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.
It’s the best of times and perhaps the beginning of the worst of times. Economic data has been solid for the most part, but the S&P had the worst week in a month as 10-year yields hit 3.2%. The good economic news and the lessening of trade tensions between the U.S., Canada, and Mexico has sent the bond market surging. To be sure, the loss in the S&P wasn’t big, just 1% and it is a testament to the fact that the stock market doesn’t scare easily. Nothing it seems to be able to lay a glove on stocks, not trade wars and emerging economy implosions but something that investors have brushing aside is troubling investors, its credit. Corporate America has taken advantage of low rates and S&P companies have doubled their borrowings to $5 trillion, data compiled by Bloomberg shows. Add to the picture, government borrowing has soared under Trump, now at $21.5 trillion. Should interest rates rise and growth slow, companies are bound to see their financial soundness deteriorate. More than $1 trillion of investment grade corporate bonds could be cut in the next downward cycle, according to Morgan Stanley. Investors who just see good economic news, may not be so happy when the economy starts to stumble and now the bond market is offering returns competitive to stocks.
Employment growth stumbled because of last month’s hurricane, but most economic data was positive last week. Payrolls came in at just 134,000 jobs, but employment growth the preceding two months was revised up by a combined 87,000 jobs. Most of the damage to payroll growth came from the hurricane impact. Employment at restaurants tumbled by 18,200 and retailing fell by 20,000. We saw similar but larger effects last year with Hurricanes, Harvey, Irma and Maria. Still, the 3-moth average of 190,000 is good this late in the business cycle. Other data was strong, the ISM manufacturing index fell 1.5 points to a still lofty 59.8 in September. While the reading remains good, some leading data such as new orders, backlogs moderated slightly, suggesting some moderation in manufacturing this quarter.
Other data was also supportive of decent growth. The ISM non-manufacturing index climbed 3.1 points to 61.6 in September. Business activity climbed by 4.5 points to 65.2 and employment jumped 5.7 points to 62.4. Factory orders advanced 2.3% in August, on the strength of civilian aircraft orders. However, the core capital goods segment fell 0.9%, the first drop since March, but also a potential sign, manufacturing may be slowing a little. Vehicle sales surged to an annual pace of 17.4 million, driven higher by the hurricane effect. Year-over-year sales were down by 4.1% because Hurricane Harvey had a larger impact on sales a year ago. The effects of Trump’s trade wars were evident in the August trade report. The deficit swelled to a six-month high of $53.2 billion. Goods exports fell 1.9% and are down 4% from May. Soybean exports fell 28% in August alone. Imports have not seen the sharp increases in price yet but will in coming months as the tariffs on China take effect. Imports rose 1.7% on the strong economy and strong dollar.
Next week will be light for economic data. The September NFIB small business optimism index, PPI and CPI and wholesale trade will be released. The economy is solid, but we may be starting to see some cracks in the financial market as interest rates climb. Trade tensions have eased with Canada and Mexico but are still dangerous with China. The sailing looks smooth to the end of the year, but the new year will bring challenges as rates continue to climb far above neutral territory and the trade war with China broadens.
The U.S. Economy:
Construction spending increased just 0.1% in August, following a 0.2% increase in July. Total private construction spending fell 0.5% in August, following a -0.2 drop in July. Total residential construction spending fell 0.7% in August and excluding home improvement dropped 0.8%. Non-residential construction spending declined 0.2% for the month. On the residential side, multi-family construction spending fell 1.7% m/m and the single-family sector saw a 0.7% decline. Public construction spending rose 2.0% in August, following a 1.7% advance in July. Despite the last two months weak performance, total construction sending has been positive 10 out of the last twelve months and total private construction spending remains up 4.4% year-over-year. The multi-family sector is down year-over-year suggesting builders are moving into single family housing. Despite the recent weakness and rising mortgage rates, we still expect modest advances in single-family housing. The recent hurricane will affect activity in September and perhaps October.
The ISM manufacturing index declined to a still lofty 59.8 in September from 61.3 in August. Details were favorable. Production, employment and trade improved slightly in September. Supply deliveries fell slightly from 64.5to 61.1 suggesting that issues in the supply chains did not broaden. Inventories fell slightly but are likely to contribute to third quarter growth. Despite tensions, trade has not appeared as a significant weight. 12 out of 18 industries reported growth in new orders. Nonmetallic minerals, primary metals and fabricated metals reported a decline in orders. The supply deliveries index fell from 64.5 to 61. According to the ISM lead times continue to extend, supplier issues have restricted performance and transportation are limiting supplier execution. Production rose from 63.3 to 63.9. Despite supply chain issues output continue to grow. No industry reported a decline in production. Employment improved from 58.5 to 58.8, the 24th straight month of employment gains. New export orders improved from 55.2 to 56. Prices paid fell from 72.1 in August to 66.9 in September. Manufacturing is doing well ad should continue to do turn in a decent performance. Trade tensions have improved with Mexico and Canada but have decreased significantly with China. Manufacturing should continue to do well, boosted by the fiscal stimulus and supply chain problems have not yet limited output.
