Monday Morning Coffee: Economic Picture is a Little Brighter


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.

Overview

Coffee and Economic ReviewGlobal markets rallied around the world and oil gained along with industrial metals. Shares in Europe were heading Friday for their second weekly advance. So far in February, the Stoxx Europe 600 Index trimmed this year’s decline to 9.2% from over 10% earlier this month. The MCSI Emerging Markets Index ended the week up 0.3%. The Shanghai Composite Index trimmed its first weekly retreat this month to 3.3%. In a new found resilience, stock markets in the U.S. and Europe have shrugged off the 6.4% selloff in Chinese stocks. Over most of January and February, a loss in China would have dragged down the global indexes. The buoyancy suggests that investors aren’t as worried about a global decline or that the aging U.S. recovery is going to decline.

In the U.S., the Standard & Poor’s 500 Index jumped 1.6% on Friday to cap the biggest two-week surge in a year. The S&P jumped 4.5% over the last two weeks, erasing its decline for February. Equites are shaking off renewed turmoil in China, a frequent reason for selling so far this year. Some positive economic news may have helped. The durable goods report was favorable for manufacturing and the GDP report for the fourth quarter was revised up, albeit the report was less favorable for growth for the first quarter. Data from the U.S. has not been robust, but it does suggest the U.S. economy is doing okay.

Data last week was mixed. The Chicago Fed National Activity Index improved in January, showing that economic activity picked up despite financial market turmoil. Consumer prices were unchanged, but the core CPI rose 0.3%, the biggest gain since August 2011. This may confound the Fed’s tactics, who may be seeing inflation ignite, as certain sectors of the U.S. economy, like trade and manufacturing, are weak. There was good news for manufacturing, as durable goods orders rose 4.9% in January, with the core capital goods orders also increasing 3.9%. On trend, manufacturing is still weak, but the report does suggest that manufacturing still has signs of life.

The BEA revised the fourth quarter GDP growth rate from 0.7% to 1.0%. The composition for the first quarter was not good, as most of the revision came from higher inventories. The annualized fourth quarter inventory build was $13.1 billion higher than in the government’s first GDP estimate. This will slow production in the first and perhaps the second quarter. The good news of the week is that personal spending increased 0.4% in January, up from 0.2% in December. Most of the increase was on utilities, but future spending will be supported by the 0.5% jump in personal income. Price was not an issue, as the PCE only increased 0.1%.

In all, the economic picture is a little brighter. The consumer remains solid, boosted by rising incomes and healthy employment growth. Manufacturing may be bottoming out, but there are still stiff headwinds from the global economy and the strong dollar. Trade is weak. In balance, the pluses are outnumbering the negative factors. Fed policy may be an issue as the central bank must weigh the reports showing that inflation is picking up versus weakness in certain other sectors of the economy. They must also account for the reactions of the financial markets and the impact on the greater macro-economy. The U.S. economy remains on a slow pace, but it still is far from recession at the moment. However, another steep equity market downturn could hurt confidence and undermine the recovery.

Next week, the incoming data will show the job market continues to bloom as we look for a 210,000 increase in nonfarm payrolls and a continuation of the 4.9% unemployment rate. We expect the manufacturing ISM to say below the 50 mark, while the non-manufacturing index comes in at 53.8 Housing data should show some improvement, with construction spending and pending-home sales eking out small gains. Vehicle sales probably crept higher to 17.7 million units.

Latest Data

The U.S. Economy:

New home sales dropped a significant 9.2% in January to an annualized pace of 494,000. Sales were down 5.2% from a year earlier. New homes sales fell despite a fall in the house price for the second consecutive month. The market loosened perceptibly in January. New homes for sale came in at 238,000, up 2.1% from December and 14.4% from January 2015. The inventory-to-sales ratio was 5.8 months, up 0.7 from December and up a full month from a year earlier. The decline suggests that new single-family construction will be restrained in coming months. There has been a loss of steam in the single-family market since last summer and this pattern may linger for several more months.

Consumer prices remained unchanged in January, following a 0.1% decline in December. The core CPI rose 0.3%, the largest monthly gain since August 2011. This surge in inflation may not stick, but if a pattern emerges, the Fed may have to move quicker than currently projected. Within core, apparel prices rose 0.6%, the first increase since August and airfares increased 1.2%. Airfares are volatile. Rents rose 0.3%, up 3.7% y/y. The energy CPI fell 1.2% and food was unchanged. The increase in the dollar is restraining inflation. The roughly 20% rise in the dollar shaves about 0.4% off of year-over-year growth in the PCE deflator, the Fed’s favorite inflation measurement. The difference between the present PCE and the Fed’s target can be attributed to the rise in the dollar. Service inflation will heat up this year, as wages rise, rents increase and medical costs increase. However, goods prices will keep inflation restrained to below the Fed target.

Despite the tightening in financial markets, U.S. economic activity improved in January. The Chicago Fed National Activity Index increased to 0.28 from -0.34 in December. Production-related indicators went from being a drag to a positive contributor during the month. Employment-related indicators were the other major positive contributor during the month. The personal consumption and housing variables were unchanged. The 3-month moving average rose to -0.15 in January from -0.3 in December, indicating growth was still below its historical trend and that inflation is likely to be restrained in coming months. The index could suggest that the real economy is still fairly solid and the decline in the markets hasn’t impacted the real economy significantly.

