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.
Global stocks fell a little on Friday, but still finished the week with gains. The Stoxx Europe 600 slid 0.5% on Friday, but was headed for a 4.7% gain for the week. It’s still down more than 10% for the year. Meantime, in the U.S., just when it looked like U.S. stocks were doomed to follow the world into a bear market, buyers lifted equities out of the deepest hole since 2014. The S & P index gained 2.8% for the week, for the strongest gain since November. The benchmark is still 10% below its May high.
Markets also saw a weakening in the lockstep moves that have paralyzed investors this year. Thirty-day correlations between the S & P and 10 other asset classes, including oil, whose sway on stock was invasive in January, have fallen for the last two weeks. Equity gauges were moving in tandem in early February, but are now seeking different directions. In addition, commodities were little changed last week after Saudi Arabia and Russia agreed Tuesday to freeze output at near record levels. The agreement did little to raise oil prices but did calm financial markets. If sustained, a turn in the markets could help reduce global recession fears.
It was a decent week for economic data. Industrial production surprised on the upside, rising 0.9%, driven largely by a weather-induced jump in utility output. Manufacturing was decent, rising 0.5%, with a decent advance in both auto and non-auto output. That doesn’t escape the fact that the manufacturing sector continues to struggle and is unlikely to turn upwards with much strength until the inventory correction is completed. Consumer prices were weak in total, but the core CPI jumped 0.3% in January, the most in four years. This probably means the Fed won’t move in March, but strengthens the hand for a June lift. Housing starts disappointed in January, falling 3.8% m/m. Housing hasn’t moved much for the last six months. Although fundamentals are improving, activity is slow to gain ground.
Next week, economic activity should be okay, but won’t sooth concerns about the durability of the expansion. Financial markets will need more than one-week to settle down talk of a recession. GDP will probably be revised down, but the composition of the report will suggest a better Q1. Durable goods orders will look better after a horrible December. Consumer spending and incomes will be fairly solid, but housing has softened lately. Both existing home and new-home sales probably fell in January.
The interplay between financial markets, the Fed and the real economy will decide how the economy fares this year. Markets are starting to stabilize after a steep correction. The Fed probably won’t move in March, but the rise in core CPI strengthens the hand for further increases, starting in June. If the markets start to tighten again, confidence may start to fray. How the consumer reacts will be pivotal on whether the economy heads back to its 2% recent trend growth, or falters in near-recession conditions. Confidence is the key. In 2007, confidence signaled the country was headed for recession. In 2009, confidence fell, but growth only moderated. We are optimistic that the same will occur this time around.
The U.S. Economy:
Despite a setback, overall builder sentiment is still indicative of steady growth for housing. The NAHB index of builder confidence fell to 58 in February from 61 in January. Also, the index is slightly below the six-month average of 61. Homebuilders are less optimistic about housing market conditions than they were last month, but still holds at a level consistent with an industry poised to make modest gains in 2016. The fundamentals for housing are solid, with healthy employment and slowly rising wage gains. 30-year fixed mortgage rates are at the lowest level since April 2015. New home sales rose an impressive 10.8% in December and the inventory-to-sales ratio at 5.2 months bodes well for housing. A ratio below 6 months suggests that builders need to accelerate building activity. Weather can play a different tune in some years, but the spring should bring a greater surge in building activity.
The PPI for final demand increased 0.1% in January, higher than expected. This was only the second monthly increase in six months. Goods prices fell 0.7%, while services rose 0.5%. The outlook for inflation is subdued. Oil seems to be finding a bottom. A very tentative turn in the global financial markets also suggests most industrial commodities are searching for a floor. If markets start to stabilize, then goods prices may start to turn slightly upwards. Service inflation remains alive. Inflation will be weak in 2016, but could start to accelerate in 2017, if these new trend hold the course.
Housing construction was weak in January. Housing starts fell 3.8% from December, but remained 1.8% above year earlier levels. Starts equaled an annual rate of 1.099 million in January, following a revised 1.143 million units in December. Both single-family and multi-family starts decreased in January. Single-family starts fell 3.9% from December, but were still up 3.5% from a year earlier. Multi-family starts fell 3.7%, down 1.6% y/y. Housing permits came in at 1.202 million, down 0.2% from December. The decline was led by single-family permits, which fell 1.6%, but were up 9.6% y/y. Although housing activity has only seen a slight decline over the past two months, residential construction has still trended up over the past five years. However, construction has been flat for the last six months. Housing may be running into supply constraints. The inventory of housing units authorized but not started has climbed nearly 60% since early-2013. Fundamentals suggest that the current slowdown is temporary and the increases in employment and wages will give some push to housing in coming months.