U.S. vehicle sales came in at an annual pace of 17.4 million units, following a 16.7 million pace in August. The sales increase was boosted by replacement of units affected by Hurricane Florence. Sales were still down 4.1% from last year, which was impacted by Hurricane Harvey. Car sales equaled an annual sales pace of 5.4 million in September, while light truck sales equaled 12 million. Sales equaled a total of 16.97 million for the third quarter. With the proposed trade agreement with Canada and Mexico, it appears the fears of tariffs on imported vehicles is fading. If tariffs are proposed, there will be exemptions for Canada and Mexico. In addition, trade talks are continuing with the European Union and Japan. Auto tariffs may be used as a negotiating tactic, but we doubt they will be imposed.
The ISM non-manufacturing index increased from 58.5 in August to 61.6 in September. Details were solid. Business activity increased to 65.2 from 60.1. Inventories rose to 61.6 from 60.4 and employment increased to 61.4 from 56.7. The supplier delivery index rose to 57 from 56, suggesting further slowing in delivery times. Trade tensions eased with projected passage the trade deal with Canada and Mexico. It will take time for that trade deal to be approved by Congress and the legislatures of Canada and Mexico. The supplier delivery problem will exist for an extended time. There are capacity problems in transportation and especially trucking. The report suggests that economic growth is above trend and good news for the 88% of the economy that is non-manufacturing.
Factory orders rose 2.3% in August, the third increase in four months. July’s decrease was revised to -0.5% from -0.8%. The headline increase was driven by the volatile civilian aircraft segment. Transportation orders increased 13.1% in August, up a strong 20.7% from a year earlier. Core capital goods order fell 0.9% in August and July’s results were revised down to 1.5%. Despite the August weakness, the trend remains strong, up 7.1% year-over-year. Inventories fell 0.1%, the first decline in 21 consecutive months. The inventory-to-sale ratio fell to 1.34 in August from 1.35 in July. The August report was somewhat disappointing, but the trend remains strong. Trade is a wild card and the results are mixed. Tensions have been reduced with Canada ad Mexico but have deteriorated with China. Trade tensions doesn’t appear to have taken a big hit out of corporate capital expenditure plans. Still, we need to keep a close watch on corporate expenditure plans, industrial production and core capital goods orders.
The trade deficit widened further in August, rising $3.2 billion to 53.2 billion, a six-month high. The goods deficit widened by $3.6 billion and the services deficit increased by $387 million Total nominal exports fell 0.8% from July as agricultural exports tumbled and industrial exports slid. Nominal imports gained 0.6% on higher imports of autos and consumer goods. Goods exports fell 1.9% m/m. Foods feeds and beverage exports fell 9.2%, while soybean exports fell 28.2% m/m. Nominal imports increased 0.6% on higher imports of autos and consumer goods. The impact of Trump’s trade war is becoming increasingly evident in the data. Goods exports slumped beginning in June and are down 4% from May. Meantime, imports have not reflected the sharp increase in tariffs on Chinese products. Nominal goods imports hit an all-time high in August, leading to a wider deficit. Tensions with Canada and Mexico may have abated, but they have surged with China. The first round of tariffs with China were concentrated on capital and intermediate goods, but the latest round will hit the consumer. Tariffs disrupt supply chains and raise inflation rates, a factor that may lead to a stronger monetary reaction.
Payrolls came in weak in September, rising just 134,000. However, upward revisions for the previous two months came in strong, at a combined 87,000 jobs. The 3/month average came in at a strong 190,000, strong data for late in the business cycle. The August weakness was largely attributed to Hurricane Florence, where retail fell by 20,00 and leisure/hospitality employment declined by 17,000. The effects of the hurricane were similar but less than a year ago when Hurricanes Harvey, Irma and Maria had a strong impact on employment. The unemployment rate fell to 3.7%, largely from a large 420,00 increase in household employment and a more modest 150,000 person rise in the civilian labor force. Average hourly earnings increased by 2.75%, down from August, but on trend with the slow moving but upward wage growth. We think the labor market still has rom to grow with payrolls averaging near 190,000 for 2018 and 150,000 in 2019.
Important Data Releases This Week
The September NFIB small business optimism index will be released on Tuesday, October 9 at 6:00 AM EDT. The small business index is expected to ease slightly to 108.0 in September from108.8 in August, which was an all—time high. Plans to boost inventories in August and some fuel from capital outlays provided fuel for the index in August.
The PPI for September will be released on Wednesday, October 10 at 8:30 AM EDT. Despite elevated input costs, most manufacturing PPI reports have been subdued. Following August’s 0.1% decline, a rise of 0.2% is expected for September. The core index is also expected to rise 0.2%. This brings the year-over-year rate for total PPI to 2.8% and for the core 2.3%.
Wholesale trade for September will be released on Wednesday, October 10 at 8:30 AM EDT. Wholesale inventories, which have been lean relative to sales, are expected to rise a sharp 0.8% in August.
The CPI for September will be released on Thursday, October 11 at 8:30 AM EDT. Only modest inflationary pressures are forecast for September, with the index rising 0.2%, the same rate as in August. The core index is expected to rise 0.1%. This brings the year-over-year increase to 2.4% for the headline number and 2.3% for the core.