Monday Morning Coffee: Slow Renegotiation of NAFTA Could Be Beneficial

By | February 20, 2017

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.


Coffee and Economic ReviewGlobal equity markets were set to end the week on softer footing on Friday, after setting record highs the previous two sessions, as investors looked for clarity on U.S. President Donald Trump’s policies on tax and trade. The MCSI All-Country World Index headed for its fourth straight week of gains after hitting a record high on Thursday, buoyed by positive signs for global economic growth. Asian and European market eased as investors cashed in recent gains. MCSI’s index of Asia-Pacific shares outside of Japan pulled back 0.2% on Friday and the Europe STOXX 600 was 0.5% lower, although it remained near the highest level in 13 months. Fundamentals and earnings are solid, spurring demand for global equities.

Most U.S. stocks rose last week, taking the S&P Index to a fresh record and its fourth straight weekly record, the longest run since July. Stocks are likely to pause next week as investors go back and forth assessing the prospects for Donald Trump’s economic plans and the timing of interest rate increases. In Congressional testimony last week, Federal Reserve Chair Janet Yellen warned against waiting too long to tighten monetary policy. Incoming data was solid last week, with advances in manufacturing and retail sales and inflation heated up, suggesting the Fed will remain on track to raise rates three times this year.

Retail sales rose a stronger than expected 0.4% in January, a sign that consumer spending will remain a prime driver of economic growth in Q1 and likely through the year. Inflation surprised on the upside, with both the PPI and CPI rising 0.6%. Although both indexes were driven upward largely by energy, core inflation remains firm, suggesting that inflation is moving towards the Fed’s 2% target. Housing starts fell 2.6% in January after a 11.3% increase in December. Single-family starts were positive and permits rose, suggesting a slightly higher gear for housing may be forthcoming. Industrial production fell 0.3% in January, driven down by utility output. Manufacturing rose 0.2% in January, up four out of the last five months. Manufacturing seems to be improving. Regional surveys are continuing on their hot run. Manufacturing still has to contend with the high dollar, but global prospects are improving. The administration’s policies on taxes could be a plus, but trade could be a significant negative. Both policies are unclear at the moment.

Federal Chair Janet Yellen’s testimony before Congress was generally optimistic concerning the near term prospects for the economy and didn’t appear overly hawkish. This raised odds the Fed will move before the middle of the year. Although March is possible, the odds are much greater for a May or June increase. The economy is currently looking very solid with most economic data flashing green. However, there is great uncertainty concerning the timing of any fiscal stimulus and even greater worries over trade. A slow approach towards renegotiating NAFTA and other trade treaties could be beneficial in the long-run. However, a system of protectionist policies, such as tariffs could ignite a trade war. These actions could cause severe disruptions in supply chains and have significant negative economic repercussions.

Latest Data

The U.S. Economy:

The NFIB small business survey index rose from 105.8 in December to 105.9, the fourth consecutive monthly gain. The index has increased 11.7 points in the last four months. The January report bucked expectations for a small decline and suggests the improvement in confidence is fairly solid. Small businesses remain optimistic about the economy’s near-term prospects and hiring plans improved slightly in January. Plans to raise compensation edged lower, but still signals an acceleration in wage growth. Capital expenditure plans also edged lower, but they held on to most of December’s gain. Small businesses believe that the new administration’s fiscal and tax policies will boost business prospects. This suggests some upside risk over the next few months.

Inflationary pressures appear to be building. The producer price index rose 0.6% in January, following a 0.2% increase in December. Goods prices led the way, rising 1.0%. Within goods, food prices were unchanged, but energy prices rose 4.7%. Excluding food and energy, goods prices rose 0.4%. Service prices increased 0.3% in January. Consumer prices also rose 0.6% in January, largely driven by a 4% rise in energy costs. Food prices at the consumer level remained tame, rising 0.1%. The core CPI rose 0.3%. The recent data suggests that inflation is closing in on the Fed’s target of 2%. The Fed won’t respond to a single month of inflation and actually should let inflation modestly overshoot the target in order to let the economy gain strength. However, pressure is growing for the Fed to move and perhaps, before June.

Retail sales surprised on the upside in January. Retail sales rose 0.4% in January, following the strong 1.0% advance in December. Gas prices were a major driver, boosting sales 2.3%. Sales at auto dealers fell 1.4%. Excluding gas and autos, sales rose 0.7%. Strong growth was noticed among sporting goods and hobby stores, electronics and appliance stores, restaurants and even department stores. Non-store sales were flat. In January, sales were up 5.6% from a year earlier, far above December’s 4.4% reading. Prospects for spending are bright. Employment gains continue to be strong and wages are rising. Tax cuts and infrastructure investment could boost spending, but the timing of such measures remains uncertain. The strong dollar will keep import prices low. Higher interest rates will be a headwind to spending down the road.

