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 euro briefly jumped to a five-week high as comments from an European Central bank policymaker that prompted investors to price in a rate hike by year’s end. Asian stocks advanced and were set for the best week since July after most of the world’s biggest economies either tightened monetary policy, or signaled tightening, in a strong sign of confidence about global growth and inflation. The Federal Reserve kicked things off with an interest rate hike on Wednesday. China followed with on one of their own on Thursday and then Britain and the ECB hinted at higher rates. The latter two were a surprise to markets given Britain’s economic future is in doubt as it exits the European Union.
Global stocks were on course for the best week since January after the Federal Reserve raised rates. The Stoxx Europe 600 index slid 0.4% on Friday, paring a weekly gain after reaching the highest level since December 2015 on Thursday. The MSCA Asia Pacific index rose 0.2% on Friday after closing Thursday at the highest since June 2015. The S&P fell 0.1% on Friday, but gained 0.2% for the week.
Last week was busy on the economic calendar. Results, although positive, were somewhat mixed. Retail sales increased 0.1%, but that did follow two months of fairly strong readings. The details were somewhat mixed for growth this quarter. The CPI rose 0.1%, but pipeline PPI rose 0.3%, more than expected. Energy has provided about half of the increase in inflation recently, but core inflation is not weakening and justifies the Fed’s actions. Housing starts were decent, rising 3%, but permits fell unexpectedly, due to weakness in the multi-family sector. Industrial production was unchanged, due to a 5.7% fall in utility output. Manufacturing was decent, rising 0.5%, up 1.2% from a year ago basis. Manufacturing is turning upwards, but survey data is more optimistic than actual output. Still, the direction is positive.
The Federal Reserve sent a clear signal a couple of weeks ago concerning its intention to raise rates at the March meeting and they fulfilled their mission. The target for the federal funds rate was raised by 25 basis points from 0.75% to 1.0%. The Fed reiterated that the risks to the economic outlook remained roughly balanced and that economic conditions will evolve in a manner that will warrant gradual rate increases. Forward guidance was largely unchanged concerning economic growth and interest rate increases between 2017 and 2019 and the Fed penciled in three interest rate increases in 2017 and in 2018. The Fed said it was carefully monitoring actual and projected increases in inflation. The use of the term “symmetric” we interpret to mean the Fed will tolerate slightly above, or below the 2% target rate for inflation. In part, we think the Fed moved in March because of the seasonality of the first quarter, not so much a pressure move because of inflation. Historically, the first quarter comes in weak and a May move would have been politically difficult.
After a busy week, the economic calendar is light. The key data will be existing and new home sales, along with durable goods orders. The economy is off to a good start for the year, confidence has surged and job numbers are decent. Spending is a little weak, suggesting the first quarter may come in soft and follow the usual seasonal pattern of the last few years. Fundamentally, the trend is sound, with growth near 2.5%. Investor and consumer confidence is high, but what comes out of Washington the next few weeks could disappoint many who hoped for a big infrastructure and tax relief surge. This makes stock prices vulnerable and that could be bad news for the economy. Mr. Trump’s budget would widen the deficit significantly, but Congress is unlikely to follow through in such a dramatic fashion. Congress does hold the purse-strings and are likely to follow the current spending limitations when all is said and done. This suggests growth will track nearer to 2% than 3%, but does provide a solid base for growth to continue. Downside risks are centered more in 2018-19, when the bite from higher rates starts to have real economic consequences. Potential trade wars could have near-term real economic risks. In all, the economy is doing well and this pattern is likely to continue.
The U.S. Economy:
Producer prices for final demand rose 0.3% in February, stronger than expected. Final demand services rose 0.4% and goods prices were up 0.3%. Growth in the core goods PPI increased 0.1%. The increase in the goods component has been influenced by energy prices, which has accounted for more than half of the increase in the goods segment over the last few months. With oil prices dropping below the $50 a barrel, that segment will lose some push in March. The PPI for final demand was up 2.2% on a year-ago basis. Final demand goods PPI was up 4% in March. Inflation is alive, but as some of the push is coming from energy prices, which are falling, the push will moderate in coming months.
The consumer price index rose 0.1% in February, following a 0.6% surge in January. The CPI was up 2.8% y/y. The energy CPI fell 1% in February, after rising 4% in January and 2.1% in December. The CPI for food rose 0.2% in February, but remained basically tame. The core CPI rose 0.2%, up 2.2% y/y. Core inflation has firmed and there is little reason to see it suddenly weaken. The firming of inflation makes the case for further Federal Reserve action. The new administration’s fiscal and potential trade policies are both inflationary if realized. The Fed will be awake to the possibilities but will hedge its bets in case Congress fails to pass stimulus measures.
The NFIB small business optimism survey fell slightly in February from 105.9 to 105.3. This was the first decline since September. Six of the ten components decreased and three edged higher. Both hiring and capital expenditure plans slipped, but reversed little of the ground made in November following the election. All told, it is encouraging to see the index remains elevated, but as an element of caution, it is doubtful that this will lead to a significant acceleration in hiring, investment or GDP growth. The biggest problem facing small businesses is finding qualified workers. 32% of small firms reported at least one job opening that is hard to fill. There seems to be a marked difference between survey-based and hard economic data. Although measures of business and consumer confidence have improved noticeably over the past several months, it hasn’t translated into stronger economic activity.
