Labor Markets Tight and Wages are Rising

By | July 17, 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 scaled record highs on Friday, capping the best week in over two months, as the dollar stayed close to nine-month lows, with bets that U.S. monetary policy will be gradual, amid hopes the earnings season will be strong which is boosting risk appetite. After a scare at the end of June, when markets slid on the view that easy money might be ending, investors have been soothed by a run of dovish statements from central bankers, including Janet Yellen. The Stoxx Europe 600 inched up 0.1% on Friday, but gained 1.6% for the week and was the first consecutive weekly advance since May 2. MCSI’s broadest index of Asia Pacific shares outside of Japan advanced 0.3% on Friday to the highest level in two years.

Although Washington is in gridlock, the White House is facing scrutiny and valuations are the highest since the financial crisis, traders have shrugged it off for another positive week for the U.S. equity markets. The Dow Jones Industrial Average climbed for the sixth week out of the last seven and the Nasdaq posted the best week of 2017. The CBOE Volatility Index fall 15% to 9.51, a 24-year low.  Analysts have high hopes for earnings. While analysts don’t expect earnings to top the first quarter, when S&P profits leaped 15% from a year ago, they will be counting on the two industries to be the back-bone of the expansion. Tech and financials are related and their performance does leak through to the rest of the market. In coming weeks, investors and analysts need to hear more from companies’ executives. Since the election, the number of chief executives that have been hesitant about talking about future growth has been increasing. A running average by Bank of America about the number of times companies issued forward guidance fell to the lowest level since 2000.  Investors in future weeks will want to know more about what is behind the earnings increase and if it is sustainable.

Last week, all eyes were on Chair Janet Yellen as she gave testimony at the Monetary Policy Meeting in Congress. She reiterated the components of the economy where the Fed is less certain about the path of growth, namely inflation. The PPI and CPI came out last week and the readings were weak.  The CPI was unchanged after falling 0.1% in May. The PPI rose 0.1% in June. On a year ago basis, the CPI was up 1.6% and the core had increased 1.7%. Sales remain a concern. Retail sales fell 0.2% in June after a 0.1% decline in May. Weak pricing is an issue. Excluding gas and autos, sales fell 0.1%. There was strength in the industrial sector. Total industrial production rose 0.4% and manufacturing was up 0.2%.  A lot of the strength in industrial production is in mining and utilities. Manufacturing is positive, but there will be a headwind coming from autos. On the bright side, the dollar has been declining and economic activity is picking up overseas. Business investment is subpar, but positive. This suggests the manufacturing sector will stay positive, but modest going forward.

Business inventories rose 0.3%, offsetting April’s 0.2% decline. However, weak sales are a problem. Fundamentals argue for at least a moderate rebound in spending, but recently the consumer has been napping. The lack of inflation is a concern for the Fed. Some of the forces restraining inflation are perhaps transitory, mainly energy prices, but some of the restraints are difficult to understand and could be structural. This may keep the Fed on a slower than anticipated course.

Next week, the focus will be on housing and the Conference Board’s index of leading economic indicators. Auto manufacturing will struggle in July as production schedules point to a large decline for retooling and attempts to lower inventories. Housing should rebound after a sharp drop in May.

The Federal Reserve’s Beige Book, covering economic activity from mid-May through June, indicates that economic activity is expanding at a slight to moderate pace across districts. Consumer spending increased in most districts, buoyed by non-auto retail and tourism. Autos were a drag in most districts. Manufacturing remained a bright spot across most districts. Construction remained from flat to growing and low inventories restrained home sales. Low prices weighed on agriculture. Energy and natural gas improved in the reporting period and sluggish coal improved over last year.

Basically, the economy is continuing in the right direction and the beige book respondents are optimistic about growth prospects in coming quarters. The economy continues to expand moderately in all 12 Federal Reserve districts. Labor markets are tight and wages are rising. Businesses are uncertain about administration policy and are wary about investing because of uncertainty of what policies the administration wants to pursue. But businesses are fairly confident the economy will continue to expand, although there are concerns that monetary policy could become a headwind in coming quarters. The economy is expected to continue on its trend +2% economic growth path, although there will be some weak and strong quarters.

Latest Data

The U.S. Economy:

The NFIB small business optimism survey declined from 104.5 in May to 103.6 in June. The decline was modestly more than expected but the index is still tracking well above its 2016 average of 95.3. The net percent of small firms expecting the economy to improve fell from 39% to 33%. The employment details were generally weaker across the board. 21% of businesses believe now is a good time to expand a business, compared to 23% in May. Capital expenditure plans increased from 28% to 30%, still in the same range we’ve seen in a year. Small firms are still grumbling about finding qualified workers. The net percent that planned on raising prices dropped from 7% to 1%. Small business confidence slipped, but doesn’t change the forecast. The NFIB survey is consistent with GDP growth of 3.5%, but the survey has a tendency to run at a higher level when the president is a Republican. All told, the index remains at an elevated level, in part because of its political bias. This suggests that there won’t be any real acceleration in hiring, investment, or GDP growth.

