Monday Morning Coffee: Economic Expansion Continues

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 ReviewEmerging markets extended their best week since October and metals advanced, supporting mining stocks. The MSCI Emerging Markets Index was set for a 6.1% advance for the week, while there was little change in the Stoxx Europe 600. Global equities have recouped more than half of the year’s losses after sinking to a two-and-half-year low. The Shanghai Composite rose 3.9% for the week as the Chinese government intervened before the meeting of the National People’s Congress over the weekend.

The Standard & Poor’s 500 Index jumped 2.7% last week, bringing its run over the past three weeks to 7.3%. A surge in hiring delivered a vote of confidence in the world’s largest economy, while oil’s rebound from a 12-year low eased deflation fears and recent actions in China added to optimism that the nation can tamp down volatility that roiled global markets. This was the third straight week that advances in the S&P that topped 1.5%, the longest stretch with gains that size since 2009.
Last week saw better than forecast data from manufacturing, construction spending and a solid job report that are removing fears of a recession. The surge in hiring is the best evidence that companies are looking past the turmoil in financial markets and weak global growth as the American consumer is sustaining the expansion. In a sign of stability, a barrel of West Texas Intermediate has climbed more than 30% since mid-February. U.S. production has slid for a sixth week and talks in OPEC about limiting production did accomplish one goal, it set a bottom for oil’s plunge and is lessening the volatility in the marketplace.

The latest data shows little evidence the expansion is in jeopardy. Vehicle sales remain strong, at 17.5 million in February and construction spending rose 1.5% in January, stronger than anyone expected. Manufacturing remains in a rut, but the ISM rose more than expected from 48.2 in January to 49.5 in February. Factory orders surprised on the upside, rising 1.6% in January, with a strong 4.7% rise in durable gods orders. Core capital goods orders rose 3.4%, suggesting that manufacturing is stabilizing. The weights on manufacturing still remain, but the worst may be over. The strongest report came in the employment numbers, where 242,000 were created in February and revisions to prior months were favorable.

In all, the outlook for the economy appears much brighter than a couple of weeks ago. Global stocks are on the mend, with the exception of China. The U.S. equity markets are making up for some lost ground. The pattern of fear, where global and domestic stocks, along with oil and industrial commodities were all crashing together, has been broken. Investors are focused on economic realities. There is still danger, but markets have settled down. The first quarter will come in weak, but part of the weakness can be attributed to inventories, which is a temporary weight. In fact, the economy is doing well enough that inflation may be wakening. The Fed may punt in March, but if the advance in core PCE continues, a June increase may be in the cards.

Next week is light on economic data. The NFIB small business survey will shed some light on sentiment. Confidence has weakened, but the settling down of the financial markets will stabilize spirits soon. Import prices probably declined 0.6%, on lower oil prices. The recent advance in oil prices, plus the tightening of the labor markets suggests that inflation may hit targets ahead of the Fed schedule. The Fed doesn’t have to be trigger-happy, but further moves this summer may be forthcoming.

Latest Data

The U.S. Economy:

Pending home sales declined 2.5% in January to 106, more than reversing the small gain in December and reaching the lowest level since January 2015. The index is now up only 1.4% for the year but still remains well above the bottom reached in the second half of 2010. The recovery in single-family home demand has been uneven over the past few years, but it remains well above the post-recession bottom in late 2010. An above normal percentage of homebuyers are using cash only to finance their purchases, a signal that sales among trade-up and trade-down homebuyers are a key source of demand. Advances in the labor market should help spur sales going forward.

Construction spending increased 1.5% in January, well above expectations, following a revised 0.6% climb in December. Public construction led the way, rising 4.5%. Private construction was positive, with a 0.5% increase. Total construction was up 10.4% year-over-year, up from 8.2% in December. Single-family construction was a disappointment, falling 0.2%, but was up 6.6% y/y. Spending on new multifamily homes rose 2.6% in January, but was up a strong 30.4% year-over-year. Public construction was boosted by a 14.75 jump in highway and street spending. Spending on nonresidential construction was up 1% m/m and up 11.5% y/y. Spending on commercial structures was the weak sector in private nonresidential construction, falling 4.8% in January. Spending on manufacturing facilities increased in January, but the revised number placed that sector below the November level. Spending on the residential and nonresidential sector will likely see a modest increase going forward. Public construction will continue to improve, but two states with a heavy dependence on energy will cut highway spending.

U.S. vehicle sales maintained a sturdy pace in February, driven in part by strong President’s Day incentives. Sales equaled an annual selling pace of 17.5 million units in February, the strongest second month reading in 15 years. The pace was just slightly below the January level of 17.6 million. All the gains over the past year have been in the light truck segment, thanks to low gasoline prices. Sales are still down from the over 18 million the market saw last fall. Sales are being fueled by healthy employment growth and rising wages, pent-up demand and attractive financing. The strength in sales lately is more impressive because of the decline in the equity markets, which normally depress sales. Once pent-up demand is released, sales will downshift to a more normal historical trend of between 16.0 million and 16.5 million.

The ISM manufacturing index increased from 48.2 to 49.5, suggesting that although manufacturing remains weak, perhaps the worst has passed. Detail improved in February. Although the index remains below the expansionary 50 mark for the fifth month, February marked the second increase in the index. Production increased from 50.2 to 52.8. New orders were unchanged at 51.5. 12 industries reported growth in new orders, led by textile mills and wood products. Backlogs improved by five and half points but remained below the fifty-mark. Employment rose from 45.9 to 48.5. Trade remained weak, with imports falling from 51 to 49 and exports falling from 47 to 46.5. Manufacturing is looking better but still remains below the expansionary 50 mark. The manufacturing sector still faces stiff headwinds including a weak global economy and a strong dollar and inventories in the fourth quarter were revised up by $13.1 billion, about $30 billion higher than a sustainable number. However, durable goods orders increased 4.9% in January and core capital goods orders were up 3.9%. Capital spending may have improved in January, but it isn’t booming. After the inventory problem is addressed, we look for a slightly better picture for manufacturing, but the trend will remain modest.

