Monday Morning Coffee: Economic Review

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 ReviewInvestors expecting the American economy to jolt equities out of their 2016 funk did not see their wishes fulfilled last week. Fresh signs of sluggishness sparked a selloff in technology and hit high-end consumers. The Nasdaq 100 Index plunged 6% for the week, with declines sparked by a mixed labor report. The S&P 500 has lost 8% in 2016, as investors fled risker assets amid concern about China’s weakness and a rout in oil is slowing the U.S. economy. Concern that the U.S. is vulnerable to global headwinds has dominated global markets last week, fueling a retreat in the dollar and pushing futures traders to price in no further Fed moves this year. Oil prices are still calling the shots in global market direction. While a weaker dollar makes commodities more appealing in other currencies, oil still lost ground as U.S. inventories rose to a record.

Employment growth was slightly disappointing in January, adding only 151,000 jobs. This weakness coincides with other data, such as recent industrial reports, that suggest the economy is weakening. Factory orders fell 2.9% in December and core capital goods orders dropped 4.3%, suggesting the industrial sector is in recession. Normally, this would slow down the Fed. However, there was just enough data in the labor report to keep Fed actions on the table this year. The unemployment rate fell to 4.9% and average wages perked up to a 2.5% advance. In addition, the participation rate picked up to 62.7% in January from 62.6% in December. Despite the losses in the equity markets and industrial weakness, there is enough positive employment sector news to keep rate increases in the ball-game.

The January employment report showed little evidence that financial market conditions have significantly slowed the labor markets, yet. Employment in the financial activities sector rose in January and gains were broad-based. This doesn’t mean the economy is immune to a large equity market downturn. A weaker stock market, low oil prices and higher mortgage rates will slow growth. However, the hit is only a few tenths of GDP, not enough to throw the country into recession.

Confidence is one channel that tightening financial markets can affect the economy. This week will bring up data on the NFIB survey and the University of Michigan’s consumer confidence survey. Retail sales probably fell 0.1%, suggesting spending got off on a slow start this year. Import prices likely fell 1.1% in January and we expect another decline in non-fuel prices. Falling import prices have been a deflationary force and will continue to slow inflation’s move towards the Fed’s 2% target. Finally next week, we expect a modest gain in inventories, but the new data will have fourth quarter implications. Also, Fed Chair Janet Yellen will testify and likely mirror those viewpoints of Stanley Fischer and Willian Dudley, which suggest the odds of a March rate hike, have diminished.

Financial markets are fragile and the employment report didn’t have enough firepower to impress markets. Since the 1970s, the S&P 500 has fallen every year when the U.S. has been in recession or the Fed has been tightening monetary policy. So far, the economy is not showing signs of recession, except in the industrial sector. In addition, equity markets are frequently out of touch with the “real” economy. So far, the losses in equity markets will reduce GDP growth by roughly a quarter of a percent in the first half of this year. If we are tracking in the 1.8% to 2.1% range, this is not a problem. At 1%, which is the current quarter’s pace so far, the economy remains vulnerable to any outside shock. However, real final demand is much stronger than 1%. Markets will have to remain depressed for a prolonged period before they would damage the recovery. This suggests that downside risks exist, but the most likely path for the U.S. economy is a continuation of the slow speed we’ve seen for quite a few years.

Latest Data

The U.S. Economy:

Personal income increased 0.3% in December, following a 0.4% advance in November. Personal spending increased 0.1%, following a 0.4% jump in November. Service spending grew 0.3%, while goods spending fell 0.7%. Prices provided a little lift, with the GDP deflator falling 0.1%. With December in the books, personal income had the best year since 2012. However, it is falling short of past expansions, but the direction is good news. In terms of spending, consumption has slowed a little, but remains healthy. Utility and energy has a lot to do with lower consumption. The deflator suggests weak inflation that consistently undershoots the Fed target. A lot to do with that is oil. A bottoming out of oil prices is good news for stability, but there is little to drive prices upwards, near-term.

