The Consumer Feels Good and Unemployment is Low, Below 4%

By | October 1, 2018

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 Review

Stocks in Europe dropped at the end of a volatile month as political concerns took center stage. The Stoxx Europe 600 Index retreated, led by Italian share as the country’s benchmark plunged the most in almost four months as the government set a wider budget deficit than the E.U sets as standard. Oil continued its upward trend as energy giants to wall Street banks predict that oil could reach $100 a barrel on Trump’s sanctions on Iran. Political risks returned in a week that saw an escalation of trade tensions between the U.S. and China. Trade tariffs moved the World Trade Organization to cut its projections of world trade to 3.9% this year, lower than the 4.4% projection in April. Next year trade growth is expected to increase 3.7%, down from the 4.0% projection in April. In a positive note, reports have surfaced that the U.S. and Canada are closer to an agreement on NAFTA.

Last week, the focus was on the Federal Reserve. The FMOC raised the federal funds rate in a widely expected move. The removal of the term “accommodative” from the statement regards that the FMOC members recognize the federal funds rate has entered neutral territory. Other data this week reinforce the Fed’s view that the domestic economy remains strong, the labor market is tight and inflationary pressures remain on target. Reports on spending and income were positive. Personal income rose 0.3% and spending rose 0.2%, both in lines with recent trends. The PCE deflator rose just 0.1% for a third month. However, year-over-year trends 2.2% for the headline and 2.0% for the core, in line with the Fed’s target.

Consumer confidence rose 3.7 points to 138.4, near an all-time high. Pending home sales were weak, dropping 1.8% to 104.7, settling near the lowest level since 2014. Price and rising mortgage rates are hurting housing. The headline durable goods report was positive, with orders rising 4.5%, but core capital goods orders fell 0.5%, casting some doubts on the durability of business spending.

Next week is full of data. We get a look at the ISM manufacturing and non-manufacturing indexes, construction spending, factory orders and employment. Despite trade tensions, the economy remains strong. The third estimate of GDP growth by the BEA revealed that real GDP grew 4.2% in the second quarter. The massive tax cuts and fiscal stimulus have juiced up the economy’s performance. The consumer feels good about things and unemployment is low, below 4%. With all this stimulus, near tern downside risks are low. However, trade tensions are a gathering weight. So are rising interest rates. The pivotal time for the economy will come in 2020-21 when the stimulus fades and the economy will slow to trend. So far, tariffs have not hurt the economy significantly, but as more tariffs are added, the impact to confidence, inflation and Fed policy will grow to a bigger factor.

Latest Data

The U.S. Economy:

The pace of economic activity held steady in August. The Chicago Fed National Activity index stayed unchanged at 0.18. Three out of the four broad categories of the index increased from the previous month. The 3-month moving average increased from 0.02 to 0.24. Production related indicators normally introduce big swings in the index, but in August that component contributed 0.16 compared with 0.1 the previous month. The sales, orders and inventories category contributed 0.07, compared with 0.1 the previous month. Employment-related indicators contributed -0.01, compared with 0.13 the previous month. The housing and personal consumption category contributed -0.04, compared with -0.06 in July. The index indicates that economic growth is above average.

Orders for durable goods surged in August, increasing 4.5%, exceeding expectations. The increase was largely driven by the volatile nondefense aircraft segment, which increased a hearty 69.1%. There other gains but also blemishes. The important core capital goods sector fell 0.5%, the first decline since March. Total shipments added 0.8% and shipments excluding defense rose 0.7%. Inventories fell 0.4%. New orders for motor vehicles and parts fell 1%. Among manufacturing industries, the outlook was mostly positive. Orders for electrical equipment rose 0.6% but orders for computers and other electronic products lost 0.5%. Orders for primary metals were up 0.9%. The report suggests that manufacturing is doing well and should continue to do so. Trade is the biggest wild card. Business investment would be much stronger if trade issues were more certain. So far, investment in capital equipment is holding up, but measure of capital expenditures plans, industrial production and core capital goods orders bear a close watching.

