Income Growth has been Solid, but Spending has been Restrained

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 rose on Friday, lifted by strong gains for tech giants such as Amazon and Facebook and growing hopes for a lasting peace on the Korean peninsula. European shares were set to end the week with a flourish as the Stoxx Europe 600 reached the highest level in 12 weeks. The latest global gains were partly spurred by forecast-beating earnings from two of the so-called FANG tech stocks, with some of the largest and most influential companies by market capitalization, which have boosted sentiment on the technology worldwide. First quarter data has been soft in a number of key economies, including Europe, raising concerns that economic growth is slowing in the developing world. In Asia, markets were reveling in the glow of the summit between North and South Korea. MSCI’s index of Asian shares outside of Japan rallied 0.8% on Friday and Japan’s Nikkei share average rose 0.7% to a two-month peak.


Wall Street closed flat on Friday as inflation fears and struggling technology and energy stocks were offset by an advance in the consumer discretionary sector led by Amazon. The Dow jones lost 11.15 points, or 0.05%, the S&P gained 0.11 percent on Friday. Several companies, including Caterpillar said it was worried about higher prices for steel. The first quarter was the first reporting period since Donald Trump imposed a duty on imports of steel and aluminum. Prices for those and other commodities have risen sharply, with U.S. crude up 7.5% in the first quarter. Higher input costs squeeze profits, a worry for investors. Compounding these troubles, the yield on the 10-year U.S. Treasuries hit 3% for the first time in four years. This requires more cash to service debt. Analysts now expect first-quarter earnings to hit growth of 24.6% in the first quarter. Despite that, the S&P has been flat since April 13 as worries about future earnings sink in.


In the U.S. real GDP came in at a better than expected 3.2% in the first quarter, but below the 2.9% rate in the fourth quarter. Growth though modest, was widespread, including investment, consumer spending, trade and government. Imports and durable goods were drags. Real disposable income accelerated to 3.4% on the back of the tax cuts, after rising 1.1% in the fourth quarter. The savings rate jumped to 3.1% from 2.6% in the fourth quarter. The U.S. economy is performing well and near-term prospects through the remainder of the decade look good. Growth will accelerate as the deficit-funded tax cuts and fiscal stimulus course through the economy. There are downside risks coming from trade and stronger than expected inflation, which may mean monetary policy could be overdone. There is a sizable probability in 2020-21 that the economy could overheat and the Fed may overreact. Recessions are caused and not guaranteed, but conditions for one will rise in 2020-21.


Last week saw the economy slow, but the advance durable goods orders did rise 2.6%. The increase was led by civilian aircraft orders. Excluding transportation, orders were unchanged. Despite sustained high levels for the ISM new orders index, actual orders remain inconsistent. The notion that the recent soft patch in capital spending might be delayed is sullied by the fact that core capital goods fell 0.1% in March. Business spending on equipment slowed in the first quarter, but structures picked up. Nonresidential fixed spending on structures grew 12.3% in Q1. March new home sales jumped 4.0% and February was revised up. The pace could have been stronger except sales were down in the Northeast in a month where four nor’easters pummeled the region.


Next week will be busy for economic data. We will get a look at personal spending and incomes for March. Income growth has been solid, but spending has been restrained recently. Analysts are looking for a break in the spending pattern. Pending home sales are released and both the PMI manufacturing and non-manufacturing indexes, international trade, construction spending, factory orders and rounding out the week, the employment report.

Latest Data

The U.S. Economy:

The pace of U.S. economic activity decelerated in March. The Chicago Fed National Activity Index ticked down to 0.1 from 0.98 the previous month. Three out of the four categories that make up the index decreased from the prior month. The 3/month moving average fell from 0.31 to 0.27. Production-related indicators are volatile month-to-month and fell from 0.54 in February to 0.14. Employment-related indicators edged down from 0.35 to 0.09. The personal consumption and housing indicators returned a reading of -0.01, compared with -0.06 in February. Despite the March decline, the index suggests that economic activity remains above average. Actual tariffs on steel and aluminum and proposed tariffs are creating uncertainty among businesses and are leading to higher input prices. While industrial production is still rising, it did slow in March. Excluding trade, the outlook for the economy still looks modestly positive.


Existing home sales continued to recover in March and are closing in on their November peak. Total sales increased 1.1% in March to an annual pace of 5.60 million units. The monthly increase was evenly split between single-family sales and condo/co-op sales. Inventory kept up with sales in March, so although still very tight at 3.6 months, it was not appreciably tighter. Price growth at 5.9% year-over-year is close to its average over the past three years. Weather may have been a factor in the March increase after a snowy February. Inventories are still tight and are having a dampening effect on sales.


