Little Chance of Stimulus Coming from Congress

By | June 5, 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

World stocks hit record highs, having gained 11% so far this year. The MCSI All-Country World Index increased 0.3% on Friday to a record high. European stocks joined the party, with the Stoxx Europe 600 increasing 0.6% on Friday. The S&P hit a new record, rising 1% to 2,438.91, despite the fact the labor report showed weak employment growth and weaker than expected car sales. Despite the rise in U.S. equities, there are signs of unease. It is visible in fund flows, where investors are rotating from the U.S. at the fastest pace in two years and short sellers are getting aggressive, raising bearish bets in three out of the last four months. U.S. stocks are at records, but they haven’t advanced much since March. Equity investors are anxious about an economy that is giving uneven evidence about its vigor, just as the Federal Reserve prepares to raise rates.

The labor report came in weak, with payrolls increasing just 138,000. However, there may have been some calendar influence, as the survey week was early and May includes some seasonal adjustments that involve the school year. Despite the weaker employment report and some slower-than-expected reports on inflation, the Open Market Committee will move in June. Further increases in September and December are being called into question. The Fed would like to continue raising rates and start to reduce its balance sheet, but data has been mixed and inflation weak, a pause could be justified. New car sales came in at 16.7 million in May, down from 16.9 million in April.  Vehicle sales have clearly plateaued. Trade was also unkind to second quarter GDP, with exports falling 0.3% and imports rising 0.8%.

Economic data still points to a decent Q2, with spending rising 0.2% in April and income gains continue to expand. On the manufacturing front, sentiment remains positive and there was little change in the index in May. New orders and employment were up for the month. Even without the auto sector expanding, we still think manufacturing will remain positive, as the global economy is getting stronger and domestic business demand will help support greater manufacturing growth. Trend growth for the economy is still slightly above 2%. Downside risks have grown a little, as the composite of economic reports have become more mixed. A slower growth rate nearer to 1.8% has become a distinct probability, down from the expected 2.3%. This would not be a disaster, but it may keep the Federal Reserve on the sidelines until December.

Next week, the economic calendar is light. We expect first quarter productivity to be revised higher. We project factory orders to slip 0.1% and the ISM non-manufacturing index will step back from its current lofty 57.5 reading to 57. The economy remains solid shape, but growth is still not far from 2% and there is little chance of stimulus coming from Congress and interest rates are rising. The Fed is going to have a hard time soft-landing a slow economy and downside risks are going to rise as time passes.

Latest Data

The U.S. Economy:

Personal income accelerated by 0.4% in April, up from a 0.2% gain in March. Revisions to personal income in the preceding two months were mostly positive. The downward revision to March’s gain was minor. On the other hand, February’s increase turned out to be $75.1 billion, up from the original estimate of $55.7 billion. Meantime, personal spending moderated from an upwardly revised March’s gain. Real spending rose 0.2% in April, following a 0.5% increase in March. Energy and automobiles did not play a major role in determining the pace of spending growth, following several months where those sectors did determine the pace of spending growth. Meantime the PCE deflator rose 0.2% in April, following a 0.2% decline in March. The core PCE was also up 0.2% and was up 1.5% for the year.  Inflation remains restrained, even though the nation has cleared the full employment barrier.

Consumer confidence fell 1.5 points in May, coming in at 119.4, according to the Conference Board’s sentiment index. The three-month moving average remained at the highest level since 2001. May’s decline was small compared to the 25.5 point increase from a year earlier. The present conditions index improved to 140.7 in May from 140.3 in April. Consumer expectations fell by 2.8 points to 102.6.  Consumer fundamentals remain solid, with employment growth growing at a healthy rate and incomes are starting to pick up speed. Spending did start the year slow, but does appear to be picking up some velocity in the second quarter.

The ISM edged slightly higher in May, rising to 54.9 in May, up from 54.8 in April. The details remained mixed. Production fell to 57.1, from 58.6, but new orders rose to 59.5, up from 57.5 in April. Fourteen out of eighteen industries reported growth in new orders. The difference between new orders and inventories widened from 6.5 in April to 8 in May.  Inventories rose from 51.0 to 51.5 in April. Trade details softened as both exports and imports softened during the month. Backlogs fell from 59.5 to 57.5.  The index remains below its first quarter average of 57 and a decline in sentiment likely explains the still decent but slower track of the index. Overall, manufacturing is expected to rise modestly, but one area of concern is autos. It is likely that autos have peaked, but numbers are still expected to remain decent, tracking near 17 million. Anecdotes from non-auto industries were generally positive. A respondent in rubber and plastic said that sales have picked up recently. Transportation and equipment respondents said the economy appears strong. Chemical products executives said that agriculture demand is very strong. Food and beverage and fabricated metals respondents said finding qualified workers is becoming more difficult. The outlook for manufacturing is positive, but modest going forward.