Construction spending increased a disappointing 0.1% in December, despite a strong pickup in public spending. Private residential construction equaled $430 billion annualized rate, down 0.6% from November, but up 9.9% from a year earlier. Private nonresidential construction equaled $394 billion, down 2.1% m/m, but up 11.8% y/y. Looking at the components for nonresidential construction, the weakness was widespread. Spending on manufacturing facilities, the largest component, fell 7.3% m/m, but remains up 19.4% from a year earlier. Public construction equaled $293 billion, up 1.9% from November and up 3.9% y/y. In terms of the year, manufacturing structures spending increased 44.7% in 2015, while spending on utilities fell 14.4%. Public construction has been strong the last few months. Spending on educational structures has strengthened notably. State governments are in better shape financially.

The ISM manufacturing index increased to 48.2 in January from 48 in December. The index has been below the expansionary 50 mark for four consecutive months. The details showed a slight improvement. Production rose to 50.2 from 49.9. New orders increased to 51.5 from 48.8. Eight industries reported growth and among them were wood and wood products, furniture and related products and electrical equipment. The inventory index was unchanged at 43.5, the seventh consecutive month the index has been below 50. The difference between new orders and inventories widened to 4.7 in January from 4.5 in December. This doesn’t point to a significant improvement in manufacturing. The pipeline isn’t filling quickly. Backlogs rose by 2 points to 43, but remains well below the 50 mark. New export orders fell 4 points to 47.5. Import orders did improve from 45.5 to 51 in January. Employment dropped from 48 in December to 45.9 in January, not boding well for factory employment in the near-term. Prices were unchanged at 33.5. No commodities were in short supply. Based on data going back to 1990, Moody’s placed manufacturing data in four phases. They are recession, early, middle and late-expansion periods. The present one fits the late-expansion phase. Some data is flashing a manufacturing recession. The I/S ratio has steadily climbed suggesting the inventory correction has more time to run. The weakness abroad, the appreciation of the dollar, low energy prices and inventories are weighing on manufacturing. There is bad news in energy, but manufacturers in computer/electronics, transportation equipment, primary metals and miscellaneous manufacturing are more upbeat.

Vehicle sales improved to an annual rate of 17.6 million units in January, up from 17.3 million in December. The result exceeded expectations because a severe winter storm hit the East Coast last month and slowed buyer traffic. Light trucks led the January increase, rising to 10.1 million units SAAR. The import share fell to 19.1% in January from the 19.8% average in 2015. Much of the health in vhicle sales is coming from light trucks produced in North America. Sales are holding up despite the financial turmoil that hit in January. Low gas prices, rising incomes and jobs, access to credit and consumer confidence are drivers of vehicle demand. Other than equities, consumer fundamentals are good and sales should track from the 17.3 million pace last year to 17.6 million in 2016.

The ISM non-manufacturing index fell more than expected in January, dropping from 55.8 to 53.5. This places the index below its fourth quarter average of 56.9. Details were soft. The business activity index fell from 59.5 to 53.9, while new orders, employment and inventories all fell. The index has been running hot for most of 2015. Although the index remains in healthy territory, a weakening of the service economy is of concern. The non-manufacturing component accounts for 88% of GDP. With manufacturing in a weak state and near contraction, a weakening of the rest of the economy would be of concern to the Federal Reserve. Conditions should improve over the course of the year, if financial markets settle down and employment growth remains healthy.

Factory orders fell 2.9% in December, the fourth decline in the last five months. Durable goods orders fell 5% and nondurable goods orders fell 0.8%. Nondefense capital goods orders excluding aircraft declined 4.3%. Factory shipments fell 1.4% in December, the sixth consecutive monthly decline. Inventories rose 0.2%, the first increase since June. Unfilled orders fell 0.5%, down 1.9% year-over-year. The factory orders report was disappointing across multiple industries. New orders fell the most in 12 months, in part because of defense orders and were down 3.9% year-over-year. Excluding the volatile defense and aircraft sector, there was still a sizable decrease in capital goods. The strong dollar, plus weak global growth are hurting the manufacturing sector. With 2015 in the books, there were declines in shipments, orders unfilled orders and inventories and the contraction was the first annual decline since 2009. The contraction in unfilled orders suggests that manufacturers are filling out backlogs and the small increase in inventories suggest producers are operating above demand. The near-term outlook for the factory sector does not look good.

