The Key Report will Be Employment

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

The specter of a global trade war sent world stocks tumbling on Friday, driving investors toward the traditional safe plays of government bonds and the Japanese yen. Europe’s STOXX 600 fell over 1% in early trading, following both Wall Street and Asia down. Trump said duties of 25% on steel and 10% on aluminum would formally be announced, sparking concerns of similar moves from major trade partners such as Europe, China and Canada. The 10-year U.S. Treasuries yield fell to 2.811 percent, the lowest level in three weeks. Japan’s Nikkei tumbled 2.5% to end the week down 3.3%, while MCSI’s broadest index of Asia Pacific stocks excluding Japan fell 0.9% open Friday to end the week 2.1% down.


The fear is that a series of retaliatory moves will start. The anxiety over tot-for-tat moves was underscored by Canada’s quick response, with officials in Ottawa saying they will retaliate. The EU detailed a plan to penalize $3.5 billion of American trade, hitting bourbon, blue jeans, orange juice, cranberries, rice and motorcycles. The official response from China was muted, with the Foreign Ministry said that China urges the U.S. to follow trade rules. Insiders were less restrained saying that the U.S measures “overturn the international trade order,” said Wen Xianjun, vice chairman of the China Nonferrous Metals Industry Association. Although China only accounts for 2% of steel imports, its massive industry expansion has helped produce a global glut of steel that has driven down prices. Canada, Brazil and South Korea are the biggest steel exporters to the U.S.  Canada, Brazil and the EU said they would look to take actions over the tariffs.


The move on tariffs risk provoking retaliation from Beijing. China has already launched a probe into U.S. imports of sorghum and is studying whether to restrict shipments of soybeans. “The impact of the step in part on which nations will be affected, said David Wolf, senior emerging markets economist at Abderdeen Standard. It’s much ado about nothing until we see the final scope of the tariffs and the response of the global trading partners. Robert Carnell, head of research at Asia-Pacific at ING, said, “The world stands on the brink of a trade war. Forgot the yield curve, this is how recessions start.”


It was a heck of a week. The economic calendar was jam-packed. Federal Reserve Chair Jerome Powell testified before Congress and the Trump administration announced plans to impose tariffs on steel and aluminum. The S&P ended the week on an up note but major indexes posted their worst week of losses since early-February on President’s Trump’s plan to impose tariffs rattled investors. For the week, the S&P dropped 2% and the Dow was down 3%. The tariffs are unlikely to hurt overall earnings in the near term, but if protectionist measures are the signs of things to come, inflation risks will rise and business activity will ultimately suffer.


The ISM was strong this week rising to 60.8, but there has been a divergence between survey, or “soft” data and “hard” data. While the ISM manufacturing reading was robust, the advance durable goods fell 3.7% in January. Much of the durable goods weakness was in the nondefense aircraft sector. However, excluding aircraft and defense, durable goods orders fell 0.2%. The trend in core capital goods orders has weakened recently from the impressive run-up in the fall. Core capital goods orders are up 3.7% at a three-month annualized pace, compared to over 18% as recently as November.


Real consumption fell 0.1% in January, leaving it up 2.3% annualized over the last three months, a noticeable deceleration from the end of 2017, but income growth was strong, rising 0.4% for the second month in a row. February U.S. vehicle sales fell back slightly to 17.1 million units from 17.2 in January. Construction spending was flat, but that followed five months of increases. New home sales slipped in January, falling 7.8%, but the winter months can be notoriously seasonal. Survey-based data showed that the Conference Board’s Consumer Confidence Index climbed to 130.8 in February, the highest since late 2000.


