This Summer the Economy May Get Bumpy

By | June 19, 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.


Coffee and Economic Review Global stocks bounced back on Friday, following a difficult week. The benchmark European index recovered Friday from the lowest close in two months. The markets seemed to be shaking off bearish sentiment brought about by the Fed’s third rate increase since December. In France, newly elected Emmanuel Macron looks set for an historic majority in the National Assembly on Sunday. It’s been a tough stretch for the United Kingdom after last week’s unsettling election. May’s retail sales fell more than expected and the CPI climbed to the fastest rate in four years. In other news, the great moderation of the economy continues in China.

In the U.S., fears that the selloff in technology stocks would spur a deeper rift in equities were calmed as the S&P ended the week little changed. The Nasdaq fell 1.1% on Friday, bringing the two-week drop to 3.4%, the worst slide since last November. Yet in a week that included a third interest rate increase by the Federal Reserve and an attack on congressional representative in Washington, the broader indexes were little moved. The S&P ended the week almost unchanged at 2,433, while the Dow Jones Industrial Average climbed 0.5% in five days to end at 21,384, the fourth weekly advance.

The Federal Reserve Open Market Committee raised the fed funds rate by 25 basis points from 1% to 1.25% and signaled the initial cap on its reinvestments will be $10 billion per month. It reinforces the view that its balance sheet will decline only gradually. Another standout from the meeting was that Chair Janet Yellen would consider raising its 2% inflation objective. No change is imminent.

Generally, economic data came in soft last week. Housing starts fell 5.5% in May to 1.092 million annualized units. Housing has now been soft for four months and could fall short of expectations for the year. Retails sales fell 0.3% in May, but that followed a 0.4% advance in April. The consumer has not been strong this year, but not weak either. Fundamentals support a modest upward trend in spending. Industrial production was unchanged in May, but manufacturing fell 0.4%. Auto sales have plateaued, but some industrial sectors like mining are still advancing. We still expect the industrial sector to remain positive, but without autos adding to growth, the advance will remain modest.

Next week will be relatively light on data, but there will be some attention to housing. Both new and existing home sales data will be released. Recently, economic data has been coming in weaker than expected and the summer might get bumpy. For manufacturing the auto industry will undergo its annual shut-down for re-tooling and this summer it will be extended to lower inventories. This could change readings on unemployment claims, vehicle production, orders, and impact other economic data. Gas prices could throw off projections for increasing domestic oil production, weakening projections for business investment. The high hopes that the administration and Congress will help stimulate the economy is fading. If even a budget gets passed, it would be surprising in the current environment. The economy’s fundamentals are still sound and growth is still proceeding near 2% on trend. However, this could prove to be an interesting summer for the economy.

Latest Data

The U.S. Economy:

The NFIB small business sentiment index was unchanged in May at 104.5, just a touch lower than the first quarter average of 115.3. The percent of firms expecting the economy expecting the economy to improve in the next six months inched higher, rising from 38% in April to 39% in May. The percentage of small firms who plan to increase employment rose to 18% from 16%. The net percentage of small firms with job openings, that are hard to fill rose, not surprising considering the full employment economy. Small businesses remain optimistic. While other sentiment surveys have flattened, or lost ground after the post-election surge. The NFIB generally favors Republicans and has only lost some ground. The index does show continued optimism concerning business conditions. However, this optimism doesn’t necessarily automatically mean more hiring and business investment.

The PPI cooled in May, remaining unchanged from April. The May report followed a 0.5% jump in the index in April. Goods PPI fell 0.5%. Within the goods category, food prices fell 0.2% and energy dropped 3%. The core PPI for goods rose 0.1%. The lack of slack is putting some upward pressure on inflation, but there are little signs of acceleration. Global oil prices are down, taking away one of the major drivers. The CPI fell 0.1% in May, following a 0.2% rise in April. Energy prices dropped 2.7% in May, but food prices rose 0.2% for the second consecutive month. Core CPI rose 0.1% in May, up 1.7% from a year earlier. The Fed raised interest rates in June, but the trend in inflation has been weak. This could put them on a slower path to normalization. However, the rise in financial markets has caught the Fed’s eye. Continued increases during a period of rising rates, could suggest a financial bubble. The Fed might speed up rate increases, which could have adverse effects.

Retail sales fell 0.3% in May, following a 0.4% rise in April. Gasoline station sales fell 2.4% and the auto industry saw a 0.2% decline in May. Sales excluding autos and gas, were unchanged in May. Other major losers were electronics and appliance stores, department stores and miscellaneous retailers. Gains were led by non-store retailers. Sales are being held back, in part, by lack of pricing power. Gas prices were a headwind in May, but were a support for year-ago sales. Sales in May were up 3.8%, not a bad reading. In general, sales are healthy given the lack of retail inflation. Fundamentals are solid for consumers, with still healthy employment growth. Nominal income growth has been steady for two years, but inflation has increased eroding some of those gains. The future of spending looks decent, but there are uncertainties. Wage growth should rise quicker as the economy is entering full employment, but so far, the gains have been restrained.

