Monday Morning Coffee: Attention to Washington’s next step may overshadow economic data in coming weeks

By | March 27, 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.

Economic Overview

Coffee and Economic Review

European stocks gave up some of Thursday’s gains ahead of the vote on health care in the United States. The STOXX 600 Index extended its weekly decline and dropped 0.3% on Friday.  Japan’s Topix trimmed some losses for a week that included the biggest one-day drop since Trump’s election. The index finished the week with a 1.4% decline for the week. The MSCI Asia-Pacific Index fared better, with a 0.1% decrease.

U.S. stocks fell the most since the week heading up to the election as President Trump suffered a major setback when he was forced to pull a health care bill from vote as dissent among congressional Republicans and Democrats waylaid plans for a new health care bill. The setback cast doubt on the president’s ability to deliver on other parts of his agenda, including tax cuts and regulatory reform. The S&P lost 1.4% on Friday to land at 2,343.98, its second weekly decline this month. The Dow Jones Average lost 1.3% to 20,596.72. Market participants feel that future Trump agenda promises like tax reforms and fiscal stimulus are not likely to pass if the repeal of the Affordable care Act did not pass. The turmoil in Washington increased market volatility. The CBOC Volatility Index rose 15%, its biggest weekly increase since end of the year.

Incoming data highlighted the difference between “hard” and “soft” economic data this week. This was clearly visible in the manufacturing sector this week, where core capital goods orders were weak in February, whereas survey measures such as the ISM showed strength. Survey data such as the ISM include both production and sentiment components. Sentiment is clearly strong right now, but this hasn’t translated into a big jump in orders for capital equipment. Some of this sentiment is based on expectations that Mr. Trump can deliver on tax reform and fiscal stimulus. Minus these expectations, manufacturing does still seem to be trending up, but not at the levels recorded by production data. There is not really a difference in direction, but magnitude.

Data last week on housing was mixed.  Existing home sales fell 6.4% in February, while sales of new homes jumped 6.1%. The trend for single-family homes is still positive, but slow. Whereas the multi-family housing sector appears to be topped out. Private construction is far from robust, but the public sector is lagging, waiting on Congress to pass a budget, which could prove to more difficult than anticipated.

Next week is a mixture of data. We get a look at the advance trade numbers for February and the Conference Board’s index of consumer sentiment. Pending home sales are released, as well as personal income and spending and the PCE deflator. We look for the fourth quarter to be revised down to 1.8% from 1.9%.

Attention to Washington’s next step may overshadow economic data in coming weeks. The healthcare measure is dead for this year, but attention now turns to tax reform. The challenge for the Trump administration is whether Congress can pass a true tax reform bill, or will it get watered down to a cut in the tax rate. There are a lot of pieces in the measure, including a destination-based border tax. Right now, the passage of that part is highly uncertain. This means the size and scope of corporate tax reform is called into question.  If the dissention from the health care bill follows the administration into taxes, than other administration priorities could also face a difficult fate. This does raise some macro-economic risks. The financial markets were running high on the Trump wave. A correction would have unpleasant consequences.

Latest Data

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 pace of U.S. economic growth improved in February. The Chicago Fed National Activity Index rose to 0.34 from -0.02 in January, mainly boosted by employment related indicators. All four broad categories improved during the month. Employment-related indicators rose to 0.21 in February, up from 0.06 in January Production-related indicators rose to 0.09, up slightly from 0.04. The index’s three-month moving average increased from 0.07 to 0.25, the highest level since December 2014. The index indicates that U.S. economic activity is above the historical trend. Some of the improvement in employment can be attributed to the warmer than usual winter, which has boosted construction employment. Some of these gains may have been pushed forward from the spring months. Production is improving after two years of a lackluster performance. Still, the index is on an uphill trend and economic activity is maintaining a healthy pace.

Existing home sales fell 3.7% in February, but remained 5.3% above year earlier levels.  Both single-family and condo/co=op sales fell in February. A slight increase in listings and the fall in sales caused the market to loosen for the first time in months. The decline in sales may have been influenced by price.  The growth rate of the median single–family home accelerated to 7.6% year-over-year, with an even stronger rate for condo/co-op price. Existing single0family homes sales came in at 4.89 million for February, down 3% from January but up 5.8% from a year earlier. The market for existing homes remains tight, but there is no evidence that the tightness is causing any big increases in new home construction. The increase in price does suggest that existing home sales will increase at a decent rate through the year and peak in 2018.

