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.
Optimism about an economic recovery in Europe that is gaining traction, helped the regional index to claw back some of the weekly losses. Europe’s STOXX 600 rose 0.4% on Friday, helped by financial and bank shares. The MSCI All-Country Index is less than half a percent off its all-time record. In the U.S., equities ended their longest streak in more than a year as slumping oil prices dragged down energy stocks. The S&P slipped 0.4% in its first decline since January 20 and the Dow Jones lost 0.5%. Oil posted its worst decline since November, as increasing domestic production and excess inventories in the U.S,. drove WTI to below the $50 a barrel during the week.
February was a solid month for the U.S. labor market, with the addition of 235,000 jobs and strength in the goods producing sector. This means that it’s almost a slam dunk that the Federal Reserve will raise rates next week. On the fiscal policy front, Republicans released their plan to repeal and replace the Affordable Care Act, but its passage in the current form is far from certain. The macroeconomic effect will be limited but the cost sharing arrangement between households, private insurers, federal and state government will change significantly.
The first quarter appears solid enough to justify a rate increase by the Federal Reserve. Communication will be a key element and the board will try and sound upbeat about the economy and stick to a gradual tightening plan. The first quarter has a historical tendency to be weak in terms of economic growth, a seasonality problem. The first quarter GDP trackers are reporting widely different results, with the New York Fed reporting Q1 growth near 3.2% and the Atlanta Fed at 1.2%. The differences between the trackers involve calculations on spending and inventory-build, data that will be released in coming weeks. The Federal Reserve may be influenced by the historical trend of first quarter GDP. It would be better for them to move in March rather than May, if data on the first quarter is weak, if only for seasonal reasons.
Weather was a factor in the employment report, allowing more construction activity than normal. That could be a factor in next week’s release of retail sales, industrial production and housing starts. In addition, inflation reports and inventories will also provide some insight. There will be winners and losers in the data. Retail sales is expected to be soft as tax refund delays are pushing spending to later months. Warm temperatures probably weakened utility output, but manufacturing will be solid in February. Inflation will weaken as energy prices were better behaved in February. We will see if the recent improvement in housing will continue. On trend, the economy is very solid and 2017 increasingly looks like a decent year.
The U.S. Economy:
Factory orders increased 1.2% in January, slightly better than expected. Nondefense aircraft orders drove the headline number. Durable goods orders rose 2.0%, while nondurable goods posted a 0.4% advance. Total orders were up 3.8% on a year-ago basis. Core capital goods orders excluding aircraft fell 0.1%, the first decline since September. Orders from this segment are up 0.5% from a year earlier. Total shipments rose 0.2%, 2.8% higher than a year ago. Although no maintaining the trend of the last few months, orders have been positive, suggesting better conditions at the nation’s factories. Manufacturing surveys have been fairly strong, but hard data has not lived up to survey results. Still, manufacturing is positive, business sentiment is strong and with employment markets tight, businesses should increase capital investment. There are some headwinds, mainly from the strong dollar. Trade is another potential trouble point. If the Trump administration places tariffs on U.S. imports, our trading partners will respond in kind. Trade wars will not benefit our trading partners, or the U.S. economy.
The trade deficit widened in January to $48.5 billion, up from $44.3 billion in December. Total nominal exports rose 0.6%, following a 2.7% gain in December. Goods exports rose 0.9%, the second consecutive monthly gain. Within goods, food and beverage exports rose 5.6%. Industrial supplies rose 5.8%, the second monthly gain. Nominal imports rose 2.3%, the fourth consecutive monthly gain. Goods imports rose 2.6%, following a 1.9% gain in December. The early Lunar New Year likely pulled some imports forward from February into January. The timing of the holiday will distort trade and inventory data, but that should be sorted out by March. Even so, trade will be a weight on first quarter growth. The appreciation of the dollar will remain an issue for trade, hurting exports and boosting imports. Other than the dollar, risks are weighted to the downside given talks of tariffs, a border adjustment tax and renegotiation of trade deals. These policy actions would affect trade in a negative way and be disruptive to supply chains.