Industrial production increased 0.9% in January, much stronger than expected. However, December’s growth was revised down to -0.7%. Manufacturing increased 0.5%, with motor vehicles and parts output rising 2.8% and non-auto production increasing 0.3%. Utility output increased 5.4%, the biggest monthly jump since the series began in 1973. Mining was unchanged in January, following four months of declines. The report suggests that manufacturing may be stabilizing. However, a quick turnaround is unlikely. The trend in manufacturing remains soft, up only 0.2% annualized over the last three months. Excluding autos, the trend is firmer, up 0.5% over the past three months. Manufacturing still has to contend with the strong dollar and weak global growth, as well as weak energy investment. In addition, inventories remain excessive. Once the inventory cycle is completed, manufacturing may turn upwards. The consumer is spending more and fundamentals for domestic consumption are solid. However, manufacturing activity in the first half of this year is still likely to be restrained.
The CPI was unchanged in January, up 1.4% from a year earlier. The core CPI climbed 0.3% in January, following a 0.2% gain in December. A tightening labor market and slightly better wage gains bodes well for inflation. That is, if energy costs stabilize. Inflation is starting to make actual progress to the Fed’s target and interest rate increases, although unlikely in March, may continue in June. Still, goods will exert downward pressure on inflation for this year, while service inflation firms up.
Japan’s economy contracted in the final three months of 2015, as the nation struggles to break free of a weak growth pattern after three years of the Abenomics program. Real GDP shrank 1.4% in the final quarter, following a 1.3% gain in the third quarter. Weakness in private consumption was the biggest contributor to a negative fourth quarter, falling 0.8%. Business spending rose 1.4% in Q4. Since the beginning of the year, the yen has appreciated 5.6% against the dollar, hurting exporters and eroding some of the benefits from monetary policy. Japan has introduced negative rates this year in an attempt to jump-start the economy.
China is stepping up support for the economy by ramping up spending and is considering new measures to boost bank lending. The nation’s chief planning agency is making more money available to local governments to fund new infrastructure projects. Meantime, China is discussing lowering the ratio of provisions that banks must set aside for bad loans. Bank loaning surged in January, suggesting that the six interest rate cuts China made recently are starting to flow through. This suggests that the nation’s state banks will open up the credit spigot, at the same time authorities promise to rein in the nation’s growing debt pile. The National Development and Reform Commission plans to offer over 400 billion yuan each quarter for infrastructure development, twice last year’s spending.
Important Data Releases This Week
The February Conference Board’s index of consumer confidence will be released on Tuesday, February 23 at 10:00 AM EST. The index probably declined from 98.1 in January to 97.1. This would come on the heels of two consecutive monthly gains. We think the turmoil in the financial markets and the weaker employment report will influence confidence. Lower energy costs will limit the decline.
January existing home sales will be released on Tuesday, February 23 at 10:00 AM EST. Existing homes sales are forecast to drop from 5.46 million annualized units to 5.34 million. This will reverse some of the big 14.7% increase in December, which was a payback for the TRID-related decline in November. Weather was not favorable in January.
January new home sales will be released on Wednesday, February 24 at 10:00 AM EST. New homes sales are forecast to drop from 544,000 annualized units to 520,000. This will reverse some of the 53,000 unit increase in December. New home sales are choppy from month-to-month and subject to large revisions.
January durable goods will be released on Thursday, February 25 at 8:30 AM EST. Durable goods have nowhere to go but up. Orders dropped 5.1% in December, as the volatile nondefense and defense aircraft orders fell 29.4% and 69.1%, respectively. Weakness was visible elsewhere and orders are below shipments, a bad sign for capital goods investment. The headline will probably rise 0.5%, but the details will remain weak.
2015-Q4 second GDP estimate will be released on Friday, February 26 at 8:30 AM EST. We look for real GDP to be revised down from 0.7% to 0.5%. The bulk of the revision will be in inventories. A smaller build bodes well for the first quarter. Inventories will also continue to weigh on the first quarter.
January personal income and spending will be released on Friday, February 26 at 8:30 AM EST. Personal income is projected to have increased 0.4% in January, slightly better than the 0.3% advance the previous two months. There won’t be a cost of living adjustment, only the third time in 40 years there hasn’t been a COLA adjustment. Spending will be strong, based on the jump in utility usage. The PCE deflator will be unchanged, but the core will have increased 0.2%, bringing year-over-year growth up from 1.4% to 1.6%.