After dragging in the second quarter, inventories have bounced back and may offset the drag from net exports this quarter. Wholesale inventories increased 0.8% in August, following a 0.6% advance in July. The August gain leaves wholesale inventories up5.1% on a year ago basis. The advance report also revealed that retail inventories rose 0.7% in August, after a 0.6% advance in July. Retail stocks were up 2.3% y/y. Inventories will be a support for third quarter growth. Businesses need to replace stocks that shrank in the second quarter. Inventories subtracted 1% from Q2 growth but will provide a positive factor for Q3.

Personal spending continues to grow at a healthy pace. Nominal personal income rose 0.3% in August, slightly cooler than the0.4% increase in July. Personal spending rose 0.2% in August, following a 0.3% rise in July. Growth was led by nondurable goods, but durable goods and services continue to rise at an average pace. The savings rate held steady at 6.6%. Inflation continues to track near the Fed’s target. The PCE deflator only rose 0.1% in August, the same increase as in July and June. The core PCE was unchanged in August. On a year ago basis, the PCE was up 2.2% and the core 2.0%. There are concerns that the tight labor market, plus the impact of tariffs could raise inflation above the Fed. Target. So far, that has not materialized but the Fed will keep to script.

Pending home sales dropped 1.8% in August, equaling an index level of 104.2. It was the lowest reading in three and a half years. The rise in mortgage rates are reducing demand. Mortgage rates on a 30-year fixed rate are 80 basis points ahead of the start of 2018. Supply constraints are also a concern to the market. The inventory-to-sales ratio did hold steady at 4.3 months, low compared to the historical average. Jobs and wage growth are positive factors in housing, but the market has been flat.


The United States would have most to lose in a trade war with other countries, while China would be better off after retaliating, a simulation by the European Central Bank found. The ECB study simulates a 10% U.S. tariff on all imports and equivalent retaliation by other countries. It suggests the United States would bear the brunt of diminished trade and damage to consumer and investor confidence. “Estimation results suggest the United States et export position would deteriorate substantially,” the ECB said to the study. “In this model, U.S. firms would invest less and hire less workers, which amplifies the negative effect.” The ECB estimates that U.S. growth would be cut by more than 2 percentage points. The International Monetary Fund estimates U.S. growth at 2.9% this year and 2.7% next year. By contrast, China would gain by exporting more to third countries where U.S. goods are subject to tariffs, although the gain would be temporary and partly offset by a negative effect on confidence.

Important Data Releases This Week

The September ISM manufacturing index will be released on Monday, Oct. 1 at 10:00 AM EDT. Easing strength at a very high level is what is projected for the September ISM to come in at 59.9 versus strong 61.3. August orders surged in August, keeping production and employment strong in September.

Construction spending in August will be released on Monday, Oct. 1 at 10:00 AM EDT. Construction spending has been bumpy and on an uneven monthly route, but year-over-year trend are favorable. August construction spending is projected to rise 0.5% versus July’s 0.1% increase. There was a strong jump in home improvement in the July report.

The September ISM non-manufacturing will be released on Wednesday, Oct.3 at a0:00 AM EDT. Projections are for a September reading of 58.0 versus the 58.5 reading in August. New orders were strong in August, including new export orders.

August factory orders will be released on Thursday, Oct. at 10:00 AM EDT. Already released durable goods orders saw an aircraft driven surge by 4.5% for August. We expect to see a 2.0% rise for the month after non-durable goods are included.

September employment will be released on Friday, Oct. 5 at 8:30 AM EDT. A solid 180,000 gain in payrolls is projected for September, following August’s 201,000 increase. The unemployment rate is projected to fell to 3.8%. Average hourly wages will rise 0.3%, bringing the year-over-year increase to 2.9%.

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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.