Vehicle Sales are Likely Topped Out

By | May 8, 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

Vehicle Sales are Likely Topped Out

A slump in oil prices to the lowest level in six months rattled commodity markets on Friday and triggered a rally in safe-haven bonds. West Texas Intermediate fell 0.1 percent o $45.48 a barrel, after it tumbled to $43.76 earlier in the day. Iron ore futures fell 6.3% on Friday after tumbling 5.3% on Thursday. Europe’s Stoxx 600 fell ahead of Sunday’s presidential elections and much of Asia reported losses on Friday. The Shanghai Composite Index was down 0.8% on Friday and near its lowest close this year.

Appetite for U.S. equities slowed as prices inched higher. The Friday afternoon advance left the benchmark 3 points higher than its March 1 close. Last week, the S&P rose 0.6%, up 7.2% in 2017 and 12% above election-day. However, investors yanked money from the biggest exchange-traded fund tracking the measure at any time since election-day. Investors have shifted into bonds, looking for protection, given stocks are at all-time highs.

There was good news in the employment report last week, as payrolls increased by 211,000. This will lead some to conclude that we are at full-employment. That could be correct, but other economic data has been mixed. Vehicle sales came in at 16.9 million, weaker than expected. The industry appears to be in late-cycle expansion and production plans are being curtailed. Credit is being tightened for the lower tier of borrowers for cars, a factor that is also slowing the sales pace. Personal income rose 0.2% and spending 0.3% in March. The acceleration in spending didn’t quite offset the weakness exhibited in the first two months, but did suggest the consumer will be back in the second quarter.

The ISM manufacturing index fell from 57.2 in March to 54.8. The ISM non-manufacturing index rose from 55.2 to 57.5. Factory orders were positive, rising 0.2% and core capital goods orders rose 0.5%. The factory sector is positive and sits at the strongest point in two years. However, actual gains do fall short of sentiment, although that gap is narrowing. As widely expected, the Federal Reserve sat tight at the May meeting of the FMOC. The Fed saw the weak first quarter GDP report as “transitory.” The Fed is turning more hawkish as we approach full employment and the probability of a June move is almost certain.

Real GDP for the first quarter came in at a weak 0.7%. Some of the weakness was weather related and temporary in nature. Part of the slowdown is also seasonal, as first quarters the past few years, have also c0me in weak. The underlying strength of the economy is still solid. Vehicle sales may have topped, but advances in employment, wages, housing and a better global economy will keep spending growth on track. The probability of any stimulus emerging from Congress this year is fading, but left on its own, the economy will still track near 2.5% for the remainder of the year.

There are some risks to the economic outlook, but few are major in scope at the present time. The stock market could see a correction, a distinct possibility concerning present valuations. The consumer could just become “tired-out.”  However, as wages are gaining strength and employment, although likely to slow, is positive. We think the consumer will remain stalwart, although vehicle sales are likely topped out. The global economy is gaining strength, a help for U.S. manufacturing. Housing is slowly advancing. There is a greater probability of the downside in 2018, as the increase in interest rates start to bite. China’s debt problem also is a risk, but there are signs officials are starting to reign in that potential trouble-area. The administration’s trade policy has downside risks, but the road to protectionism does appear to be slower than feared.

Next week, we get a peek at small business confidence and inflation. Inflation readings will likely be negative as oil prices are dropping, along with many other key industrial inputs. Weak auto sales likely slowed sales a little, but non-auto sales likely staged a comeback in April. Business inventories will turn in a modest addition, aiding production heading into Q2.

Latest Data

The U.S. Economy:

Personal income increased by 0.2% in March, following a 0.3% increase in February. The increase in income helped personal spending rise 0.3% in the same month. The March increase in spending helped offset a 0.1% decline in expenditures in February and a 0.3% decline in January. Spending in the first quarter was influenced by weather. Warmer-than-normal weather depressed utility spending in January and February. Durable goods spending in March fell sharply as a snowstorm hit the Northeast. The outlook for consumer spending is still good, despite the Q1-weakness. A lot of spending weakness in the first quarter was temporary in nature. A rebound is expected. The GDP deflator fell 0.2% in March, as the price of gasoline and other energy goods fell 5.5%. The slowdown in inflation may give the Fed “pause” but it is unlikely to change their mind about a June increase in rates.

