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.
The sleepy tone of U.S. stocks lasted another week, with a prolonged string of motionless sessions as the S&P Index approached its latest milestone. Unmoved by politics, the economy, or earnings, the benchmark index slipped 0.4% over the last five days, ending at 2,896.61 on Friday. The market seems to have settled down short of the 2,400 mark. The market is showing resilience amid financial turmoil in China and the firing of the FBI director James Comey. For the second time this year, 2,400 proved to be too high a hurdle for the S&P. The index surpassed the mark in March without being able to hold it. It exceeded it on Monday and Tuesday, but both times ended below.
Consumer prices rebounded last month, but at a slower pace than expected, while retail sales advanced after an unexpected drop in March. That is enough to bolster the case for Federal Reserve tightening in June, but not enough to excite stocks or bonds. The Stoxx Europe 600 rose 0.3% in five days. The MCSI Emerging Market index rose 0.3% to cap a fifth straight advance, its longest rally since March. The measure is at the highest level in 11 months. West Texas Intermediate rose 3.4% for the week, but is down 11% in 2017. China’s stock market remains in a slump, the rout continues, with equities down roughly $560 billion, making them the world’s worst performers since mid-April.
The PPI rose 0.5% in April, but the CPI rose a more subdued 0.2%. Core CPI only increased 0.1%. The Fed won’t ignore the recent softness in core inflation, but they will maintain the trajectory of gradually normalizing rates. The Fed fears that now we’ve reached full employment, inflation fires will be stoked. Income growth has averaged near 2% for the length of the expansion, now it is edging closer to 3%. There are a lot of “help-wanted” signs and the labor problem is going to get worse. The administration’s hard line policy on immigration will make matters worse. The Fed will work to prevent overheating. As interest rates tighten, it is likely the economy will enter late-stage expansion. The Fed is likely to overshoot the mark and the probability increases that unemployment will go up. Once unemployment goes up by 35 basis points, a recession invariably follows.
A recession is not inevitable. The probability of a near term recession remains quite low, about 20%, but as rates rise in the 2018-19 period, the probability of a downturn does go up. On paper, the federal funds rate will equal 3% by decade’s end. Policymakers will also start to unwind the Fed’s outsize balance sheet. It will be difficult to “soft-land” an economy that is growing not a lot more than 2%. Hence, the probability of a recession increases in the 2018-19 period, when the rate increases start to impact real economic activity.
Retail sales increased 0.4% in April after a revised 0.1% increase in March. The report, plus the advance in jobs, suggests that the consumer will return after a weak first quarter. Second quarter growth is tracking well above 3%. The economy is currently in solid shape. Growth will end up 2017 a little shy of 2.5%. Fiscal policy could boost the economy for a couple of quarters, but that is looking increasingly remote. However, some modest tax reform measure could pass in 2018. The economy remains on a tight sailing trim for the near-term. It is in 2018-19 when storm clouds could gather.
The economic calendar is light this week. We look for housing to start to bounce back in April, after weather took a toll in March. Industrial production will post a modest gain, but the details will be more telling. Manufacturing should post a solid gain, after 0.4% decline in March. The trend in manufacturing looks encouraging, but the advance will be modest, as the auto industry has clearly peaked.
The U.S. Economy:
The NFIB small business optimism index slipped from 104.7 in March to 104.5 in April. Although it was the third consecutive monthly decline, the index remains elevated. The decline reverses little of the optimism following the election. The net percent of small firms expecting the economy to improve in the next six months fell from 46% to 38%. The number of firms with a hard to fill job opening rose from 30% to 33%. Small business optimism jumped following the election of Donald Trump. The passage of Trump-Care through the House of Representatives was a victory for the Trump administration, but the bill will look much different when the Senate version comes up. Other fiscal policy changes such as tax reform and infrastructure are unlikely to pass until 2018, or at all. The index traditionally favors Republican presidents and disfavors Democrats. Although the increase in the index is partly political in nature, it is encouraging to note that small businesses are optimistic, but what they say they are going to do in terms of hiring and capital investment can be quite different in reality.