Sales of new single-family homes are trending upwards, rising 6.7% in February and are up 12.8% above year earlier levels. Sales came in at a 592,000 annual pace. The inventory/sales ratio was 5.4 months, down by 0.2 months from January and 0.1 of a month from a year earlier. The increase in sales could be affected by the fall in price. The seasonally adjusted median average price for new-homes fell 6.2% in February and were down 4.7% from February 2016. Three out of four Census regions reported increases in February, but the Midwest accounted for the largest share of the national increase, up 30.9% m/m and up 50.8% y/y.

New orders for durable goods increased 1.7% in February. The gains were mainly driven by an increase in nondefense aircraft orders, which soared 47.6% from January. Other details were less rosy. Excluding transportation, orders rose 0.4% in February. The core nondefense capital goods orders excluding aircraft declined 0.1%, the first decline since November. Total shipments rose 0.3% in February. Core capital goods shipments increased 1.0%, the biggest jump since December. Among manufacturers, data was mostly positive. Orders for electrical equipment rose 2.2%, while orders for computer and electronic products fell 0.2%. Primary metals added 2.3%. The report suggests manufacturing is firming, but there is a gap between soft and hard data. The steady gains in production for both January and February signal that factories are in recovery mode, but what matters to productivity the most, core capital goods is mixed. Manufacturing surveys are optimistic and suggest business sentiment is optimistic, but actual business capital investment is still lagging, although in a positive range. Setbacks to the new administration’s agenda cold cause business executives to re-think their capital investment plans. Factories also have to adjust to the still high trade-weighted dollar and potential disruptions to trade under the new administration.

International:

Business sentiment at Asia’s top companies rose to the highest level in almost two years in the first quarter of 2017, buoyed by positive economic signs for the United States and China that have underpinned improved global demand. The Thomson Reuters/INSEAD Asian Business Sentiment index representing the six-month outlook of 96 firms, rebounded to 70 for January-March from 63 three months earlier. A reading over 50 represents a positive view. During the quarter, the United States and China, the top destination for Asian exporters, reported a slew of upbeat economic data that was stronger than market expectations. Optimism in the U.S., a lack of immediate crisis in China and improved economic conditions in Europe have reduced some of the immediate risks. Sentiment in Malaysia jumped more than 20 points to a three-year high of 75 in the first quarter. Sentiment improved in Thailand, Singapore and Taiwan.  China and India reported a slight decline in sentiment. Despite the increase in sentiment, the high dollar, uncertainty over Trump’s trade policies and demand from China are seen as the area’s biggest risks.

Important Data Releases This Week

February advance goods deficit will be released on Tuesday, March 28 at 8:30 AM EDT. We look for the deficit to narrow to $ 65 billion for February. The early Lunar New Year distorted some trade figures; pulling forward some imports in January. We anticipate a drop in imports, payback for January’s gain.

March Conference Board’s index of consumer sentiment will be released on Tuesday, March 28 at 10:00 AM EDT. We look for the index to rise from 114.8 in February to 116.5 in March, putting it’s at the highest level since 2001. The rise in the equity markets and the increase in employment is making consumers confident.

February pending home sales will be released on Wednesday, March 29 at 10:00 AM EDT. We look for sales to have increased 3% in February after a 2.8% decline in January. Sales have been volatile and the January decline overdone. The gain will put sales back in the trend began in the second half of 2016.

GDP (2016-Q4 will be released on Wednesday, March 29 at 8:30 AM EST. We look for GDP to decrease 1.8% from 1.9%% in the final quarter of 2016. A revision in intellectual property and nonresidential investment should account for most of the revisions.

February personal income and spending will be released on Friday, March 31 at 8:30 AM EST. We expect personal income to rise 0.3% in February, down slightly from the 0.4% advance in January. Nominal spending will be unchanged, with weakness in utilities and gas. The GDP deflator will rise 0.2%, up 1.7% from a year earlier, still tracking near the Fed’s 2% target.


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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.