Retail sales increased 0.1% in February, following a 0.6% surge in January and 1.0% jump in December. Details were mixed. Motor vehicle and parts sales fell 0.2% in February and sales at gasoline stations fell 0.6%. Excluding autos and gas, sales rose 0.2%. Delayed tax returns likely affected sales at restaurants, grocery stores and apparel stores. Sales were up 5.7% from year earlier levels, down from January’s 6.0% rate, but still elevated. On a year-ago basis, sales at gasoline stations were up 19.6% and non-store retailers were up 13%. No other segment was in double-digit territory. The outlook for sales is optimistic, as employment growth is strong and wages are advancing. Auto sales are likely topped out. Potential stimulus from the new administration is a plus, if the measures pass Congress. Even so, the outlook for the consumer is optimistic.
Business inventories rose 0.3% in January, following a 0.4% advance in December. Inventories are up 2.3% y/y. Retailers led the way in January, with stocks rising 0.8%. Manufacturer’s stocks rose 0.2% and wholesale inventories were down 0.2%. Total business sales increased 0.2% and the inventory-to-sales ratio held steady at 1.35 months. Inventories remain on a stable footing. Retailers stood out, mainly because of increasing stocks of autos and parts. However, apart from autos, inventories are up, in part boosted by warmer than normal weather, which allows for more shopping. The I/S ratio for food and beverages, clothing and general merchandise have retreated during January. The outlook for inventories looks more favorable over the next two years. Employment growth is healthy and wages are rising, supporting final demand. The outlook appears more favorable for production and a positive inventory build.
The NAHB homebuilder sentiment index jumped 6 points in March to 71, indicating very favorable conditions for homebuilding over the next six months. All three subcomponents increased during the month. The stability of the index in 2016 and so far in 2017 is indicative of steady growth in the housing market over the next few quarters. The increase in the index was broad-based across regions. The Northeast led the pack with a 14 point increase, followed by the Midwest with a 9 point rise. The West was the most optimistic, resting in the high 70s. Survey results have been very optimistic lately, but hard data, although positive, has not delivered at such robust expectations. The housing market will face rising rates, a factor that will slow activity down in coming quarters.
Residential construction continues to trend upwards at a steady pace. Housing starts increased 3% in February to an annual pace of 1.288 million units. The February increase was fueled by a 6.5% increase in single-family starts to a 872,000 units annual rate. Multi-family starts declined 7.7% m/m to 316,000 units. Permits fell 6.2% to 1.213 million units. The decline was driven by a 21.6% decline in the multi-family component. Single-family permits rose 3.1% in February. Housing activity is improving slowly. Starts were decent in all areas except the West, where rain in California subdued activity. The outlook for housing activity is mixed. There is room to grow in the single-family sector. Starts in the multifamily component have been flat over the past year at 325,000. Driving single-family activity are the gains in jobs and wages. However, interest rates are increasing and that will slow activity in coming quarters. Still, the outlook for single-family construction is positive, and the slow trend upwards is likely to continue for several more years.
Industrial production was flat in February, slowed by a 5.7% decline in utility production. January’s decline was revised upward from -0.3% to -0.1%. Manufacturing rose at a strong 0.5% rate. Details were positive. Durable goods output rose 0.6% in February. Durable goods production is slowly strengthening after two years of lackluster performance. Motor vehicles and parts production rose 0.8%. Non-auto production rose 0.4%. The machinery segment gained 1.1% and was up 5.1% from a year earlier. Business equipment production rose 0.7%. The weak trend in business equipment investment may soon be a thing of the past. Consumer goods production fell 0.4%, but production in January was revised upwards. Mining gained 2.7% and was up 1.8% from a year earlier. Manufacturing is slowly strengthening, but more data is needed to call it a meaningful turnaround. There is a noted difference between survey data and actual output, but the difference is not direction but magnitude. Manufacturing is clearly improving, but the pace remains to be seen.
China’s Premier Li Keqiang reassured investors that the world’s second largest economy is strong and not at risk of a hard landing, while stressing Beijing’s support for globalization and free trade at a time of rising protectionism. Li also reiterated that China does not want a trade war with the U.S., and urged talks with Washington to find common ground. “Our hope on the Chinese side is that no matter what bumps this relationship hits, we hope it will continue to move forward in a positive direction,” he said. Data in recent weeks has been strong and the economy is off to a decent start to 2017, but growth appears to be heavily dependent on credit, infrastructure investment and the property market. The economy grew 6.7% last year and the growth target for this year was set at 6.5%, or higher. Private investment has rebounded in the first two months of the year attributed to a better economic environment compared to a year ago and policy support. However, analysts say China’s continued reliance on a credit-fueled growth increases the chances of a financial crisis in the future. Many believe a massive bank bailout may be inevitable.
Important Data Releases This Week
February existing home sales will be released on Monday, March 20 at10:00 AM EDT. We look for sales to fall from 5.69 million to 5.58 million. This will undo part of the 3.3% January rise, but still keep sales on a fairly strong trend.
February existing home sales will be released on Thursday, March 23 at 10:00 AM EDT. We look for sales to fall from 5.55 million to 5.65 million. The rise in mortgage rates has slowed new home sales a bit, even though January’s sales did overcome some of December’s weakness. We still expect sales to remain solid going into the spring months.
February durable goods sales will be released on Friday, March 24 at 8:30 AM EDT. We look for durable goods orders to increase 1.5% in February, following the 1.8% gain in January. Aircraft orders will provide the boost to the headline number, as was the case in January. Excluding transportation, we expect a 0.5% rise in orders and core capital goods orders will be positive. The Lunar New Year likely pushed some core orders from January to February.