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.
European shares rose on Friday breaching a five-month high hit a day earlier as investors cheered positive signals on U.S.-China trade and after UK lawmakers voted to delay a potentially chaotic Brexit exit from the European Union. The pan European STOXX 600 was up 0.1 percent 0826 GMT, piecing the Oct. 5 high set on Thursday and on track for the biggest weekly gain in a month. The mood was boosted by growing expectations that Britain will not leave the European Union without a deal following Thursday’s night parliamentary vote. Meantime, Chinese Vice Premier Liu He spoke by phone with U.S. Treasury Secretary Steven Mnuchin and U.S. trade representative Robert Lighthizer, with the two sides making substantive progress on trade talks. The prospect that the talks may take longer than expected tempered some of the gains and there is still no clarity on how close the two economic powers are on reaching an agreement.
U.S. stocks rose on Friday on news there seems to be progress on U.S.-China trade. The Dow Jones Industrial Average rose 138.93 points to 25,848.87 on Friday. The S&P rose 14 points to 2,822.48 and had the best weekly gain since the end of November. U.S. data showed that manufacturing output fell for a second consecutive month and factory activity in the New York region was weaker than expected this month. The weak data has lent support to the Federal Reserve’s dovish stance on future rate hikes, which have helped lift stocks this year. Fed officials are scheduled to meet next week to assess the economy and the future course of monetary policy. Evidence is growing that the economy weakened noticeably in the first quarter and the Fed stance of holding rates seems wise as more subpar economic reports are emerging.
Several reports this week suggested a moderation in the pace of economic growth. The week started with January’s retail sales report, which showed a modest 0.2% bounce back in consumer spending after what was the worst month for retailers since the Great Recession. Stripping away the volatile components, food, autos, gas and building materials, the control group fared weak in December, falling 2.3%, the largest monthly decline since 2000. Consumer confidence remains high and the University of Michigan’s index of consumer sentiment increased from 93.8 in February to 97.8 in March. This seems to suggest the weak patch in spending is temporary, but the first quarter will be dented. December was market by a government shutdown and falling equity markets and confidence was being undermined by what could have been additional tariffs. Since then, equity markets have regained all the losses they gave up in December and confidence measures have trended higher. Spending doesn’t seem to be falling off a cliff, but it will be weaker in the first quarter and following reports on consumption will be under a spotlight.
Price data for February remained mostly in check, but lower energy prices last year held down inflation on year-over-year basis. Core inflation is running at a 2.1% annual rate over the last three months and the price trend is near the Fed’s target, suggesting that from a inflation perspective, there is no need for the Fed to move in the near term. In last week’s employment report, we did learn that average weekly wages hit a new cycle high in February. Wage increases have only bled through to consumer inflation at a slow pace. Higher productivity increases and historically high profit margins have given companies scope to control the higher wage costs and suggest inflation will not get out of hand anytime soon.
The hard data for durable goods orders were positive in January, rising 0.4%. This is decent considering the volatile reading on new orders from the ISM manufacturing index in recent months. Core orders and shipments both notched 0.8% gains over the month. The headline number was boosted by aircraft orders but there is uncertainty on how durable goods orders will be impacted due to the grounding of the Boeing 737 MAX aircraft. U.S industrial production came in weaker than expected and details suggest a net negative for GDP growth. Manufacturing fell 0.4%, the second consecutive monthly decline. The weakness was centered in the auto industry, where output slipped 0.1%, following a 7.6% decline in January. The decrease was not consistent with hours worked in auto plants in February, nor industry production schedules. This suggests there could be some positive revisions in coming months. However, the overall trend for manufacturing remains weak.
The latest economic data is suggesting the economy will turn in a weak first quarter. Estimates range from around 1% annualized growth in the first quarter to 0.4%. A weak first quarter is hardly a new concept. Since 2010, real GD growth averaged 1.7% in the first quarter, 0.7% lower than the following three quarters of the year. Despite efforts by the BEA, there still seems to be some residual seasonality issues in the income and product accounts. The big question now is, will the economy bounce back? Adding to the uncertainty is the fact that the economy has clearly downshifted as the impact of the fiscal and tax stimulus is fading. This means the underlying strength of the economy is a lot closer to 2% than 3%. Most economists and analysts are penciling in a 2.5% growth rate for the economy this year. Also, many business leaders say a recession will follow in 2020-21, suggesting that confidence is not as sturdy as some measurements suggest. Investors and consumers may head to the exits, if confidence is shaken. Downshifting an economy can get out of hand. We will be watching things closely in coming months.