The new Fed Chairman opened the door for four rate hikes. “My personal outlook for the economy has strengthened since December.” He listed four events that changed his outlook, “We have seen continuing strength in the labor market.”… We have seen some data that in my case add some confidence to my view that inflation is moving up to target. We have seen continued strength across the globe and we’ve seen fiscal policy become more stimulative.” The statements send a clear signal that the Fed will do more hiking this year. “For a long time, there was slack in the labor market, and that argued for continuing to support lower unemployment. We’ve reached the point where the risks are really two-sided now,“ Powell said. “If the economy overheats, we’ll have to raise rates faster, and that raises the chances of recession, and recessions tend to hit vulnerable populations the most, “ he added. “We’re trying to balance the risk of getting inflation up to 2% with the risk of the economy overheating.”


The focus in the next week will be trade policy and whether more trading partners retaliate. For economic data, the key report will be employment. One January surprise was the drop in hours worked, which could be weather and flu. Next week we get a look at the ISM non-manufacturing index and factory orders for January, as well as international trade, the Beige Book and the important employment report.

Latest Data

The U.S. Economy:

The pace of economic growth moved sideways in January. The Chicago Fed National Activity Index ticked down to 0.12 from 0.14 the previous two months. Two out of the four broad categories that make up the index decreased from the previous month and two made negative contributions. The index’s three month moving average declined to 0.17. The January reading at 0.12 was the first month since 2014 in which the CFNAI stringed together five consecutive months of positive readings.  In January, the production indicators fell to -0.01, but the employment indicators were positive. Personal consumption and housing improved but sales, orders and inventories retreated slightly. The index indicates that U.S. economic activity is above average.


Stockpile build started 2018 on a high note according to the advance report. Wholesale stock’s increased 0.7% in January, following December’s 0.6% gain. Meantime, retail stocks advanced 0.8%. Auto and parts provided most of the retail lift, rising 1.7%. Both wholesale categories fared well. Durable goods inventories rose 0.3% and nondurable goods saw a 1.3% rise. Inventory build was widespread in January, with no categories posting a stock decline. Auto stocks are now increasing after a period of trying to control inventories. We expect a decent rate of inventory build in 2018 as the economy makes strong gains.


The advance goods deficit widened further in January. The goods deficit rose to $74.4 billion in January from $72.3 billion in December. The details were downbeat as both exports and imports declined. Nominal goods exports decreased 2.25 from December and the decline was broad based. Industrial supplies exports fell 3%, while capital goods imports lost 5.2%. Goods imports edged down 0.5%, following robust gains the four preceding months. The trade deficit hit a nine year high in December and the advance report suggests that January will be higher. The falling exports comes in the wake of an even weaker dollar. The weakness in imports is likely temporary. Imports have surged since mid-2017 and the strength of the economy means more imports.


Personal income growth was steady at 0.4% in January. The impact from the new tax law was in the report with nominal disposable income rising 0.9% after rising an average 0.3% the preceding three months. While incomes were healthy, spending slowed in January. Personal spending fell 0.1% in January, The decline was led by durable goods spending, which dropped 1.6%. Weakness was broad-based, but led by motor vehicles. Nondurable goods spending was flat for the month. Spending slipped in January, but that followed a strong fourth quarter. Weather played a role. Spending is not a concern as incomes are still rising at a decent pace.


The personal consumption deflator increased 0.4% in January, following a 0.1% advance in December. Energy boosted the deflator, while food prices increased 0.1% for a second straight month. The core PCE deflator increased 0.3% in January, following a 0.22% increase in December. The headline PCE was up 1.7% y/y, while the core PCE was up 1.5% in January. Although the number weren’t any big surprise, the Fed will lean towards more rate increases. Inflationary pressures are building and the fiscal stimulus adds more pressure to the pipeline. The new Chairman Powell’s statements have been hawkish and the word “overheated” is a jump in policy intentions. The Fed will be on the move in 2018.