Construction spending disappointed in March, falling 0.2%, following a 1.8% advance in February and a 0.8% increase in January. Private residential construction increased 1.2% in March, with the single-family component increasing 0.3%. Nonresidential construction spending fell 1.3%.  Of the largest components of nonresidential construction, investment in manufacturing facilities fell 0.5% from February, down 9.8% from a year earlier. Spending on commercial facilities decreased 3.2%, but is up 12.7% from a year earlier. Public construction fell 0.9%, down 6.5% y/y. Highway and street construction increased 0.5% m/m, but is down 3.1% from the previous March. Although, construction fell in March, it has been on an upward trend. The value of single-family homes is increasing steadily. Commercial development has been positive. Manufacturing remains weak. There has been a modest increase in highway and street spending, but the public sector is being held back by declining education investment.

The ISM manufacturing index fell from 57.2 in March to 54.8 in April. This was weaker than first quarter average of 57.  Details were weaker, with new orders falling from 64.5 to 57.5.  Production increased from 57.6 to 58.6. Inventories rose from 49 to 51. Employment fell from 58.9 to 52.  New exports orders rose from 59 to 59.5, while imports gained from 53.5 to 55.5. Prices paid fell two points to 68.5.  After taking a jump forward after the election, survey data is taking a step back. There has been a sizable difference between “hard” and “soft” data, but his is beginning to change. Sentiment drove the index forward and is now aligning with reality. This does not imply that manufacturing is weakening. The auto sector has plateaued and that will act as a brake on overall production. Other sectors, including energy, are seeing gains and the overall picture remains positive, but still advancing at a slow pace.

Following March’s dip, April’s vehicle sales only increased modestly, suggesting that auto sales have plateaued. U.S. vehicle sales equaled an annual rate of 16.9 million in April, up from a 16.6 million rate in March. The sales pace represents a decline of nearly 3% from a year ago and 2.3% from the first quarter average. Incentives were a factor in the April sales pace. According to J.D. Power, incentives average $3,500 a car in April, almost 10% of the average transaction price, surpassing the previous peak in April 2009. Also, inventories of some models exceeded 90 days, well above the 60-day number thought to be ideal. Automakers are planning extended shut-downs in July to deal with the excessive inventories. One factor slowing sales is tighter credit for sub-prime customers. Another factor affecting the new car market is declining used car prices, which are placing downward pressure on leasing terms. The auto industry has downshifted to a lower, but still decent number of just slightly better than 17 million units this year.

The ISM non-manufacturing index increased to 57.6 in April, up from 55.2 in March. The report implies decent underlying momentum for the economy early in the quarter. Details were generally upbeat.  Business activity increased to 62.4 from 58.9. New orders rose to 63.2, up from 58.9 in March.  Employment fell slightly to 51.4 from 51.6.  Imports fell to 53.0 from 56.5, but exports increased to 65.5 from 62.5. The non-manufacturing part of the economy is doing well, but some of the strength is driven by improved sentiment. There is a sizable gap between first quarter GDP and the manufacturing and non-manufacturing surveys. This gap will narrow as some of the first quarter weakness is temporary for GDP.  Anecdotes in the April survey were encouraging. A respondent in construction said business is improving and more project inquiries are increasing. Retail was more optimistic about the remainder of the year.

The trade deficit narrowed slightly in March to $43.7 billion, down from $43.8 billion in February. Total exports broke a three-month string of increases to fall 0.9% in March. Goods exports fell by 1.6%, while exports of services increased 0.6%. Automotive exports dropped 6.2%, after a small gain in February.  Exports of industrial materials dropped 4.6%. Total imports fell 0.7%, the second consecutive decline.  Goods imports dropped 0.9%, while service imports held steady. Both imports and exports have been on a steep upward trajectory since early 2016 and March’s small decline does not derail the trend. Among exports, food and beverages and industrial supplies have made the most progress over the past year.  Auto exports had a strong first quarter and consumer goods indicate a stronger global economy. Capital goods exports are a needed tool to jump start the global economy and have stabilized after falling in 2015 and 2016. Industrial supplies have been the largest mover among imports, climbing 30% over the past year.  Auto imports likely peaked for the auto industry. Domestic demand for imported consumer goods, are holding up quite well. The dollar will remain a drag on trade, as the Fed is tightening interest rates. However, the dollar’s future rise will be slow, as the bank of England is set to tighten and the ECB will slow stimulus efforts. There might be trade policies changes under President Trump, but the changes do appear to be slower and less threatening than originally anticipated.