Payroll employment gains were somewhat disappointing in January. There were 151,000 jobs added in the first month of the year. Benchmark revisions reduced December’s addition down by 30,000 to 262,000, which is still good. November’s gain was revised up by 28,000 to 280,000. Some of January’s weakness can be attributed to December, where construction was unusually strong rising by 48,000. That came down to 18,000 in January. Manufacturing added 29,000 in January, despite the weakness in that sector. Two industries where the December strength were couriers and temp-help, both which were boosted by the holidays in December. While declining temp-help could have ominous implications, these two industries, plus construction reduced payrolls by 45,000. In service industries, retail trade was high adding 58,000 in January after being flat in December. Healthcare was stable, but government payrolls declined by 7,000. Average hourly earnings increased by 0.5% m/m, up 2.5% year-over-year. The unemployment rate edged down to 4.9%, even as the labor participation rate increased to 62.7%.

The trade deficit widened to $43.4 billion in December from $42.2 billion in November. Total exports decreased 0.3%, driven by widespread declines. Automotive exports fell 4.4%, followed by food and beverages, which both fell 3.6%. Imports increased 0.3%. A 3.4% rise in automotive imports was the largest factor in the December increase, while industrial materials gained 1.4%. Total petroleum imports rose sharply, increasing 18.1% to 309 million barrels. The trade deficit has had little velocity over the last few months and December was no exception. Overseas demand remains weak and the strong U.S. dollar is hurting exports. At the same time, the strong dollar and low oil prices are hurting imports. The U.S. economy is likely to resist the impact of global weakness and keep expanding in 2016. This will drive import demand upwards. The U.S. economy and the slow advance in Europe will help the global economy start to strengthen as time passes. Eventually, global prospects will gain enough velocity that the dollar rebalances against other major currencies. Prospects for trade will look brighter in 2017-18.

International:

Euro-area unemployment decreased to a five-year low, a piece of good news as the European Central bank considers increasing its monetary stimulus next month. The region’s jobless rate decreased to 10.4% from 10.5% in November. That’s the lowest since 2011. Central bankers around the world are reaching to try and add stimulus in response to an emerging world slowdown and commodity slump. Mario Draghi said in January that the Governing Council will review its stimulus policies in March as collapsing oil prices risk pushing the region’s inflation rate back to zero.

China set a range for its economic growth target for the first time in two decades, saying the world’s second-largest economy would expand 6.5% to 7% this year. While downward pressure is “relatively big” in the first quarter, China can meet the goal, National Development and Reform Commission Xu Shaoshi said recently. The country also plans to take steps to curb excess industrial capacity and deal with “zombie companies.” The new goal comes at a precarious time, as policy makers battle the slowest growth in 25 years, the yuan dropping to a five-year low and the second bear market in stocks in less than a year. China’s capital outflows jumped to $1 trillion last year.

The euro-area’s combined PMI declined to 53.6 in January from 54.3 in December and the measure for prices dropped to the lowest since March. The PMI, compiled by Markit Economics, said there was some “mildly positive signs, with rising levels of employment and backlogs of work. The PI is still well above the 50 mark, signifying expansion. The PMI points to divergence in the euro-area, with Spain and Germany leading growth. France’s PMI was just 50.2.

China’s manufacturing PMI fell to a three-year low in January of 49.4. The private manufacturing PMI edged up to 48.4 in January from 48.2 in December. In the private index, there was a hint of good news as new orders increased from December to the highest level since June. The non-manufacturing PMI fell from 54.4 in December, a 16-month high to 53.5 last month. The economy is showing signs of bottoming out and efforts to trim excess capacity are starting to show results. The pressure on economic growth remains intense in light of continued global volatility.

Important Data Releases This Week

January NFIB survey will be released on Tuesday, February 9 at 6:00 AM EST. The NFIB survey inched higher in December, but a true test of confidence comes in January. Expectations about the economy have declined, suggesting that the index will retreat slightly in January.

January import prices will be released on Friday, February 12 at 8:30 AM EST. Import prices probably fell 1.1% in January. Lower oil prices will be a drag, but nonfuel prices also tracked down last month.

January retail sales will be released on Friday, February 12 at 8:30 AM EST. Retail sales probably fell 0.1% in January. Sales at gas stations will be a drag. Weather will have mixed implications. Temperatures were normal, which is good for utilities, but the East Coast storm prevented some spending.

February University of Michigan’s consumer confidence survey will be released on Friday February 12 at 8:30 AM EST. The volatility of the equity markets will keep consumer confidence in check. We look for the index to fall to 90 from 92 in January.


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