Next week, all eyes will be on the Federal Open Market Committee meeting. We expect no changes in interest rates and projections are for no moves for the remainder of the year. Turning to the economic data, we look for a nice rebound in existing home sales. Factory orders will be released including data on nondurable goods.
The U.S. Economy:
Retail sales recovered a small portion of December’s decline during the first month of the year, but revisions were unkind on net. Retail sales advanced 0.2% n January, following a revised 1.6% drop in December. Motor vehicles and parts and gas sales declined in January. Core sales, which exclude those components, rose 1.2%, led by sporting goods stores, building supply stores and non-store retailers. Apparel, furniture and appliance stores saw losses in January. Total sales were up 2.3% from a year earlier, up from a weak 1.6% reading in December. Sharp movements in gasoline prices have restrained sending in recent months. Consumer fundamentals remain solid and that should support spending going forward. Trade tensions remain a threat but there does appear to be some progress towards a trade deal. Tariffs raise prices of goods and weaken income growth on a global level. Energy prices are a wild card.
Business inventories grew by 0.6% in December, following an almost unchanged reading for November. Manufacturing stocks fell by 0.02% but retailers saw inventories grow by 0.9% and wholesalers saw a 1.1% advance. Business sales fell 1% across all three categories of goods. That brought the inventory-to-sales ratio up to 1.38 from 1.36. December was weak for sales across the board but there was a partial rebound in January. Stocks are not too out of line but will need to be watched closely to keep the I/S ratio from getting too high and inviting a inventory correction.
The NFIB small business optimism index inched forward to 101.7 in February, up from 101.2 in January. The February advance did little to recoup the losses the index has seen since last August. Details were mixed. Plans to increase employment fell to 16% from 18%. Expectations for the economy did improve from 6% to 11%. Expectations for sales increases and expectations for price increases were unchanged. Capital expenditure plans advanced slightly to 27 from 26%. The February report did little to increase confidence that has been falling since last August. However, the fact that is bottomed out might be a sign that confidence is starting to firm up after a series of negative impacts from trade, government shutdowns and a downshift in the economy. A successful trade agreement with China may help firm confidence and stronger growth in the second and third quarters would help restore a positive input from a series of negative impacts from policy uncertainty. Financial markets have turned since December and that may also help restore confidence.
Import prices increased 0.6% in February, following a 0.1% advance in January. Energy prices drove the February increase. Excluding fuels, import prices were flat February, following a 0.3% decline in January. On a year ago basis, import prices were down 1.3% and non-fuel prices were down 0.6%. Export prices increased 0.6% in February but were down the same amount excluding fuels. Prices exclude tariffs so that prices including tariffs are contributing a small boost to U.S. consumer prices.
New home sales fell 6.9% in January to an annual rate of 607,000. Sales remained down 4.1% from January 2018. Falling sales are starting to have an impact on pricing. The median price for a single-family home was down 3.8% from January 2018. Although new home inventory fell in January, it was more than offset by the fall n sales. New single-family home inventories listed for sale at the end of January totaled 336,000, down 1.5% from December, but still up 3.8% from January 2018. The inventory-to-sales ratio equaled 6.6 months in January, up from 5.6 months in January 2018.
New orders for durable manufactured goods increased 0.4% in January, the third consecutive monthly advance. The January increase was largely driven by the volatile transportation sector. Core capital goods orders rose 0.8% in January, offsetting most of the 0.9% decline in December. Excluding transportation, orders fell 0.1%, but are up 4.1% from a year earlier. Capital goods orders gained 1.8% and were up 11.9% on a year ago basis. Boeing orders totaled 46 in January, but that was down from 218 in December. Among manufacturing industries, orders were mixed. Orders for electrical equipment increased 1.7% but orders for computers and electronic products fell 1.3%. Orders for primary metals were down 1.5% but machinery orders climbed 1.4%. Manufacturing is holding up but bears close watching. The increase in core capital goods orders was only the second positive increase in eight months. Trade remains a risk and evidence is emerging that the global economy is slowing. Labor also remains a limit for manufacturing as the tight labor market makes it difficult to find qualified workers.
Producer prices rose 0.1% in February, following a 0.1% decline in January. The goods PPI advanced 0.4%. The PPI for food declined 0.3% and energy prices increased 1.8% in February. Excluding food and energy, the PPI for final demand rose 0.1%. The PPI for final demand was up 1.8% on a year ago basis, while the core PPI for goods was up 2.2%. The PPI rose in February, but the trend has been weak. Past declines in oil prices are placing a hamper on inflation. Oil prices may tighten later as OPEC cuts and lower supply from Iran and Venezuela may firm prices despite growing U.S. production. Meantime, the CPI increased 0.2% in February following three months of being unchanged. Food and energy prices rose 0.4% in February. Excluding food and energy, the CPI was up just 0.1%. On a year-over-year basis, the CPI was up 1.5% and the core CPI was up 2.1%. With weak inflation expected, the Fed will stay on the sidelines for most of the year. There is debate on whether the committee may move one more time in December, but that decision will depend on the economy’s momentum and whether oil prices make a big comeback later this year.