Producer prices increased 0.5% in April, following a 0.1% decline in March. Inflation has bounced around the last couple of months, but it is likely the Fed will stay on track to raise rates in June. The PPI was up 2.5% above year earlier levels, while goods were up 4.0%. Excluding food and energy, the PPI for core goods was up 2.3% y/y. Although the PPI was fairly robust in April, the CPI was more subdued, rising just 0.2% and that followed a 0.3% decline in March. The core CPI rose just 0.1% in March. Although the core came in light, this will not slow the Fed. The Fed is concerned the labor market will overheat. Another move in September is likely, but the Fed could pause and await developments after that if inflation, or the economy, starts to falter. Oil prices are likely to remain low and the labor market does not seem to have the pricing power of past years, so far. Rents seem to be flattening out. Commodity prices will stay restrained because of expected slower growth in China. Inflation will be alive, but likely restrained in coming quarters.
Business inventories closed a lackluster first quarter above expectations, but inventory build should improve the rest of the year. Inventories grew by 0.2% in March. Retailers led growth, increasing by 0.5%, while wholesalers also grew by 0.2% and manufacturers were unchanged. Sales were unchanged in March and the inventory-to-sales ratio held steady for the fourth consecutive month at 1.35. Inventory build was lackluster in the first quarter, held back by a weak performance among manufacturers. Wholesalers held firm and retailers forged ahead, with steady gains outside of autos and parts. Notably, clothing and general merchandise stores added to stocks. Sales are projected to perk up after the soft first quarter. The nation is near full-employment and wages should start to rise more rapidly. With stronger sales, businesses will start to raise inventory stocks and drive production to stronger levels.
Retail sales improved in April, rising 0.4%, following a 0.1% rise in March. Gains were mixed across segments. Auto dealers contributed 0.1 percentage point and non-store retailers, electronics, appliance stores and building supply stores were other leaders. Sales rose 0.3% excluding autos and gasoline. Sales were 4.5% above year earlier levels and 3.7% excluding autos and gas. There were upward revisions to March and February, which could boost the weak Q1’s first quarter report. Confidence is high and employment growth remains healthy. Incomes are sluggish, but considering the economy is at full employment, wage growth should pick up. Savings is within its recent range and debt burdens are historically low, factors that should keep spending solid. Inflation is alive and that is a headwind for the consumer In balance, consumption should pick up after the weak first quarter.
The euro-area is maintaining its growth momentum in the start of 2017, strengthening the case of those pressuring the European Central bank to sketch out a plan to end the extraordinary stimulus measures. Real GDP rose 0.5% in the first three months of the year, matching the pace of the earlier quarter. While policy makers have expressed different view on the sturdiness of the 19-nation recovery, June seems to be the month the Governing Council will set a course for a gradual exit from monetary stimulus. The recovery is now into its fourth year and ECB President Mario Draghi has characterized the recovery as “solid and broad.” The recovery is becoming more broad-based. In 2015, the recovery was due to the weakness of the euro. Now the recovery is more balanced with domestic demand doing fine and global trade is recovered.
Important Data Releases This Week
The May NAHB housing market index will be released on Monday, May 15 at 10:00 AM EDT. The index is expected to fall from 68 to 67 in May, the fourth consecutive decline. However, the index remains elevated and does bode well for home-building activity.
April housing starts will be released on Tuesday, May 16 at 8:30 AM EDT. Weather was unfavorable for housing in March and we expect a modest bounce-back in April. We look for housing starts to rise from 1.215 million to 1.275 million.
April industrial production will be released on Tuesday, May 16 at 9:15 AM EDT. We look for industrial production to rise 0.6% in April and manufacturing to post the same increase. Autos and parts production is projected to have increased after falling 3% in March. However, the auto industry faces challenges ahead as sales have peaked. Non-auto output fell 0.2% in March, but likely bounced back in April.