 0.3% in March, following the 0.2% increase in February.

March housing starts will be released on Friday, April 19 at 10:00 AM EDT. We see starts coming in at an annual pace of 1.239 million up from the 1.162 million pace in February. Total permits are projected to come in at 1.300 million, up from 1.295 million in February.


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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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