Trend Growth Remains at 2%

By | May 29, 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.

Overview

Coffee and Economic Review

The S&P rose 1.4% last week, the best gain in a month. Technology shares continued to shine, as the Nasdaq rose 2.4%.  Despite the rise in equities, investors continue to be cautious and are pulling money out of stocks. They have withdrawn $20 billion from exchange-traded funds and mutual funds so far this quarter, reversing about a third of the inflows November and March. Hopes for a stronger economy have faded along with optimism with Trump’s pre-growth policies. Despite the rise in the market, investors are cautious by historical standards.

The U.S. started 2017 on a weak note, although Q1 GDP growth was revised from 0.7% to 1.2%. Consumer spending slowed, in part because of weather and made only a minor contribution to growth. Fixed investment was the main driver, especially in structures. Real disposable income rose 1.7%, after falling 0.3% in the fourth quarter, suggesting the consumer has ammunition to spend in the second quarter. Although GDP growth stumbled in the first quarter, other indicators such as employment show a stronger economy. Weather undermined utility and vehicle spending, but that factor was temporary in nature. Not much has changed in the economy since the election. The economy continues to grow at 2% and trend employment growth is 200,000. The economy remains remarkably stable after nearly eight years of growth. The economy is entering full employment and likely has entered the late stage of recovery. The economy is not overheating, but may be heading that way. Downside risks are fairly low near-term. However, they do increase in 2018-19, as rising interest rates start to impact an economy that is only growing 2%.

New home sales fell 11.5% in April to 569,000 annualized units. Existing home sales dropped from a 5.7 million annual pace to 5.57 million. Housing is off to a slow start so far this year. Supply constraints, rising prices and weaker multi-family demand are slowing the housing market. We do expect some positive readings from the single-family sector. Durable goods orders fell 0.7% in April, hurt by aircraft orders. Revisions show a still positive, but a weaker manufacturing picture than previously thought.

Next week, we get a peek at personal income and spending and the GDP deflator. Vehicle sales will give us some insight on second quarter spending. Construction spending and the ISM manufacturing index will provide more data and international trade and employment growth will end a busy week. The U.S. economy remains intact. Second quarter growth is tracking well north of 3%, offsetting the first quarter weakness. Trend growth remains at 2%, slightly disappointing, but steady.

Latest Data

The U.S. Economy:

The pace of U.S. economic activity picked up in April. The Chicago Fed National Activity Index increased to 0.49 in April, up from 0.07 in March, thanks to production related indicators. Two out of four major categories improved in April, with only one making a negative contribution. Production related indicators surged to 0.46 in April from 0.01. The employment indicator contributed 0.1 of a percentage point to April’s CFNAI. The report suggests the economy rests on solid fundamentals. The 3-month moving average rose from 0.00 to 0.23, the highest reading since late-2014 and is posting its longest streak in two years. The headline index indicates U.S. economic activity was above its historical trend.

New home sales tumbled in April, falling 11.4% and are now only 0.5% above year earlier levels.  Sales came in at a 569,000 annualized rate in April. However, March sales were revised upwards, offsetting some of the impact of the April drop. Although the April decline was led by the West region, all other regions suffered declines. The April decline loosened the market. Inventories came in at 268,000, up 1.5% from March and by 11.5% from a year earlier. The April inventory-to-sales ratio was 5.7 months, up0.8 of a month fro0m March and 0.6 from April 2016. Because of the drop in sales, backlogs rose during the month. Affordability is starting to be a factor in home sales. The ratio of median new home price to median family income is close to a record high, so only very low mortgage rates are keeping demand at a reasonably strong level.

Existing home sales slipped 2.3% in April, but remained 1.6% higher than a year earlier. Sales came in at a 5.57 million units annualized pace in April. Existing single-family sales came in at 4.95 million, down 2/4% from March, but up 1.6% from April 2016. Existing condo/co-op came in at 620,000, down 1.6% from March, but up 1.6% y/y. Three out four Census regions registered declines in April. Total listings are trending downwards, coming in at 1.63 million, down 2.8% from March. Although exist9ng home sales had a moderate upward trend through the end of last year, the trend for the first four months of this year is flat. The reason appears to be the scarcity of listings and the resulting upward pressure on prices.  This is starting to affect affordability. Listings are at the lowest point since 2000. Some of these pressures can be blamed on the recession, where homeowners purchased houses at high prices before the recession.  It will probably take another year of price appreciation before homeowners get prices that will make them want to sell.

