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.
Global markets had a terrible week, following the drop in U.S. equities that started on February 2. The MSCI Asia-Pacific Index was down 2.3% on Friday, the Nikkei-225 lost 3.4% to a weekly loss of almost 9%. The Shanghai Composite also succumbed to the carnage and was down 4.4%, the biggest weekly decline since the stick market collapse of 2015. The Stoxx Europe 600 was set for the worst week since2016 as banks and financial services stocks led most industry stocks lower. Over $5 trillion has been wiped out from global stocks since the peak in January. Equity traders have yet to get comfortable with the jump in the benchmark 10-year yields to the highest in four years and worries over unwinding bets against the volatility in stocks continue to cast a shadow over markets.
U.S. equities ended the worst week in two years on a positive note, but rate hike fears that pushed markets into a correction remain as inflation figures are released this week. The S&P tumbled 5.2% last week, jolting markets from an unprecedented stretch of calm. Pressure on equities came from the Treasury market, where yields spiked to a four-year high. This raised concerns the Federal Reserve would accelerate its rate-hike schedule. Yields ended the week at 2.85%, near where they started, as Treasuries moved higher when equity selling reached its most frantic levels. Signs mounted during the week, with measures of market unrest pushing into junk-bonds, emerging market equities and Treasuries. The Cboe Volatility Index ended the week at 29, almost three times higher than in January.
Despite the volatility in the stock market, actual U.S. economic data remains solid. This week was light on actual data. The ISM non-manufacturing index posted a solid rebound in January after the service sector took a small breather in November and December. The index hit anew cycle high of 59.9. The increase in orders drove the headline index higher but the breadth of positive responses across industries was notable. The global economy continues to show strength. The upswing in demand and the still weakening dollar has been a boon for U.S. exports, which rose 1.8% in December to the highest point on record. The strength of the U.S. economy propelled a 2.5% rise in imports. These actions also resulted in a wider trade deficit. This may result in trade taking a wider chunk of Q4-GDP than the 1.13 percentage points estimated the advance GDP report. Still, the higher trade volumes between the U.S and the rest of the world, is a positive element for both domestic and foreign economies, even if it results in a slight drag from trade in the GDP calculations.
Next week will be interesting for both economic data and financial markets. Small business confidence will be released by the NFIB. Retail sales, business inventories and industrial production will provide insight on the consumer and the manufacturing sector. Housing starts and homebuilders confidence will be a highlight and both the CPI and PPI will be released and those reports will be watched carefully by many eyes, including investors, the bond market and the Federal Reserve.
After a week of financial market gyrations, it is important to remember that the economy is still performing well. Although the odds of a recession have likely increased during the last week, they are still low. The tax cuts and the government budget that just got passed actually adds stimulus to an economy that likely did not need it. The two-year deal Congress passes adds nearly $300 billion to Federal spending over the next two years going over the caps set in the Budget Control Act of 2011 by a significant margin. Adding the projected $415 billion in projected tax cuts, this amounts to a fiscal stimulus of close to three quarters of a trillion dollars. This suggests a much stronger economy, for at least two years. In this environment inflationary pressures are likely to grow. This also suggests a pro-active Fed. The great danger comes in 2020-21, when growth slows and the deficit is high and the Fed might have to retreat too late to prevent a suddenly slowing economy. This expansion has been slow, but solid. Congress might have just lit a fire that could send the economic engine over the cliff.
The U.S. Economy:
The non-manufacturing segment of the U.S. economy is off to a strong start this year. The ISM non-manufacturing index increased from 56 in December to 59.9 in January. Details were strong, with employment jumping from 56.3 to 61.6 and new orders rising from 54.5 to 62.7.The business activity index rose from 57.8 to 59.8. The survey suggests that the economy is off to the races, but survey results don’t always track real time movements of the economy. Still, the economy is doing well and the tax cuts will boost consumer spending and investment this year. Both sentiment and confidence is strong and the consumer sector will hold up fairly well in 2018.
The trade deficit widened more than expected in December, increasing from $50.4 billion to $53.1 billion. December marked the biggest deficit was the largest since 2008 and confirmed trade’s drag on fourth quarter GDP. Total exports increased 1.8%, or $203.4 billion. Goods exports added $3.4 billion for a 2.5% gain and serviced exports rose by $142 million, or a 0.2% gain. Total imports rose for a fourth consecutive month, rising by $6.2 billion. Goods imports rose 2.9%, while services gained 0.6%. The trade deficit came in at $566 billion in 2017, compared to $504.8 billion in 2016. This was the largest deficit since 2008. Exports were up 5.5z5 y/y and imports increased by 6.7% than in 2016. The increase in imports and export volumes show the strength of both the U.S. and global economies. The faster growth in imports has driven up the trade deficit. However, the depreciation of the dollar and the strengthening global economy, have boosted exports. The dollar has falling roughly 9.5% in the last year. This will boost exports in 2018-19.
Important Data Releases This Week
January NFIB will be released on Tuesday, February 13 at 6:00 AM EST. The survey declined from 107.5 in November to 104.9 in December. Despite the retreat, the survey remains elevated. Passage of the tax cuts will likely lift confidence to 106 in January.
January retail sales will be released on Wednesday, February 14 at 8:30 AM EST. Retail sales rose 0.4% in December, following a hurricane-related 0.9% bounce in November. Sales are projected to advance 0.3%, a decent jump considering auto sales retreated during the month. The consumer is feeling confident and lower taxes may spur spending.
January CPI index will be released on Wednesday, February 14 at 8:30 AM EST. Although input prices were fairly strong the last few months, there was little pass-through to the consumer side. The CPI increased 0.1% in December. We look for a 0.2% increase in December and the core should continue rising at its 0.3% pace. Inflation is awakening, but still under control, a factor that will keep the Fed on its slow upward schedule.
December business inventories will be released Wednesday, February 14 on at 10:00 AM EST. Business inventory growth resumed in November rising 0.4% after remaining unchanged in October. The return to a more normal trend will continue in December, with stocks rising a projected 0.3%. The I/S ratio fell to 1.33 and is likely to remain unchanged in December.
January PPI index will be released on Thursday, February 15 at 8:30 AM EST. We look for index to increase 0.2%, following the 0.1% decline in December. Energy prices rose last month, in part driven by colder than normal weather. With the global economy accelerating, input prices are increasing, but did lose ground last week as the equity markets retreated.
January industrial production will be released on Thursday, February 15 at 8:30 AM EST. We look for industrial production to rise 0.3% in January after the 0.9% increase in December. Utility output was a big plus in December, rising 5.6% and January was also cold. Manufacturing only rose 0.1% in December but is projected to rise 0.3% in Janaury. Inventories are low and sales are strong, a near-term support for production. The manufacturing sector is solid, boosting by a healthy domestic and global economy.
January housing starts will be released on Friday at 10:00 AM EST. Housing starts fell 8.2% in December, to an annual pace of 1.192 million units annual pace. Permits were down only 0.1%, suggesting better activity in coming months. We project a modest increase in starts, up 0.2% as Janaury had two full weeks of unseasonably cold weather. Housing has been improving lately after a slow period in the first half of 2017. The multi-family sector is about topped out, but the single-family sector has room to grow.