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.
Investors adopted a cautious tone as European stocks pared a third straight week of gains before a major speech by U.S. President Trump. Japan’s Topix Index lost 0.4 of a percent on Friday, but rose 0.4% for the week. The S&P ended up at a record 2,367.34 and the Dow Jones Industrial Average added 198 points in five days to end at 20,821.76. Investors are taking a wary stance ahead of Mr. Trump’s speech on Tuesday. This week will be three weeks since President Trump promised something “phenomenal” with respect tax reform and little has surfaced. If Mr. Trump’s speech fails to provide details, some investors will turn to profit taking and the stock market rally may backtrack.
There was little economic news last week. In the global economy, the Markit PMIs for manufacturing and services improved for both the euro-zone and Germany. Both manufacturing PMIs hit a cycle high, suggesting an improvement in this sector of the global economy. Both existing and new home sales advanced in January after a disappointing December. Inventories are a problem for existing homes and mortgage rates are rising, factors that are keeping sales in the slow lane, although the trend remains positive.
The Federal Open Market Committee minutes noted that support for rate hikes is building. The tone was more hawkish, but we still don’t think the committee will move before June. Participants noted that economic forecasts have not changed appreciably since December. Some members have made forecasts about future fiscal policy, but the minutes stressed the high uncertainty about future policy. Fiscal policy was listed as an upside risk to growth, but other members stressed the downside risks on the administration’s policies on trade, immigration and regulations.
This week’s economic calendar is packed. The advance durable goods and goods trade details are released and GDP second estimate for Q1. Pending home sales is released, as well as personal spending and incomes, the GDP deflator, construction spending and both the ISM manufacturing and non-manufacturing indexes. Vehicle sales are also released this week.
The economy remains solid. With GHDP growth tracking well above the 2% mark in Q1. The consumer is strong and manufacturing is showing tentative signs of recovery. There are uncertainties concerning the timing of any stimulus under the administration. There are also concerns about trade. Mr. Trump and his administration’s officials are giving two conflicting views on Mexico. Confidence remains high though and until more clarity is provided on policies, near-term prospects appear bright. The economy is growing well north of 2% and that rate will likely prevail through the year.
The U.S. Economy:
The pace of economic growth ebbed in January. The Chicago Fed National Activity Index slipped to -0.05 in January from 0.18 in December. Three out of four broad categories fell during the month. The production-related indicators dropped to -0.07 in January from 0.18. The personal consumption and housing sector declined to -0.05 from -0.03. On the bright side, the employment-related indicators improved to 0.06 from -0.01. The Chicago Fed Index is off to a slow start this year, but of January’s decline was in production. The index is back where it was in the last half of 2016. The three-month average of -0.03 is still near its highest level since August 2015. There is reason to believe that manufacturing is strengthening. The Federal Reserve’s measure of manufacturing was positive three out of the last four months. The outlook for consumption is fairly good. This suggests an improving economy, forecast to grow slightly less than 2.5%.
January home sales recovered some of the ground lost in December and are still trending up despite slowing in the second half of last year. New-home sales rose 3.7% from December and are 5.5% above year earlier levels. Sales came in at an annual pace of 555,000. New homes listed for sale came in at 265,000 in January, up 3.5% from December and up 10.9% from January 2016. The I/S ratio equaled 5.7 months of sales in January, the same as in December but up 0.2 of a mot h from a year earlier. Sales are still growing at a steady, but unspectacular rate. The new-home market is not fully tight and that partly reflects the weakness in existing home demand. Existing home sales are flat, but new home sales are slowly rising. Existing home sales will have to increase at stronger rates before the new home market reaches potential.
Existing home sales rebounded 3.3% in January, more than recovering December’s decline. There were gains in both single-family and multi-family dwellings. Existing home sales came in at 5.69 million units in January, up 3.7% y/y. Sales rose in three out of four Census regions. The market remains tight. Single-family listings rose 4.4% m/m, but remain down 6.85 y/y. The I/S ratio for single-family homes was 3.6 months, up 0.1 month from December, which was the lowest level in recent memory. Looking forward, the outlook is cloudy. First-time buyers are reticent to take the plunge on buying a house and mortgage rates are rising. The labor market is moving in the right direction, keeping the market stable.
The euro-area economic activity unexpectedly rose to the highest level in almost six years in February as the region’s recovery became more broad-based and inflationary pressures continued to build. The composite Purchasing Manager’s Index climbed to 56.0 in February from 54.4 in January. Inflows of new orders and surging confidence among firms point to a potentially stronger expansion in months ahead. The ECB will be pleases by signs of stronger growth and the upturn in pricing pressures. However, election uncertainties and Brexit could disrupt the business environment this year. The ECB is committed to continue asset purchases until the end of the year. Growing price pressures suggest some pull-back in stimulus, but ECB President Mario Draghi has repeatedly argued that significant stimulus is still needed.
Important Data Releases This Week
January advanced durable goods will be released on Monday, February 27 at 8:30 AM EST. We look for durable goods to rise 0.8% in January, following the 0.5% decline in December.
January pending home sales will be released on Monday, February 27 at 10:00 AM EST. We expect the sales index to rise 0.5% after the 1.0% advance in December. Rates are rising and that may slow activity in January.
GDP (2016-Q4 will be released on Tuesday, February28 at 8:30 AM EST. We look for GDP to increase 2.3% in the final quarter of 2016, stronger than the 1.9% first estimate. We look for a stronger outlook from consumer spending and some inventory build.
January personal income and spending will be released on Wednesday, March 1 at 8:30 AM EST. We expect personal income to rise 0.3% in January, identical to the average of the last three months. Nominal spending will also rise 0.4%, with weakness in utilities and autos. Spending on the other sectors has held up in recent months. The GDP deflator will rise 0.2%, up 1.6% from a year earlier, close to the Fed’s 2% target.
February ISM manufacturing index will be released on Wednesday, March 1 at 10:00 AM EST. We expect that manufacturing will continue to show slow progress, rising from 56 to 56.3. Domestic demand is decent and there is some inventory build. However, the dollar is strong and trade policies uncertain, which could put a damper on manufacturing.
January construction spending will be released on Wednesday, March 1 at 10:00 AM EST. Construction spending should resume its positive trend after the public sector led to a 0.2% decline in December.
February vehicle sales will be released on Wednesday, March 1 at 4:00 PM EST. We expect sales to decrease to 17.4 million in February after equaling 17.6 million in January.
February ISM non-manufacturing index will be released on Friday, March 3 at 10:00 AM EST. We expect that the non-manufacturing index to increase from 56.3 to 56.5. Fundamentals are supportive for the non-manufacturing component of the economy.