The advance goods deficit widened in April, rising to $67.6 billion from $65.1 billion in March. Nominal exports fell 0.9% 9n April and March’s was revised to a 0.3% decline. Automotive vehicle exports fell 7.5%, following a 3.9% decline in March. Consumer goods exports fell 4.1% and other exports fell 2.3%. Nominal imports rose 0.7% in April, following a 0.1% gain on March. Foods, feeds and beverages rose 3.2% and capital goods imports rose 1.6%. The advance goods report was less supportive for second quarter growth than anticipated. Risks to trade are weighted to the downside with talks of tariffs, border-adjustment taxes and renegotiation of trade deals. These deals would disrupt supply chains and have a negative impact on manufacturing.

New orders for durable goods slipped 0.7% in April, the first loss in five months. The change was driven by nondefense aircraft, which declined 9.2%. Orders were flat for nondefense capital goods.  Total orders for January, February and March were revised from 2.4%, 2.3% and 0.7% to 0.3%, 1.4% and 2.3%, respectively. Core capital goods orders were revised to flat in March. Excluding transportation, orders fell 0.4%. Orders were up 3.5% from a year earlier. Among manufacturers, data was mixed. Orders for electrical equipment fell 1.7%, but those for electronic products and computers rose 1.4%. Orders for machinery slipped 0.8%. The report suggests that the pickup in manufacturing looks more delayed and less impressive than previously believed, including capital goods. Policy uncertainty may be keeping businesses on the sidelines. Healthcare policy is far from being settled and with attention focused on the U.S. election-Russia probe, other agenda items such as tax reform and infrastructure investment are being delayed, or sidelined. This keeps business in a waiting mode.

International:

Moody’s Investor’s Service cut its rating on China’s debt for the first time since 1989, challenging the view that China’s leadership will be able to rein in leverage while maintaining the pace of economic growth. Moody’s cut China’s rating by one notch from A1 to Aa3 as it expects the economy’s financial strength to erode in coming years as growth slows and debt continues to rise. China’s debt has been a concern as Beijing tries to walk a fine line as it tries to cool financial risks. China’s outstanding debt climbed to 260% of GDP at the end of 2016, up from 160% in 2008.  Moody’s is not hitting the panic button. “The stable outlook reflects our assessment at the A1 level, that risks are balanced,” Moody’s said in a statement. The erosion in China’s credit profile will be gradual and we expect, eventually contained as reforms deepen. This will allow the sovereign to remain resilient to negative shocks, with GDP growth likely to remain strong compared to other sovereigns.” While China’s debt risks have been swelling for years, the cut comes as some of the pressures are easing. China’s first quarter growth was the fastest since 2012. With the economic structure improving and government debt under control, the economy will continue to grow as a medium-to-fast pace, helping prevent debt risks, the finance ministry said in a statement.

Important Data Releases This Week

April personal income and spending will be released on Tuesday, May 30 at 8:30 AM EST. We expect personal income to rise 0.4% in April, a little faster than the 0.2% rise in March. Nominal spending will rise 0.3%, but there is uncertainty with spending on autos. Spending was weak in the first quarter, but with incomes rising that should be a temporary factor. The GDP deflator is expected to rise 0.1%.

April ISM manufacturing index will be released on Wednesday, May 31 at 10:00 AM EST. We expect that manufacturing will back-track a little, falling from 54.8 in April to 54.6 in April. This is still a good reading.  Manufacturing was strong in the first quarter, so a slight step-back is expected. Sentiment is stabilizing at a decent level, but still far from robust.

March construction spending will be released on Thursday, June 1 at 8:30 AM EST. Construction spending should resume its positive trend, rising 0.5% in April after a 0.2% decline in March. Public spending remains weak, but nonresidential and residential construction, are moving upwards at a slow pace.

April vehicle sales will be released on Thursday, June 1 at 4:00 PM EST. We expect sales to increase to 17.0 million in May from 16.8 million in April. Although below their cyclical peak, sales are still running at decent levels.

March international trade will be released on Friday, June 2 at 8:30 AM EDT. We project the trade deficit to widen from $43.7 billion in March to $46.8 billion in April. Already released goods data showed imports rising 0.7% and exports fell 0.9% during the month. A slightly weaker dollar should help exports.

April employment will be released on Friday, June 2 at 8:30 AM EDT. We look for employment to rise by 185,000, stronger than the 176,000 average over the last six months. The unemployment rate will be unchanged at 4.4%.


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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.