New orders for durable goods advanced for a second straight month in March, rising 2.6%. The change for February was also revised up. The nondefense aircraft sector provided most of the March lift, rising 44.5%. Excluding transportation, orders were unchanged from the previous month. Excluding defense, orders increased 2.8% and are up 9% from a year ago. Capital goods orders increased 5.4% and are up 12.3% y/y. Transportation orders advanced 7.6%. Motor vehicles and parts orders only increased 0.1%. Core capital goods orders fell 0.1%. Details from the report are not as rosy as the headline number suggested. The slowness in core capital goods orders and shipments is a cause for concern. Companies may be factored in the impact of the tariffs and the consequences of a full-blown trade war. Even if a trade war is averted, the tariffs on steel and aluminum is hurting domestic users of the metals. The tariffs will cost users more and hurt exports. These actions could hurt the exports of cars and hurt domestic sales. More people are employed in the consumption of steel and aluminum than in industries that produce the metals. Trade restrictions are inefficient as they cause damage to domestic industries.


Wholesale inventories logged another solid gain in March, rising 0.5%, following February’s 1% increase. Wholesale inventories are up 5.8% from a year ago. Performance among wholesale inventories was mixed. Durable goods surged 0.8%, while nondurable goods fell 0.1%. Durable goods inventories are up 6.2% y/y, while nondurable goods are up only 5.2%. Retailers backpedaled in March, slipping 0.4%, but remain up.6% on a year-ago basis. Motor vehicles and parts stocks fell 1%, while retailers excluding the auto sector decreased 0.1%.. The decline in retail stocks may be a sign of a needed inventory correction. The I/S ratio remains inflated for this late in the business cycle. Producers take their clues from the broader economy. The weaker spending pattern in the first quarter may have led to unwanted inventories and some tapping of the brakes may be needed to achieve a more balanced inventory level.



Important Data Releases This Week

March personal income and spending will be released on Monday, April 30 at 8:30 AM EDT. We expect personal income to rise 0.4% in March, the same as in February. Nominal spending will rise 0.4%, following the disappointing 0.2% increase in February. The core GDP deflator is expected to rise 0.1% on weak energy prices for that month. Inflation is awakening, but still remains at subdued levels.


March pending home sales will be released on Monday, April 30 at 10:00 AM EDT. Pending home sales are expected to rise 1.0% in March after the sharp 3.1% jump in February. The resale market is showing strength though the longer-term trend has been flat.


April ISM manufacturing index will be released on Tuesday, May 1 at 10:00 AM EDT. The ISM manufacturing index is staying elevated, although moderating from 60.8 in February to 55.6 in March. We expect the index will come in at 56.5 in April. Orders are running at multi-year highs and iin a sign of capacity stress, delivery times have been lengthening sharply.


March construction spending will be released on Tuesday, May 1 at 10:00 AM EDT. Construction spending is expected to bounce back a solid 0.5% higher in March after the weak 0.1% advance in February. Spending on single-family homes will drive the increase, offsetting weakness in the nonresidential sector.


April vehicle sales will be released on Tuesday, May 1 at 4:00 PM EDT. February vehicle sales increased more than expected in March to 17.5 million units. Sales aren’t likely to have the same strength in April, coming in at 17.2 million units, still a good sign for consumer spending.


March international trade will be released on Thursday, May 3 at 8:30 AM EDT. The U.S. trade deficit is expected to narrow sharply in March to $50.0 billion from February’s $57.6 billion, in line with the advance data. Imports of goods fell sharply in March, while goods exports continue to show strength.


March factory orders will be released on Thursday, May 3 at 10:00 AM EDT. The durable goods report for March showed strength, which will boost the factory orders data. Total orders are projected to increase 1.3%. Some of the details were weak, especially the core capital goods orders which are pointing to slowing business investment.


April ISM non-manufacturing index will be released on Tuesday, May 1 at 10:00 AM EDT. The ISM non-manufacturing index is expected to show strength, coming in at 58.5, versus 58.8 for March. Delivery times are lengthening and input costs are going up, signs of strength in the service sector.


April payroll employment will be released on Friday, Friday, May 4 at 8:30 AM EDT. Payroll growth was weak in March, rising only by 103,000. Payrolls are projected to gain strength in April and rise by 190,000. The unemployment rate should fall to 4.0%. Wage pressures should inch up only 0.2%.

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