Construction spending declined 1.4% in April, following a 1.1% increase in March. April marked the first decline since last December. The decline was broad-based. Private construction fell 0.7% from March, but was up 10.4% from a year earlier. Private residential construction fell 0.7% m/m, but was up 16% year-over-year. Private nonresidential construction spending fell 0.6% from March. Of the components of private nonresidential construction spending, investment in manufacturing facilities fell 1.9% from March and was down 8.4% from a year earlier. Spending on power and utility structures fell 0.2% m/m, but was up 1.7% over April 2016. Public construction fell 3.7% from March, but is up 0.3% from a year earlier. The April report was disappointing, but declines in previous months were revised away. Meantime, private residential spending is up at a strong rate 16% over the past year and nonresidential spending is up 4.4%. Public construction remains weak. Commercial buildings and office space are advancing by double-digits year-over-year.

Following April’s weak results, May vehicle sales again disappointed, coming in at an annual pace of 16.7 million units. May marked the third consecutive month the sales pace has been below 17 million and marks a 3.0% decline in both the year-ago pace year-to-date average. Incentives still are tracking at record levels, but are having little luck in jump-starting sales. Pent-up demand has diminished and sales have shifted to a longer-term demand cycle. Consumer fundamentals remain strong and a pickup in residential construction is helping support truck sales. Low gas prices are a plus. We still project that sales will top 17 million for the year, but barely.

The trade deficit widened to $47.6 billion in April, up from $45.3 billion in March. Total nominal exports fell 0.3%. Goods exports fell by 0.4%. Service exports have now increased for six consecutive months and are at an all-time high. Exports of foods and beverages rose 5.1% after posting an even bigger increase in March. Capital goods exports were flat. Nominal imports rose 0.8%. Goods imports rose 0.9%. Among goods imports, consumer goods were up 4%, while food and beverage imports gained 3.3%. Capital goods imports rose 1.8%. Industrial supply imports fell 3.4%. Exports came in weaker than anticipated in April and will represent less support for second quarter growth. Not all the details on exports are negative. Both imports and exports of capital goods are rising and greater equipment spending will support stronger GDP growth both here and abroad. Additionally, consumer goods demand shows no signs of fatigue. The vehicle cycle peaked in January, when auto imports reached a record high.  The trade deficit is a result of the strong U.S. expansion. The U.S. is in a stronger economic position than many of its trade partners. The strong dollar is driving imports and is a headwind for exports. Risks are to the downside, coming from administration talks on tariffs, border-adjustment taxes and renegotiation of trade deals.

Payrolls were weak again in May, rising by only 138,000 jobs. That followed an addition of 174,000 in April.  Some of the weakness could be explained by calendar events, as the survey week occurred early in the month and May is affected by seasonal effects related to the end of the school year. The early survey week may not have captured industries hiring for seasonal work.  Also, the end of the school year may not have been adequately may not have been adequately captured, resulting in losses in local and state government employees. Manufacturing trade and government pulled back in May. However, gains in March and April were revised downward by a total of 66,000 jobs. The three-month average slipped to 121,000 jobs, the weakest average since 2012. The unemployment rate fell to 4.3%, mainly due to a decline in the participation rate to 62.7% from 62.9%.  The average workweek was unchanged.  Although the labor market remains firm, the downward revisions in March and April are worrisome, expect we are at full employment and payroll growth is expected to weaken. We expect payroll growth to rebound in coming months, but if the weakening trend continues, the Fed may put the brakes on a faster pace of interest rate increases.


likely stay above the expansionary 50 level this year, however, the deleveraging campaign will inevitably slow growth as tightening measures have already pushed up borrowing costs for factories.   China’s manufacturing economy is stabilizing ahead of an expected slowdown in the second half of the year.  China’s factory PMI remained at 51.2 for the second consecutive month in May. The non-manufacturing index increased to 54.5, indicating the consumer is remaining active. The small business enterprise index strengthened to 51, the highest level in five years.  The index for large companies weakened to 51.2 from 52. Input prices weakened to 49.5 from 51.8. New orders were unchanged at 52.3. New export orders to 50.7 from 50.6. The steel index climbed to 54.8 from 49.1.

Euro-area inflation decelerated to 1.4% in May from 1.9% in April. The May reading was the weakest so far this year and gives ammunition to European Central Bank policy makers who say it’s too early to commit to an exit from monetary stimulus. The core index fell to 0.9%, also weaker than expected. More subdued inflation will make the case that the exit can be slow. At the same time, the ECB needs the discussion about exiting to have some momentum. They don’t want the markets to run ahead of events. There is a need for a fine balancing act.

Important Data Releases This Week

Productivity and costs (2017-Q1 will be released on Monday, June 5 at 8:30 EDT. Revision should show productivity will be unchanged after a 0.6% decline in the first estimate. Already released data show that output was stronger in the first quarter. Revisions to unit labor costs should be interesting. We project the increase in unit labor costs to fall from 3% to 2.3%, giving the Fed more leeway in controlling inflation.

May ISM non-manufacturing index will be released on Monday, June 5 at 10:00 AM EST. Service sentiment has softened lately as expectations of stimulus have diminished. This suggests some backtrack in the ISM non-manufacturing index from 57.5 to 57. This still a decent reading and consumer fundamentals are still solid.

April factory orders will be released on Monday, June 5 at 10:00 AM EST. We look for factory orders to fall 0.1%. The capital goods orders were unchanged in the release of durable goods and total durable goods orders fell 0.7%.  Aircraft orders were weak in April, but other non-transportation sectors seem to be holding up, including mining.

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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.