Business inventories lost some momentum in April, declining 0.2%. Retail stocks fell by 0.2%. Motor vehicles and parts weighted in the most on the sector, falling 0.4%, but retail stocks excluding the auto sector dropped 0.2%. Wholesale inventories fell 0.5%, while manufacturers added just 0.01%. Sales were flat, but were up 5.6% year-over-year. The business inventory-to-sales ratio held steady for a fifth consecutive month at 1.37 months. Business inventories have moved from lift to drag, but one month does not make a trend. Weak sales and an stubbornly high I/S ratio indicate that spending has hit a weak spot. All eyes are on the American consumer, who can easily put inventories in their place. We expect spending to ride the tailwinds of a strong economy. The economy is at full employment and wages should rise and fuel spending. Once spending picks up, there will room for greater production gains.

Industrial production was unchanged in May, following a 1.1% increase in April. -This marks the fourth consecutive month, production has not declined. Manufacturing fell 0.4%, following a 1.1% increase in April. The details for manufacturing were mostly negative. Motor vehicles and parts output fell 2.0% in May. Manufacturing, excluding the auto sector, fell 0.2%, but that did follow a 0.9% advance in April. Mining advanced 1.6% and utilities saw a 0.4% increase. Business equipment output declined 0.7%, but consumer goods increased 0.2%. The report did not show gains, but that followed a decent jump in April and industrial sector is in considerable better shape than a year earlier. Utilities are dependent on weather, but it is clear that both manufacturing and mining are much stronger than a year earlier. Durable goods output is looking stronger despite a topping out of the auto sector. The global economy is an aid as there are clear signs of improvement. Future gains in mining will depend on oil prices. As the economy has entered full employment, businesses will have to invest more in machinery to boost productivity. Growth in robotics and virtual reality technology are pushing new innovations. Firms are investing in machine learning with higher levels of sophistication in cognitive technologies.
Home building sentiment fell modestly in June, but still remains at a relatively elevated level. The NAHB homebuilder’s sentiment index fell to 67 in June from 69 in May. The index remains just slightly below the six month average of 68. Performance of all three subcomponents softened in June. However, the future and present sales components are still hovering in the 70s and prospective buyer traffic is only a touch below the expansionary level.

Despite the elevated level of confidence, actual housing activity has been weak so far this year. Housing starts fell 5.5% in May to an annual pace of 1.092 million. Starts are now 2.4% below year earlier levels. Single family starts fell 3.9%, but are up 8.5% from May 2016. The multi-family sector declined 9.7% from April and are down 25.7% y/y. Permits fell 4.9% to an annual pace of 1.168 million. Single family permits fell 1.9% and the multi-family component fell 10.4%. Residential construction has taken a four month breather. There is some downside risk that activity could be leveling off. There is evidence that supply bottlenecks could be part of the problem, especially labor. Purchases of single-family homes continue to trend upwards and the rental vacancy rate is at a cyclical low, and actually lower than it has been since the 1980s. This and the combination of solid consumer fundamentals still point to greater demand Despite the slowdown, the outlook still calls for greater housing activity, at least in the single-family sector. The labor problem could be lengthy, especially since the Trump administration has tightened down on immigration. Labor shortages could be a bottleneck for the length of the entire Trump administration.


China’s economy is generally remaining on solid footing in May, but tighter monetary policy, a cooling n market and slowing investment suggest that some momentum will be lost in coming months. Industrial production grew 6.5% from a year earlier in May, defying expectations for a slight softening. However, rising inventories are a risk, with stocks picking up to 10%. While housing sales grew 10% in May, new construction was almost halved to 5.2%. The housing market is expected to slow as the government reins in credit growth. Infrastructure spending is a key lever for the government to stabilize growth, slowed to 20.9% in the first five months of the year. Retail spending was more upbeat, rising 10.7% from a year earlier in May. Analysts expect the Chinese economy will grow 6.8% in the second quarter, a slight cooling from the 6.9% first quarter. Despite some tightening, broader liquidity conditions, such as M2 growth, loan growth, or the growth of outstanding financing is still largely stable.

Important Data Releases This Week

May existing home sales will be released on Wednesday, June 21 at 10:00 AM EDT. We expect existing home sale to rise from the current 5.57 million to 5.63 million. This would offset some of April’s decline, but still be only the second rise in four months. The lack of inventory is a problem. Inventories are down 9% from a year ago. Stronger prices may entice homeowners to list prices.

May new home sales will be released on Friday June 23 at 10:00 AM EDT. April new home sales were disappointing. Sales dropped 11.4% to 569,000, but March was revised upwards. The trend in new homes sales is encouraging. Sales have averaged 591,000 over the last six months. Sales are projected to reach 588,000 in May.

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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.