Business inventories grew 0.4% in December, following a 0.8% increase in November. Within categories, wholesale inventories climbed 1.0%, but retailers and manufacturers only added 0.1% to stockpiles. Sales growth impressed at 2%. This brought the I/S ratio down to 1.35 from 1.38. The manufacturer’s I/S ratio improved to 1.31 from 1.34. If sales continue the recent trend, this will give manufacturers a green light for production. The I/S ratio does remain near year earlier levels and does have room to trend further downward. With a strong consumer, there should be a boost for manufacturers, both to meet final demand and allow some modest inventory build.

Industrial production fell 0.3% in January, held back by a 5.7% decline in utility output. Manufacturing increased 0.2% in January. This was the second consecutive 0.2% increase. Overall production is flat with a year ago comparison, while manufacturing remains up 0.3%. Non-auto manufacturing was up 0.5% in January and up 0.3% on a year ago basis. Business equipment output climbed 0.1% and December was revised to an 0.8% increase. Mining rose 2.8% in the first month of the year. The manufacturing sector appears to be improving. Domestic demand is decent, but the strong dollar will remain a headwind for exports. Mining will be a plus, as domestic oil production is turning upwards, as OPEC cuts have resulted in higher oil prices. Business sentiment does appear to be improving since the election. However, trade issues are causing concerns in companies that could be exposed to potential changes in trade regulations. With the inventory correction completed and final demand strengthening, the outlook is improving for the industrial sector. However, some of the expected boost from the new administration must run through Congress, whose glacial work pace may cause business sentiment to back-track in coming months.

Homebuilding sentiment fell to 65 in February from 67 in January, according to the NAHB index. Although down from January, homebuilder sentiment is still near the highest point in years and favorable for future construction. All three subcomponents lost ground in February. Traffic of prospective buyers retrenched because of the higher interest mortgage rates that followed the election of Donald Trump. Still, the index remains healthy and overall fundamentals are favorable for construction activity this year.

Housing starts fell 2.6% in January to a annual rate of 1.246 million units, but were up 10.5% from a year earlier. Starts for single-family construction increased 1.9% m/m to 823,000 units. Structures for five, or more units totaled 421,000, down 7.9% for the month but up 25.7% from a year earlier. Permits came in at 1.285 million units, up 4.6% m/m and 8.2% y/y. Permits for multi-family units rose 19.8%, while single-family permits fell 2.7%. Housing starts in the West fell 41.3%, indicating that weather was a factor in the weakness in that area. There appears to be some construction bottlenecks. The backlog of multi-family units under construction is 22 months, near a record high, but the average of workers to units under construction is at a cyclical low. It is unlikely that multifamily construction could break a 450,000 unit barrier. There is room to grow for single-family construction, but potential fist-time buyers are still hesitant and returning homebuyers still have weak balance sheets and long memories of the recession. Rising employment and wages will be a support for housing, which will grow, but only at a slow pace.


The euro-area economy expanded less than initially reported in the fourth quarter as three of its largest economies fell short of expectations and Greek output unexpectedly shrank.  Real GDP rose 0.4% in the final quarter of last year.  This followed a rise of 0.4% in the third quarter.  Forecasts fell short in Germany, Italy and the Netherlands.  Greek output shrank 0.4%.  Data coming out of the first quarter has, for the most part, been positive.  European Central bank officials argue that monetary stimulus is still important in sustaining the recovery.  President Mario Draghi has pledged to continue government-bond purchases until at least the end of 2017.  Political uncertainty will be a problem in 2017, with several nations facing elections.

Important Data Releases This Week

January existing home sales will be released on Wednesday, February 22 at 10:00 AM EST. We expect sales to rise from 5.49 million to 5.55 million. This would more than reverse December’s decline and be a touch below the fourth quarter average of 5.57 million. Higher mortgage rates will remain a weight on sales and inventories are problematic. Inventories are at the lowest level since 1999.

January new home sales will be released on Friday, February 24 at 10:00 AM EST. We look for sales to rise from 536,000 in December to 588,000 in January. Sales fell sharply in December, but we believe this was overdone. Weather was mixed, warmer in the East, but a lot of precipitation in the West.

You can now follow the Monday Morning Coffee Blog via podcast.

iTunes: FTR On the Go

Listen to Stitcher

FTR is the leader in economic analysis and forecasting the commercial freight and transportation equipment markets. For more information: Click here

Category: Monday Morning Coffee Tags:

About Steve Graham

Steve is one of the premier analysts in the transportation equipment industry. On a monthly basis Steve tracks and analyzes in detail the trailer and heavy-duty truck industry. Aside from following these two sectors he is also instrumental in helping our customers analyze the economy and its impact on transportation and transportation equipment.