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 o
n the transportation, freight, and equipment markets. Hopefully, this will be an informative addition to the fine body of work associated with FTR.
European shares struggled to follow Asian peers higher as the euro strengthened after a busy week. The Stoxx Europe 600 fluctuated before turning lower with most national gauges. European Central Bank President Mario Draghi said he was optimistic concerning wage growth in the region, but stressed patience. Shares in Japan ended fractionally higher and the yen jumped to the strongest in four weeks.
Soap maker and real-estate stocks have taken over a rally that used to be led by social media and smartphone makers. Companies with stable earnings and dividends have led growth in November, a departure when leadership was led by cyclical companies. Investors are looking for safety even as the market is poised for its longest streak of monthly gains in a decade. The S&P slipped 0.1 percent last week to 2,578.85, the second straight monthly decline. Demand for stocks is slowing. Halfway through November, U.S. equity EFTs have absorbed about $2 billion. Over the past year, these funds have attracted an average $18 billion a month.
Last week’s economic calendar was busy. Three of the leading inflation indicators showed a firming of inflationary pressures. The PPI rose 0.4% and three-quarters of the increase did not come from energy. The CPI barely rose, but excluding food and energy, the advance was stronger. Core services have been weak most of the year, but services prices rose 0.3% and core goods recorded a rare increase. In addition, the import price index showed the strongest rate of nonfuel import price inflation in more than five years.
Industrial production jumped 0.9% in October, led by a 1.3% surge in manufacturing output. The factory sector has been held back by the hurricanes the last few months. The Federal Reserve said excluding the effect of the hurricanes, output advanced 0.3% for the total index and 0.2% for manufacturing. Although there has been noise, the trend for the industrial side is upwards. Retail sales rose 0.2% in October ad September’s surge was revised upwards to 1.9%. The October increase was more than expected, considering gas prices retreated and auto sales stepped back. The consumer is resilient and that bodes well for the important holiday season. Housing starts jumped 13.7% in October, halting a streak of three monthly declines. Most of the increase was in the multi-family sector, but single-famil
y starts did enjoy a 5.3% increase as well. Rebounding from the hurricanes had a large input to the October increase. Over the past year, residential construction has been basically flat.
Next week will be short, with a look at existing home sales, consumer confidence and advance durable goods. Recent data has been upbeat and the fourth quarter may come in near the same 3% rate of the preceding two quarters. The underlying strength of the economy suggests growth will track near 2.8% over the next few quarters, not quite 3% but a solid performance. If the tax reform effort becomes law, that could boost growth by roughly quarter of a percent for about three quarters. Of course, timing and the final form of the law could change that estimate. Tax reform, or not, the economy is in solid shape. The economic outlook for 2018 looks decent, barring a geopolitical blunder. However, interest rates are rising and trade is an issue. Even on a calm day, there are still a few storm clouds.
The U.S. Economy:
Producer prices exceeded expectations in October. The PPI for final demand rose 0.4% in October, following a 0.4% rise in September and a 0.2% increase in August. Goods and core goods prices rose 0.3%. The PPI for energy was unchanged in October after jumping 3.4% in September following the aftermath of the hurricanes. On a year-ago basis, the PPI was up 2.7%, up from 2.5% in September. Although producer prices beat expectations in October and energy was not the driver as in September, the trend in inflation remains weak. Prices for gas dropped 4.6% in October, following the hurricane-induced 10.9% jump in September. For the PPI to achieve sustained velocity, energy prices must be on an upward slope.
While producer prices were fairly strong in October, there was little pass-through to the consumer side. The CPI rose 0.1% in October, following the hurricane-affected 0.5% increase in September. A 0.3% rise in shelter was the main positive driver. The energy CPI slid 1% on a 2.4% decline in gasoline prices. Food prices were unchanged. Excluding food and energy, the CPI rose 0.2%. Total CPI was up 2.0% from a year earlier, while the core reading was up 1.8%. The gain in October does place the CPI up 4.3% annualized in the last three months, better than the 2% reading in August. Some of this strength is transitory. The Fed is forward looking and believes in the Phillips curve. They will raise rates in December. There is a risk in the tightening process will anchor long-term inflation expectations at their current low level. The Fed will likely tighten 3 times next year, but that will depend on the next Fed chair.