New orders for durable goods rose 4.9% in January,, following a 4.6% decline in December. Strength in the volatile aircraft and defense segments lifted the headline figure higher. Core capital goods orders increased 3.9%, following a 3.7% decline the month before. Durable inventories fell 0.1%. Core capital goods shipments fell 0.4% and December’s figure was revised to -0.9%. Electrical equipment orders rose 1.1% in January, after a 2.9% increase in December. Primary metal orders increased 0.7%. Machinery orders increased 6.9%, after a 4.1% drop in December. January’s report marked some improvement from December, but won’t significantly boost first quarter growth. Factories are facing the same headwinds they encountered in 2015. The strong dollar and weak global growth is hurting exports. Inventories are a weight on production. There has been some advancement in inventories, but there still is ground to cover. Final demand is still improving, a factor that may help the factory sector keep out of recession.

The advance release of trade data was not favorable. U.S. trade deficit widened to $62.2 billion in January, up from $61.5 billion in December. Exports fell 2.9%. Weakness was widespread, with declines in all categories. Food-feed-beverages dropped the most, by 4.8%. Industrial supplies decreased 3%, followed by capital goods at 2.3%. Imports declined 1.5%, led by a 6.6% decrease in industrial supplies and a 2.4^ in capital goods imports. The report suggests that trade will remain a drag on the U.S. economy for the near future. The strong dollar is hurting exports. Weakness in emerging markets is compounding the problem. The fall in imports is also concerning. Total imports have fallen nearly 6% from a year earlier. The decline is almost entirely driven by a drop in industrial goods imports, a result of low energy prices. Considering the strength of the dollar, the decline illustrates a deeper problem. The decline in capital goods is likely due to concerns about the global marketplace and a possible spillover to the U.S. economy. The only bright spot is consumer goods, where imports have increased over the past year. The outlook for trade in the near term is not very optimistic.

Real GDP grew 1.0% in the final quarter, according to the BEA’s second estimate. Although growth was a little stronger than the original 0.7% estimate, the composition was not favorable for growth in the first quarter because of revised higher inventories. Growth in final sales remained unchanged at 1.2%. Inventories reduced growth by 1.4 percentage points in the fourth quarter. Trade was also a negative factor. Consumer spending added 1.4 percentage points to growth. Fixed investment was a slight drag as the contribution from the residential side was overwhelmed by a slide in the nonresidential sector. The outlook for the economy remains positive. There is weakness in trade and manufacturing and inventories are holding back production. On the other hand, the consumer is strong, boosted by healthy employment growth. The turmoil in the financial markets has done some damage to the economy, but the country remains far from recession. The economy should track just slightly below 2% in 2016.

Personal income was solid in January, rising 0.5%, following three months of 0.3% growth. Year-over-year growth increased to 4.3%, up from 4.0% in December. Incomes are beginning to show strength, but still lag below the 4.8% numbers we saw in year-over-year growth before the Great Recession. Personal spending grew 0.4% in January, driven by surging utility spending during the month. Prices were not a problem as the PCE only increased 0.1%. The PCE was up 1.3% from a year earlier and the core PCE was up 1.7%, getting closer to the Fed target of 2%. The outlook for the consumer looks solid, with healthy wage gains and a willingness to spend. The rise in the PCE will test the Fed. How to deal with a still fragile economy and shaky financial markets, while signs of service inflation are starting to ignite will be a test for Fed policy this year.

International:

The German economy took a hit from weak global demand, with a manufacturing gauge dropping to a 15-month low. The Markit Economics PMI fell to 50.2 in February from 52.3 in January. The services gauge improved slightly, but the composite measure was the lowest since July. While Germany weathered global headwinds throughout 2015, maintaining its rate of expansion in the fourth quarter, business confidence has softened lately. China’s slowdown is weighing on exports, while the equity sell-off threatens the fragile recovery in the euro-area, the country’s largest trading partner. The PMI for the euro-area slipped to 52.7 in February, the lowest in a year, from 53.6 in January. Markit said that euro-area growth may slip from the fourth quarter’s 0.3% rate in Q1.

German business confidence softened in February. The Ifo institute’s business climate index declined to 105.7 in February from 107.3 in January. The current situation index improved to 112.9 from 112.5, but the expectations component dropped to 98.8 from 102.3. German exports fell 0.6% in the final quarter of 2015, but capital investment rose 1.5% and government spending climbed 1%, leaving the GDP growth intact at 0.3%.

Important Data Releases This Week

January pending home sales will be released on Monday, February 29 at 10:00 AM EST. Pending homes sales are forecast to increase 0.4% in January, following the 0.1% increase in December. A dip in the 30-year mortgage rates probably helped boost sales.

February ISM manufacturing index will be released on Tuesday, March 1 at 10:00 AM EST. We look for a small improvement in the manufacturing ISM, rising from 48.2 to 48.8. This would still be the fifth month below the expansionary 50 mark. Manufacturing still has troubles, but that doesn’t mean the entire economy is in recession. The ISM has to be below 43.2 to be consistent with a decline in the broader economy. New orders rose last month to above the 50 mark. Whenever the inventory problem is adjusted to a more normal I/S ratio, we expect the manufacturing ISM to break into the low 50s.

February vehicle will be released on Tuesday, March 1 at 4:00 PM EST. Vehicle sales likely crept higher to 17.7 million units. This would be the best February since 2000, but sales are still down a bit from the fourth quarter average of 17.9 million.

February ISM non-manufacturing index will be released on Thursday, March 3 at 10:00 AM EST. Despite the small improvement, the index would still be tracking below the levels seen in the second half of last year. Financial market conditions have weakened the index, but is still remains well into an expansionary mode.

February employment will be released on Friday, March 4 at 8:30 AM EST. Employment will gain about 210,000 in February, a pickup from the January report of 151,000. Cold weather hindered employment in January, so a little rebound is expected. The unemployment rate will remain unchanged at 4.9%.


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