The Economy is Running at a Healthy Pace

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

World stocks hit a one-week high on Friday before easing a touch, before caution ahead of jobs data in the U.S. outweighed a potential breakthrough in nuclear tensions over the Korean peninsula. The U.S. pressing ahead on steel and aluminum imports on Thursday did not seem to rattle investors as much as last week. The MSCI All-Country World Index, which tracks shares in 47 countries, was up 0.1% on Friday and set for a weekly gain of almost 2%. Gains came largely from Asia, which recorded sharp rallies after U.S. President Trump said he was prepared to meet North Korea’s Kim Jong Un, potentially making a major breakthrough in nuclear tensions between the two countries.


In the U.S. the market value of U.S. common stock advanced by 1.68% on Friday and is up 4.2% for the year on date. Fears of a crippling trade war subsided and worries over a debilitating interest rate climb eased. Despite the lessening of fears that the tariff on steel and aluminum might develop into a full-fledged trade war, there are still large uncertainties concerning trade policy and how it will affect business activity in coming months. Trump followed through on his pledge to impose still tariffs on imported steel and aluminum, but excluded Canada and Mexico and left the door open to spare other countries on the basis of national security. The president warned there would be more tariffs coming and that he planned to proceed with what he called “reciprocal taxes” on imports that charge higher duties on U.S. goods than the U.S. charges on their products. The tariff threat has escalated tensions from Beijing to Brussels. On Thursday, China’s foreign minister, Wang Yi, vowed a “justified and necessary” response to any efforts to incite a trade war. What happens now is unknown. If Trump is happy with just a $1 billion reduction in China’s trade deficit and the Europe is exempted on steel and aluminum, than little economic impact can be expected. If this is the start of a trade war with allies and China, the economic impact could be devastating. We look for more tensions in coming months.


Last week saw a strong payroll report, with the addition of 313,000 jobs. That pushed the 3-month average to 242,000 after job gains in January and December were revised upwards. Strength was wide spread across industries. Average hourly earnings were only up 0.1% in February and only up 2.6% from a year earlier. For those analysts who have been waiting for inflation to heat up from a tight labor market, they will have to wait longer. The ISM non-manufacturing index edged down in February, but remained well in expansion territory at 59.5. In January, the trade deficit widened by $2.7 billion to reach the largest gap since October 2008. Lower exports of goods and services drove the increase, as imports were more or less flat for the month. Trade deficits will remain high for the time being, as the healthy economy fuels imports. The low dollar and the accelerating global economy will fuel exports, unless trade is derailed by Mr. Trump’s policies.


This week, we get a look at the NFIB small business optimism index, both major popular inflation indexes will be featured, business inventories, retail sales, import and export prices, home builder’s confidence and housing starts and industrial production. The economy is running at a healthy pace. The Atlanta Fed has the 1st quarter running at a 2.5% pace and Moody’s is close at 2.4%, while the New York Fed has Q1 pacing at a 2.8% rate. Inflation is gaining a little ground but does not seem to be a threat yet. The fiscal and tax relief stimulus will be working through the economy, but there are few signs of overheating, as of yet. So far, even a strong employment report shows few signs of wage inflation. There are some upside risks that we could overheat from the fiscal side and there are downside risks because of trade policy. So far, the economic engine is running clean, but the probability of stormy weather has increased.

Latest Data

The U.S. Economy:

The ISM non-manufacturing index slipped from 59.9 in January to 59.5 in February. Despite the decline, the index remains elevated and above the fourth quarter average of 57.7. Details were mixed, as new orders increased from 62.7 to 64.8 and business activity rose from 59.8 to 62.8. Employment fell from 61.6 to 55.0 and supplier deliveries were unchanged at 55.5. Inventories rose from 49 to 53.3, but inventory sentiment remained at 61, a reading that suggests inventories are too high. A respondent from construction noted that lumber related costs continue to increase and supply is starting to be a problem. The tariff on steel will hurt construction later this year.


Factory orders took a step back in January, falling 1.4%, as durable goods suffered the biggest decline since July. The nondefense aircraft and defense sectors were mainly to blame for the January weakness. Durable goods orders fell 3.6% in January, but were up 7% y/y. Core capital goods orders lost 0.3% and that followed a 0.5% decline in December. Orders for this segment are still up 6.3% from a year earlier. Despite the January weakness total orders are up 6.6% from a year ago and orders in 2017 posted the best gain since 2011. We expect the broader streak in factory activity to remain positive. Amid stronger domestic and global demand, companies are facing capacity constraints. Purchasing new equipment is more compelling as labor supplies dry up. Capacity utilization is trending up. The tariff on steel and aluminum will raise prices of key inputs. A trade war would hurt the U.S. in the long run.