Construction spending increased 1.3% in January, following a revised 0.8% decline in December. Total private construction advanced 0.2% in January but was down 2% year-over-year. Residential construction spending fell 0.3% m/m and was 5.6% lower y/y. Of the components of residential construction, spending on single-family homes fell 0.7% and was down 7.2% year-over-year. Spending on multi-family structures increased 1.4% m/m and was up 12.8% year-over-year. Nonresidential construction spending increased 0.8% from December and is up 2.4% y/y. Public construction spending increased 4.9% in February. Driving that sector was a 11.8% jump in spending on highway and street spending, which was up12.7% y/y. The report suggests that spending on single family homes is still a drag, but highway construction is expanding at a rapid pace.
Industrial production increased 0.1% n February, following a 0.4% decline in January. Details were mixed. Manufacturing fell 0.4% I February, following a 0.5% decline in January. Part of the decline in manufacturing can be attributed to auto output. Motor vehicles and parts production fell 0.1% in February, following a sharp 7.6% decline in January. Production in non-auto product declined 0.4%, after increasing 0.1% in January. Total manufacturing was up 1 from a year earlier. Mining output increased 0.3% in both January and February. Utility output jumped 3.7% in February. The fall in the manufactured component of the index did mirror the decline in the February ISM manufacturing index, which fell to the lowest level since late-2016. We expect more bumps in the road, as the U.S. economy has downshifted and the global economy is slowing. Trade remains a major risk. Even if a trade deal is reached with China, there is still a possibility that President Trump may put tariffs on imported autos and parts. In addition to trade, the tight labor market may also limit growth in manufacturing.
Plunging car production drove an unexpected decline in German industrial output in January, as the engine room of Europe’s largest economy sputtered on trade tensions and unease about Brexit. Industrial output dropped 0.8% in January, but December was revised up to a 0.8% advance. Automobile production dropped 9.2% in January, hurt by strikes at suppliers, a switch to new brands and a plunge in demand from China. Exports were flat in January and imports rose 1.5%, narrowing the trade surplus to 18.5 billion euros ($20.80 billion). The weak data suggests that Germany will only post meager growth in the first quarter, after it barely avoided a recession in the second half of the year. The German government cut its forecast for growth in 2019 to 1.0% from 1.8%.
Growth in China’s industrial output fell to a 17-year low in the first two months of the year and the jobless rate rose, pointing to further weakness in the world’s second largest economy. The weakness suggests that China’s government is likely to trigger more support measures from Beijing. China combines January and February’s report in orders to smooth out distortions caused by the Lunar New Year. Pressured by weak demand at home and abroad, China’s industrial output rose 5.3% in January-February, less than expected and the weakest reading since early 2002. Growth was expected in the 5.5%-to-5.7% range. Data showed exports tumbled the most in three years in February, suggesting U.S. tariffs on Chinese goods and cooling global demand were taking a greater toll. China’s jobless rate rose to 5.3% in February from 4.9% in December. Not all the news was bad, retail sales rose 8.2% in January-February, in line with December.
Important Data Releases This Week
March NAHB housing market index will be released on Monday, March 18 at 10:00 AM EDT. A third month of improvement is the expectation for the housing market index, following a much better increase to 62 in February. We see the index rising to 63 in March. The index ad been holding in the high 60s range before plunging sharply to60 in November.
January factory orders will be released on Tuesday, March 19 at 10:00 AM EDT. Advance data for durables in the January report rose 0.4%, while transportation orders slipped 0.1% and core capital goods orders nearly reversed a prior drop with a 0.8% rise. We see total factory orders, which include data on nondurable goods, falling 0.1% for the month.
The February leading economic indicators will be released on Thursday, March 21 at 10:00 AM EDT. We see the leading indicator index rising 0.1% for February after showing for December and January at minus 0.1% and no change.
February existing home sales will be released on Friday, March 22 at 10:00 AM EDT. Despite falling mortgage rates and an easy comparison with a very weak December, existing home sales failed to post a gain and fell sharply to a three-year low annualized rate of 4.490 million units. We look for an increase to 5.080 million for February.
January wholesale trade will be released on Friday, March 22 at 10:00 AM EDT. Wholesale inventories have been building sharply and suddenly in relation to sales. We see inventories rising just 0.1% in January, after rising 1.1% in December.