Factory orders posted broad gains in January but did fall short of expectations. Factory orders increased 1.6% in January, the first increase in three months. Durable goods orders were strong, rising 4.7%, the largest increase in about a year. Nondurable goods orders decreased 1.4%. Lower petroleum prices affected the nondurable goods sector. Core capital goods orders rose 3.4%. Within the details there was an enormous ump in new orders for mining, oil and gas manufacturing machinery, as it rose 365.7%, the largest jump since the inception of the series in 1992. However this is payback for a large drop in December and overall orders remains low. Inventories fell 0.4%, compared to a 0.2% average decline in the fourth quarter. Total shipments rose 0.3% in January. The report show stabilization in the manufacturing sector and may be pointing to better times. Combined with the ISM report, the worst of the manufacturing weakness may be behind us. However, orders are barely above shipments, suggesting that progress will be slow.

The ISM non-manufacturing index slipped slightly in February felling from 53.5 to 53.4, but it does remain supportive for growth. Details were mixed. The business activity index rose from 53.9 to 57.8. New orders fell from 56.5 to 55.5. Inventories were a point higher at 52.5 for the month. The index suggests that the first quarter will remain fairly weak. However, the economy is still expanding and the velocity will pick up a little when the manufacturing sector clears away the inventory pile-up. Mining is still declining, but healthcare is still hiring.

Payroll employment held up in February despite financial market weakness and challenges in the manufacturing sector. Payrolls increased by 242,000 in February and the figure for January was revised higher to 172,000. The unemployment rate was unchanged at 4.9%, as the labor participation rate increased by 0.2% to 62.9%. Private payrolls rose by 230,000 as gains in services outweighed losses in the goods producing area, which fell by 15,000. Healthcare rose by 57,000 and the losses in education in January were reversed. Leisure/hospitality and retail were strong. Temp-help and transportation/warehousing lost jobs, likely tied to the goods producing area. Average weekly hours dipped to 34.4 from 34.6 hours but average hourly earnings rose by 2.2%. The average weekly earnings increase was down slightly from the average of the last six months, but the direction remains intact. Employment growth should average above 200,000 for 2016.

The U.S. trade deficit increased by $1 billion in January to $45.7 billion. Weak foreign demand and the strong dollar continue to weigh on trade. Exports fell 2.1%, while imports decreased 1.3%. The export number was the weakest since February 2011. Shipments of capital goods, industrial supplies and consumer goods all decreased in January. Falling commodity prices and slowdown in major economies such as China and Brazil have slowed trade across the globe. Exports to Canada, China and Central America have hit multi-year lows, a result of the strong dollar. Downside risks for the global economy seem to predominate. A rash of low PMIs across the globe suggests little prospects of an upturn in the near-term. The emerging market slowdown could derail the entire global economy, but we think global GDP is still likely to hit 2.5%, about the same increase as last year.


China’s factory gauge extended its stretch of deteriorating conditions to the seventh straight month and the service index fell to the weakest level in seven years. The manufacturing PMI dropped to 49 in February, the weakest reading since January 2009. The Chinese New Year holiday had an effect on the manufacturing sector. Some plants stayed closed for longer than usual. The Caixin and Markit Economic manufacturing PMI fell to 48 in February from 48.4 in January. The service PMI fell to 52.7 from 53.5 in January. Measures of new orders, selling prices, employment backlogs and inventories were below the 50 mark. The central bank stepped up efforts to cushion demand by lowering reserve requirements for banks. However, the credit surge mainly benefits state owned companies. Private business is still suffering.

Euro-area cut prices at the fastest pace in almost three years, compounding an already worrisome inflation environment for the European Central Bank. The price gauge for the European PMI manufacturing index fell further below the 50 mark to the lowest reading since June 2013. The CPI for the euro-area fell 0.2% in February, the most in a year. The ECB policy makers meet this week to decide to increase their stimulus program.

China unveiled a record fiscal deficit and pledged to accelerate the re-structuring of its state-owned industries and set a weaker growth target this year. Premier Li Keqiang announced a 6.5% to 7.0% expansion goal, down from an objective 7% target last year. This was the first range offered for economic growth since 1995. The plan reflected the government’s determination to maintain growth and put of confronting its debt, now nearly 250% of gross domestic product. The slowest growth in 25 years has prompted officials to tweak monetary policy to “prudent with a slight easing bias” last month. The Finance Ministry said the fiscal deficit would increase to 3% of GDP from 2.3%. Money supply will rise by 13%, up from 12% in 2015. The deficit will be the highest since the founding of the People’s Republic of China in 1949.

Important Data Releases This Week

February NFIB Small Business Optimism survey will be released on Tuesday, March 8 at 6:00 AM EST. The tightening in the financial markets contributed to the January decline in the index, which fell from 95.2 to 93.9. The index may retreat a little in February, but stronger employment and other economic data should stabilize the index fairly soon.

February import prices will be released on Friday, March 11 at 8:30 AM EST. Import prices are projected to decline 0.6% in February, the eighth consecutive decline, but this may be among the smallest decline. Oil prices continued to fall until the middle of the month. Non-fuel prices likely fell 0.2%, also below trend.

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