The nominal trade deficit widened from $53.9 billion in December to $56.6 billion in January, the fifth consecutive month the deficit has increased. January was the largest since 2008. The goods deficit increased from $73.7 billion to $76.5 billion and the services surplus improved slightly. Nominal goods exports declined 1.3% in January. Imports were unchanged. The increasing trade deficit could fan protectionist sentiment. Trump’s tariffs will create winners and losers. Winners are the steel and aluminum producers. Losers will be those who use steel, automakers and construction, as well as beverage producers and machinery producers. The economic costs of the tariffs are small, but if the U.S. leaves NAFTA or our trading partners retaliate on other goods, the U.S. economy will suffer.


Payroll growth soared in February. The labor market added 313,000 jobs. Gains were broad based across industries, with an addition of 50,000 in retail, 28,000 in financial services and 61,000 in construction, which likely gained from a return of less severe weather. Average hourly earnings only rose 0.1% and were up 2.6% from a year earlier. The workweek also increased to 34.5 hours from 34.4 hours in January. The surge in labor force entrants was a big surprise. The participation rate shot up to 63 from 62.7. The unemployment rate remained at 4.1%. The increase in adult men to its highest share since early 2015 drove the improvement, partly explained by the resurgence of hiring in male-dominated goods-producing industries. The jump in employment suggests that the labor markets still have some slack. We are not quite at full employment and there is enough slack left that wages are not gaining much ground.


The OECD composite leading indicator held steady at 100.1 in January, but improved from the 99.9 average from last year. The gauge for the euro-area held at 100.6 for the fourth consecutive month. Germany shed 0.1 of a point from a month earlier, but that is not a cause for alarm. The U.S. was stable at 99.9. The index for Russia printed a solid 101.5, up from 101.3 the previous month. The index suggests that a downturn is unlikely for the global economy. Global stability and more entrenched GDP growth is supporting the upbeat reading of the index. The U.S. tax cuts are adding to the euphoria. Growth is being sustained in the euro-zone. The fact that all the major global economies are expanding in unison for the first time in a decade is a positive force for global growth.

Important Data Releases This Week

February NFIB will be released on Tuesday, March 13 at 6:00 AM EDT. The survey increased from 104.9 in December to 106.9 in January. The survey is tracking at a fairly elevated level. Views of the economy will likely lift confidence to 107.5 in February.


February CPI index will be released on Tuesday, March 13 at 8:30 AM EDT. Inflation gained ground in January, with the headline CPI rising by a more than expected 0.5% rate. Core inflation also rose stronger than trend, at a 0.3% rate. We expect the headline reading to rise 0.3% and the core 0.2% in February, enough to allow the Fed to proceed with plans to raise rates this month.


February retail sales will be released on Wednesday, March 14 at 8:30 AM EDT. Retail sales fell 0.3% in January, but were unchanged excluding autos. Sales are projected to advance in February and it will be interesting to see if the new withholding schedules had any impact on spending. Auto sales retreated only slightly in February, but utilities might be a drag as the weather was less severe.


January business inventories will be released Wednesday, March 14 on at 10:00 AM EDT. Business inventory growth has been solid, rising 0.4% the last two months. The return to slightly lower trend will continue in January, with stocks rising a projected 0.2%. The I/S ratio remained at 1.33 and is likely to remain unchanged in January.


February PPI index will be released on Wednesday, March 14 at 8:30 AM EDT. The PPI rose 0.4% in January, pushed up by a 0.7% rise in goods prices, mainly driven by energy. We expect a more trend like 0.3% rise in February.


February industrial production will be released on Friday, March 15 at 8:30 AM EDT. Industrial production rose 0.9% in January, but most of the lift came from a 5.6% jump in utility output and a 1.6% rise in mining production. Manufacturing only rose 0.1%. We expect total IP to only rise 0.2% in February, as the weather was less severe. There has been a noted difference between the survey data and actual production, with the survey data more optimistic. We still expect the industrial sector to be positive, with the manufacturing segment up 0.2% in February.


February housing starts will be released on Friday, March 15 at 10:00 AM EDT. Housing starts jumped 9.7% in January to an annual rate of 1.326 million. Most of the strength was in the multi-family sector. Permits did rise 7.4%. The single-family sector was permit activity fell but remained at a decent level. The outlook for housing is mixed, The economy is improving, but so are mortgage rates. After the big January jump, some fall-off in activity can be expected, but the trend is still moving slowly upwards.

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