Factory orders increased 0.2% in March, the fourth consecutive monthly gain. Durable goods orders posted a 0.9% increase, but nondurable goods saw a 0.5% decline. Core capital goods orders rose 0.5%, the sixth consecutive monthly increase. Core capital goods orders were up 2.6% from a year earlier.  Factory shipments slipped 0.1%, but remain up 1.5% y/y. Inventories were flat and the inventory-to-sales ratio rose to 1.32 from 1.31. The report suggests that factory conditions are improving. Business investment has emerged as a growth sector after a long dry spell. The latest GDP report shows that factories are in the best shape in two years, after being a drag on growth through the last quarter of 2016. Business sentiment remains strong, but actual data does fall short of survey results. Still, fundamentals are in place with solid business balance sheets, still favorable financial conditions and steady demand. This will keep factory activity bust for the next few quarters.

U.S. job growth rebounded in April after a weak March. Payrolls increased by 211,000, following a downward revised 79,000 addition in March. Private employment increased by 194,000, with the bulk in Professional/business services. Mining employment grew by 10,000, following a 9,000 gain in March. Manufacturing employment rose by 6,000. Government employment increased by 17,000 workers, but federal hiring dropped by 6,000 jobs. The unemployment rate dropped to 4.4%, the third consecutive monthly decline. The labor participation rate dropped from 63% to 62.9%. The report suggests that the weakness in March was boosted by transitory factors, including weather. There is increasing evidence the economy is at full employment, suggesting wages will start to rise at rates that concern the Federal Reserve. This suggests the Open Market Committee will keep on track on its rate increasing schedule.  Job growth will stay well north of the 100,000 needed to keep pace with growth.

International:

China’s official factory gauge fell from 51.8 in March, a five-year high, to 51.2 I April. The services PMI decreased to a six-month low of 54 from 55.1. The indicators suggest that economic growth is set to slow after picking up to 6.9% in the first quarter, the first back-to-back acceleration in two years. Factory and service activity remain at relatively robust levels, while weakness is appearing in employment, output, new orders and export orders. Factories weakened on falling market demand, lower commodity prices and slower export growth, but they do remain in expansion mode, driven by growth in hi-tech equipment and consumer goods. Forecasts have lowered growth forecasts this year, as official have introduced tighter property curbs and a higher base of producer prices is likely to weigh on output in coming months. China is in the course of monetary tightening and regulations are strengthening, factors that are projected to slow the economy.

Asian factories are off to a good start in the second quarter, buoyed by strong global demand for electronics. China’s PMI slowed, but the decline was attributed to weaker prices for iron ore and other industrial commodities and signs of moderation in China’s housing sector. China, Japan, South Korea, Taiwan and Singapore have reported stronger shipments in recent months. South Korea reported April exports rose 24.2% in April, the fastest since August 2011. Manufacturing hit a 10-month high in Indonesia and expanded for the first time in two years in Malaysia. Part of the increase in shipments can be attributed to the launch of the I-Phone 8 later this year. Investors are cashing in on the global electronic “super-cycle” this year.

The euro-area’s GDP rose 0.5% in the first quarter, matching the pace of the second quarter.  The recovery is steady and seems to be more broad-based. Weakness in the euro helped the recovery begin in 2015, but the recovery s more balanced because domestic demand is doing fine and exports are recovering because global trade is recovering. Indicators from manufacturing to employment are picking up and inflation is approaching the central bank’s goal.  Inflation accelerated to 1.9%, the level the ECB aims to achieve over the medium term and a underlying measure of inflation was the highest in almost four years.

Important Data Releases This Week

April NFIB small business survey will be released on Tuesday, May 9 at 6:00 AM EDT. Small business optimism dipped in March, but remains at a high level. The index fell from 105.7 in February to 104.7 in March. We look for a small rise in April to 105.3, as employment details and views concerning the economy remain solid for small businesses.

April PPI index will be released on Thursday, May 11 at 8:30 AM EDT. We look for index to increase 0.2%, after the 0.1% decline in March. Energy will be neutral, but nonfuel inputs are running a trend-like 0.2%.

April CPI index will be released on Friday, May 12 at 8:30 AM EDT. We look for index to rise 0.2% in April following the 0.1% rise in February. Energy prices didn’t move much in April, but wages are starting to exert upward pressure on the cost of goods.

April retail sales will be released on Friday, May 12 at 8:30 AM EDT. We look for retail sales to rise 0.4% in April.  Auto sales will be up modestly and non-auto sales will see some upward swing in activity.  Gas sales will see a slight positive contribution to sales. Warmer weather likely helped the consumer spend more in April.

March business inventories will be released on Friday, May 12 at 10:00 AM EDT. We project that business inventories rose 0.1% in March and the I/S ratio will remain unchanged. Inventories came in light in the first quarter, setting the stage for a stronger build in the second quarter. Auto inventories are excessive, clearing the way for extended vacations later this summer.


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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.

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