Retail sales slowed in October, in part a payback for the big surge in September. Retail sales rose 0.2% in October, following the 1.9% jump in September. Sales in certain sector, particularly cars and autos and building supplies, jumped in September because of the hurricanes. Sales at gasoline stations fell 1.2% in October, after a 6.4% jump in September. Sales excluding gasoline and autos increased 0.3% in October. Total sales were up 4.6% from a year earlier. The near term outlook for spending remains modest. Sales grew in October despite lower auto sales, but that disconnect will likely not persist. Fundamentals for the consumer are solid. Modest income growth is a restraint on spending. Wages should still pick up as the labor market tightens. There are risks and uncertainty about the lack of action in Congress is one worry, rising interest rates are another growing restraint. Still, the consumer is expected to still be the major driver of growth.
Business inventories were unchanged in September, following a 0.6% rise in August. Wholesalers escaped hurricane damage for the most part and stocks advanced 0.3%. Manufacturers saw a 0.7% increase. However, retailers were hit by the storm and retrenched 0.9%. Auto and parts dealers suffered the biggest September decline as hurricanes Harvey and Irma damaged vehicle fleets. Retailers, excluding the auto sector declined 0.1%. Business sales were strong, rising 1.4%, Retailers made the most gains, with sales rising 2.1%. Merchant wholesalers saw sales rise 1.3% and manufacturers saw a sales gain of 0.8%. The business inventory-to-sales ratio fell to 1.36 months from 1.38. The hurricanes disrupted supply chains. Families in the South first rushed to buy supplies ahead of the storm and rushed to buy vehicles to replace the damaged ones. Wholesale petroleum inventories also declined because of evacuation orders. Conversely, clothing and general merchandise stores saw weaker sales as bad weather kept consumers home. In all, the disruptions did not bleed into October’s numbers. The strong global and domestic economy has producers running at a high level. Rallying commodity prices are a boost to production. Policy uncertainty remains a downside risk, but the U.S. economy is strong enough to create a healthy inventory build on its own. Businesses may have to adjust if Congress fails to deliver on tax reform and infrastructure work.
Industrial production increased a healthy 0.9% in October, following a 0.4% rise in September. It was the largest monthly gain since April. The increase was fueled by a large increase in manufacturing, aided by utilities. Mining lost ground. Manufacturing increase a sizable 1.3%, matching April’s gain. The Federal Reserve did say that excluding the impact of the hurricanes, total IP rose 0.3% and manufacturing 0.2%, in line with recent trends. Manufacturing employment and hours worked were early indications that manufacturing was picking up. Motor vehicles and parts saw a 1.0% increase in production. Manufacturing excluding the auto sector increased 1.3%. Total manufacturing is up 2.5% from a year earlier and non-auto output is up 2.9%. Business equipment production was up 0.5%, up 4.2% from a year earlier. Utility output rose 2% in October and is up 0.9% y/y. Mining lost 1.3%, but production is up 6.4% above a year earlier. Capacity utilization rose 0.6 of a percentage point. The report confirms that manufacturing is healthier and the U.S. is on solid footing, despite the recent hurricanes. The dollar has been retreating most of the year and the global economy is getting stronger. The healthy domestic economy is also a strong driver of industrial activity. The return of business investment is also a plus for the industrial sector.
Homebuilder sentiment increased modestly from 68 in October to 70 in November. This was the highest level since March and the second highest since July 2005. Builder’s confidence was rewarded, as housing starts regained some of the ground lost in August and September. Total housing starts increased 13.7% in October to an annual pace of 1.290 million. The monthly increase was led by multi-family starts, which increased 36.8% to an annual pace of 413,000 units. Single-family starts increased a healthy 5.3% to a annualized pace of 877,000. Permits rose 5.9% to an annual pace of 1.297 units. The permit backlog edged up, ris9ng 1.3% m/m to 152,000 units. Part of October’s strength was the resumption of construction in Florida and Texas after the hurricanes. Still, the October increase just leveled out residential construction since last December. Although it has slowed in the past year, there is still room to grow for residential construction. There are still constraints in labor and capacity bottlenecks. The multifamily sector may be approaching a peak, but there is lots of room to grow for the single-family sector.
Important Data Releases This Week
October existing home sales will be released on Wednesday, November 20 at 10:00 AM EDT. Existing home sales increased in September after three months of declines. The industry suffers from lean inventories and that will likely cause sales to be flat in October.
October advanced durable goods will be released on Wednesday, November 20 at 8:30 EDT. Recent data for the factory sector has been upbeat. Final statistics showed durable goods orders advancing 2.0% in September. August and September data has been to some degree affected by the hurricanes. October may see a rebound, coupled with the recent positive trend in equipment investment. Look for a 0.3% advance in October.