The PPI rose 0.1% in June, after being unchanged in May. Excluding food and energy, the core goods PPI was up 0.1% and services rose 0.2% in June. Final demand PPI was up 2.0% from a year earlier, while the core was up 2.2%. Inflation has been coming in on the soft side, but there are some transitory factors. Energy, for example, has fallen three out of the last four months. The CPI was unchanged in June, following a 0.1% decline in May. The CPI for energy declined 1.6% in June and 2.7% in May. Food prices were unchanged in June. Excluding food and energy, the core CPI rose 0.1%, for the third consecutive month. On a year ago basis, the CPI was up 1.6% and the core CPI 1.7%.  Inflation remains weak and does have the Federal Reserve’s attention. This seems to run counter to the Phillips curve, which states that wen unemployment is low, inflation is high. There could be several reasons for this phenomena, including globalization, or shadow slack in the job market. Goods prices, including oil, may pick up a little velocity as the global economy strengthens, but this might be several quarters before any it translates into real inflation. The same effect may come from the labor markets in that over time a tight labor market might trigger higher inflation, but not for several quarters. In the near-term, the outlook for inflation is mild, but this may keep the Federal Reserve on a slow track to raise rates.

Retail sales fell 0.2% in June, below expectations. This followed a 0.1% decline in May. Gasoline station sales fell 1.3%. Excluding autos, sales fell 0.2% and excluding autos and gas, they were down 0.1%. Other than gas stations, other losers were miscellaneous retailers, restaurants, grocery stores and department stores. Sales were up 2.8% on a year ago basis, the weakest growth since August. Part of the weakness in spending can be attributed to weak pricing power, which limits growth but does benefit consumers. Energy prices are a drag and the auto industry has plateaued out. The shift to on-line spending is taking a toll of brick and mortar stores. Consumers are still buying things, but falling prices allow consumers to buy more without spending more. Prospects are fairly bright. Incomes are slowly rising. Goods prices are restrained, but consumers are shifting spending to services, where price growth is more rapid. Still, if income growth remains slow, spending will also remain subpar.

Stockpiles bounced back in May, but weak sales takes part of the credit. Business inventories rose 0.3% in May, following a 0.2% decline in April. Retailers and wholesalers led gains, rising 0.5% and 0.4% respectively. Manufacturing inventories fell 0.1%. Sales declined 0.2% in May, following no change in April and a 0.1% decline in March. The inventory-to-sales ratio inched forward from 1.37 to 1.38 months. May’s inventory build was inflated by weak sales and auto retooling. Retailers boosted stocks at the largest pace in four months, largely driven by the auto industry. Automotive manufacturers released extra inventory ahead of the annual retooling of the industry. Weak sales are a problem because the I/S ratio is now edging up. Sales have been consistently weak since January, keeping producers in neutral.  However, some positive trends are emerging. Durable goods producers are seeing rising metal prices and increased industrial production. Employment gains have been healthy and wages are rising, although still slowly. These trend should boost spending and production and lift overall inventories.

Industrial production increased 0.4% in June, exceeding expectations. The May IP report was revised to show a 0.1% advance. This marks the fifth consecutive month industrial production has advanced.  Manufacturing rose 0.2% in June. Motor vehicle and parts output increased 0.7%, but May was revised from -2.0% to -2.2%. Non-auto production rose only 0.1% and is up 1.2% y/y. Business equipment output gained 0.1% and is up 0.7% y/y.  Consumer goods production was unchanged in June.  Mining was up 1.6%, but utility output was unchanged.  Auto production rose, but that trend is unlikely to last as sales are falling. Mining has been on an upswing, even at lower prices.  Non-auto output is growing, but only slowly. Exports have been growing due to a stronger global economy and a weaker dollar. Total IP was up 4.7% in the second quarter, largely driven by mining and utilities. Manufacturing advanced 1.4%, a slightly slower increase than in the first quarter. The outlook for industrial activity is positive, but still quite modest. Exports and mining are a plus, but autos and the flat housing sector are restraints.


The Bank of Canada finally pulled the trigger. Monetary policymakers raised their target for the overnight rate by 25 basis points to 0.75%, the first increase in seven years.  Strong GDP and job growth overwhelmed concerns about weak inflation.  In the press release, the BOC raised its GDP growth forecast for 2017 from 2.6% to 2.8%.Policymakers have been warning markets for several weeks that a tightening action was imminent. GDP growth has been strong, showing annualized growth of over 3% for the last three quarters. Job growth has been strong and concerns were rising about a potential bubble in the housing market. Despite weak inflation, the Bank of Canada, like the Federal Reserve, was not going to wait for prices to rapidly accelerate before taking action. The Bank has raised its expectations for GDP growth and its optimism over the economy’s prospects are growing. The drag of low oil prices is fading and global demand is picking up. Canada is a large commodity exporter and business activity is picking up.

Important Data Releases This Week

June NAHB homebuilder’s optimism index will be released on Tuesday, July 18 at 10:00 AM EDT. The NAHB index equaled 67 in June and we expect the index to rise 1 point.

June housing starts will be released on Friday, June 16 at 8:30 AM EDT. We expect housing starts to regain some of May’s 5.5% decline. Housing activity has been slow so far this year and although fundamentals are falling into place for better activity, actual starts have lagged. The single-family sector is still expected to post gains, while the multifamily sector has been flat since mid-2016.

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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.