February was decent for the labor market. Payrolls increased by 235,000 jobs, in line with the 238,000 produced in January. The mild winter, better conditions for manufacturing and the rebound in energy prices, allowed firmer conditions for goods producing industries. Goods production payrolls added 58,000 in total. Manufacturers added 28,000 and natural resources produced 9,000, the third month of additions. Services weakened a little, adding 132,000, down from 167,000 in January. The service sector was hurt by a decline of 26,000 in retail payrolls after an addition of 40,000 in January. Government payrolls increased by 8,000. Average hourly earnings moved in the right direction, increasing 0.2% for the month, up 2.8% y/y. The unemployment rate declined from 4.78% to 4.7%. The labor participation rate edged higher to 63%. The report was positive from the viewpoint of labor markets and as a support for spending. The only blemish is the strong outcome of jobs that were weather-related and may have pulled-forward some spring work. Employment growth should average near 200,000 this year and place more workers in the labor force that have been sitting on the sidelines.
Domestic spending drove euro-area growth in the fourth quarter of 2016. Real GDP grew 0.4% in the final quarter of 2016, matching the third quarter rate. Household consumption added 0.2 of a percent point to growth, while government spending and investment added 0.1% each. Recent data has highlighted the strength of the euro-area recovery, with the gauge of investor confidence jumping to the highest level since before the global financial crisis. The inflation rate has quadrupled to 2% in just four months and is adding some pressure to the European Central Bank to map out an exit from its stimulus programs. Imports outpaced exports in the fourth quarter, lowering growth by 0.1%.
Important Data Releases This Week
February NFIB will be released on Tuesday, March 14 at 6:00 AM EDT. We look for the survey to rise from 105.8 to 105.9, the fourth consecutive increase. Small businesses remain optimistic about the economy’s prospects and job openings edged higher in February. Small businesses are still having a difficult time finding qualified workers.
February PPI will be released on Tuesday, March 14 at 8:30 AM EDT. We look for the PPI to remain unchanged after the 0.6% increase in January. Energy prices were elevated in January and settled down in February. Food prices are tame.
February CPI will be released on Wednesday, March 15 at 8:30 AM EDT. We look for the CPI to increase 0.1% after the 0.6% increase in January. Energy prices were active in January and settled down in February. Food prices are likely to remain unchanged. The core CPI will rise a trend-like 0.2%. The weaker inflation readings won’t stop the Fed from moving.
February retail sales will be released on Wednesday, March 15 at 8:30 AM EDT. We look for sales to fall 0.1% in February, following the 0.4% gain in January and the 1.0% jump in December. Autos will be neutral and gas prices fell in February. Tax refunds are late and may affect some consumer decisions. On trend, consumer spending is still healthy.
January business inventories will be released on Wednesday, March 15 at 10:00 AM EDT. We look for inventories to rise 0.4%. The early Lunar New Year saw a surge of inventories ahead of the holiday. Some of these will be marked as inventories until the cycle rights itself. On trend, the inventory correction of last year is mostly completed and domestic sales are decent. The I/S ratio may rise this month, but settle down in a couple of months.
The March NAHB housing market index will be released on Wednesday, March 15 at 10:00 AM EDT. The index is expected to fall from 65 to 64 in March, the third consecutive decline. However, the index remains elevated. The index historically declines slightly in March.
February housing starts will be released on Thursday, March 16 at 8:30 AM EDT. Housing starts are projected to rise from 1.246 million units in January to 1.28 million. Weather was warmer in February, a positive factor for starts. The single-family sector is slowly advancing, while the multi-family sector has been volatile. Mortgage rates moved up, but settled into a tight range in February.
February industrial production will be released on Friday, March 17 at 9:15 AM EDT. We look for industrial production to rise 0.5% in February, following a 0.3% decline in January. Car production is flattening, but non-auto output is trending upwards. The increase in rotary rigs is a plus for industrial production.