Manufacturing may be stronger than expected in the first quarter. The ISM manufacturing index increased from 59.1 in January to 60.8 in February. New orders fell 1.2 percentage points to 64.2, with 15 out of 18 industries reporting growth. Textile mills, paper, printing and publishing were leaders in order activity, while apparel lost ground. Production fell to 62.0 from 64.5. The inventory index increased from 52.3 to 56.7. Supplier deliveries fell 1.9 percentage points to 61.1, the 17th consecutive month of slowing deliveries. The employment index increased 5.5 percentage points to 59.7 in February, more than reversing January’s decline. New export orders rose from 59.8 to 62.8. New import orders increased from 58.4 to 60.5. The prices paid index rose by 5.9 points over the last two months. Among commodities listed in short supply were capacitors, resistors, skilled labor and titanium dioxide. Manufacturing is off to a good start this quarter and risks are tilted to stronger production. The global economy is off to a good start this year. Risks are tilted to the upside as the global economy is ramping up and domestic businesses are adding inventories. The dollar is depreciating and there is a lot of fiscal stimulus in the pipeline. The anecdote show some signs of capacity issues. However, it is across the board and does not actually mean yet the economy is overheating. Employment is one of the biggest problems.


U.S. construction spending was essentially flat in January, but was 3.2% higher than a year earlier. Private nonresidential construction fell 1.5% from December. Public construction registered another strong increase, rising 1.8% m/m. Private residential construction increased 3.2% m/m and was up 4.2% from a year earlier. Of the components of private residential construction, single-family home spending increased 0.6% from December and was up 8.8% from January 2017. Public construction was up 8.2% from a year earlier. Construction slowed a bit in January but remains near a record high. On the residential side, momentum is building in the single-family market as a diminished supply attracts more builders into the market. The multifamily sector is declining from a year earlier. The public sector is growing and could grow more if an infrastructure package passes, which is unlikely.


Vehicle sales fell to a 17.08 million units in February, down 2.4% y/y. The month had 24 selling days, the same as last year. Light truck sales had more than 66% of sales for the second consecutive month. Furthermore, incentive spending trailed year earlier levels for the first time in more than four years as automakers began to shift towards prioritizing profit margins. Incentive spending is likely to moderate from record levels in 2017. If vehicles get too heavily discounted, it can lead to swelling inventories and over-production, like in 2017. Tightening access to credit at the bottom of the customer lists and higher interest rates will be a headwind for sales going forward Higher incomes and low gas prices will help boost sales. Sales will track near 17 million for this year.


China’s manufacturing purchasing manager’s index fell to 50.3 in February from 51.3 in January, the biggest slump in five years. New export orders declined for a second month and the services index slipped to 54.4 from 55.3. February was the Lunar New Year and that may be a factor in the cooler reading. However, the weaker readings coincide with weaker flash gauges with China’s major trading partners in Europe and Japan. The Commerce Department said it imposed duties on aluminum foil from China, adding to trade tensions. The composite index fell to 52.9 from 54.6. Manufacturing output dropped to 50.7 from 53.5. The 44.8 reading for small business was the weakest in two years. The steel industry fell to 49.5 from 50.9.

Important Data Releases This Week

February ISM non-manufacturing index will be released on Monday, March 5 at 10:00 AM EST. The nonmanufacturing index is projected to inch up to 60.5 in February from 59.9 in January. Consumer confidence is strong and the tax legislation likely boosted sentiment. Housing data might slow the sentiment as housing weakened recently.


January factory orders will be released at Tuesday, March 6 at 10:00 AM EST. Factory orders increased 1.7% in December, but the latest advance durable goods release showed a 3.7% decline in January. We look for factory orders to fall 1.1% in total and the core capital goods orders to decline 0.5%.


January international trade will be released on Wednesday, March 7 at 8:30 AM EDT. The U.S. trade deficit widened more than expected in December, increasing to $53.1 billion from a revised $50.4 billion. We look for the deficit to widen further to $55.4 billion in January. Already released data showed goods exports falling 2.25 and imports 0.5%. The service sector won’t change those numbers much.


February employment will be released on Friday, March 9, at 8:30 AM EST. Our forecast projects employment will grow by 210,000 and average hourly earnings will rise 0.2%. The number of hours worked will bounce back to December levels.

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