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 ReviewGlobal equities showed signs of respite after a turbulent week with European stocks advancing on Friday and oil rising from a 12-year low. The Stoxx Europe 600 rallied from its lowest close since September 2013 following a selloff that sent most global stocks into a bear market. The MSCI Emerging market index fell 0.5% in Friday extending the week’s decline to 4%. China’s markets were largely closed last week for the New Year holiday.

U.S. stocks halted a five-day slide and oil rebounded to the biggest jump in seven years. The S&P 500 rally on Friday trimmed the loss for the week to less than 1% amid data showing higher retail sales. Bank stocks rallied on Friday after Commerzbank AG’s results helped European equities rebound from low levels. U.S. banks also saw a Friday turnaround on greater confidence after a week of turbulence.

Investors spent the first four days selling risker assets amid growing concerns that central-bank policy effects were losing their stimulative effects. Federal Reserve Chair Janet Yellen signaled that financial market volatility could delay rate increases as the central bank assesses the impact of the recent turmoil on domestic growth. Data Friday was brighter, when retail sales came in at 0.2% better than expected and December’s result was revised upwards. Confidence dipped lower as the University of Michigan’s index slipped slightly and the NFIB index took a step backwards. The downturn in the financial markets is showing up in confidence indexes, but not yet in spending habits or in the labor markets. This suggests only slight damage to the macro-economy if markets start to stabilize.

There is a definite divergence between what the markets are saying and the macro-economy. The talk is increasingly ominous from the market viewpoint suggesting that troubled markets are signaling, or may even precipitate a recession. Data from the real economy is more positive, with the exception of the industrial sector, trade and energy components. Equity markets can be a useful barometer of the economy as they do affect real output and spending through the wealth effect. Some financial components are flashing red, but a broader view reveals that a lot of components are not. So far, the incoming economic data suggests that the risk of recession is still relatively low. However, recession risks do increase if the markets continue to tumble. If they stabilize fairly soon, the damage to the macro-economy will remain relatively small.

The economy remains well above recession levels. The financial market tumble has probably reduced growth from slightly over 2% to slightly below that mark. The danger of downside risks mainly come from continuation of a market slide. Past history shows if the S&P goes into a bear market, the odds of a recession following are uncomfortably high. However, if markets stabilize, the probability is that we will continue on the recent trend of growth of near 2%. We are not yet, at a “cross-roads” but we are getting fairly close. The odds still favor the optimists, but the hour of pessimism could be close.

Next week we expect economic data to be decent, but mixed. Inflation will remain low. Housing starts should rise modestly. Industrial production will likely bounce back, but manufacturing will remain barely positive. The Fed will wait for more data and skip raising rates in March. They will be watching financial market developments closely both here and abroad and also keeping an eye on China.

Latest Data

The U.S. Economy:

The tightening of financial markets is hurting business sentiment. The NFIB Small Business Optimism index fell from 95.2 in December to 93.9 in January. This was the second decline in three months and puts the index at the lowest level since early-2014. The details were not overly impressive. The net percent of firms that plan on expanding employment fell from 15% to 11%. However many companies still grumble about finding qualified workers. A net 15% said they plan on raising compensation this year, down from 21% in December. Expectations for the economy to improve remain weak, from -15% to -21% in January. It appears that the tightening financial market conditions are hurting confidence. It appears that employment prospects are weakening. The Fed’s move to tighten is hurting stocks, along with weakness abroad and low oil prices. The expansion may not be in jeopardy, but downside risks have increased.

Retail sales rose 0.2% in January, suggesting consumer spending might not be as weak as many analysts thought. In addition, sales were revised in December to a 0.2% increase. Excluding autos, sales were up just 0.1% in January and excluding autos and gas, sales were up a more positive 0.4%. January growth was led by non-store retailers, general merchandise stores excluding department stores, grocery stores, building supply stores and auto dealers. Year-over-year sales increased to 3.4% from 2.4% in December. Despite the January increase in spending, sales are only 0.6% higher than in July. Most of the weakness can be blamed on lower prices. Prospects are for a modest improvement. Consumer fundamentals are still healthy, with the exception of the financial markets. Job gains are enough to tighten labor markets, which will lead to stronger wage gains. Confidence is holding steady, suggesting that the market downturn has not yet, affected consumer habits.

Business inventories increased 0.1% in December, following a 0.1% decline in November. Motor parts and vehicle inventories rose 0.9%. Business sales fell 0.6%, with not category showing an improvement. Total sales are down 2.7% from a year earlier. However, inventories are up 1.7%. The I/S ratio moved up to 1.39 months. The manufacturing I/S increased to 1.39 months in December from 1.38 in November. The wholesale I/S was unchanged at 1.32 months n December and the retail I/S ratio increased to 1.49 months from 1.48. Inventories remain a problem, but part of the story is declining sales. The I/S ratio needs to come down, but stronger sales would fix the problem much quicker than slowing production.

The University of Michigan’s index of consumer sentiment fell to 90.7 in February from 92 in January. Both major components fell in February. The expectations index retreated to 81 from 82.7 in January and the present situation index fell to 105.8 from 106.4. Market volatility and weak international news continue to weigh in on sentiment. However, the strong labor market is keeping confidence at a fairly high level. If the markets bottom out and turn upwards, confidence may turn upwards. If the labor markets start to stumble, confidence may start to nose-dive.

International:

Germany’s GDP expanded 0.3% in the final quarter of 2015, showing resilience despite an emerging market slowdown and heightened concerns about global growth. German business confidence has fallen the last two months and the European stock market is down to levels last seen in 2013. Despite the global slowdown, domestic consumption is holding up. Government spending increased significantly in the fourth quarter, in response to the refugee crisis. However, manufacturing is weakening. Production fell 1.2% in December and a manufacturing gauge fell in January. Germany is the key for the euro-area and the private consumption component looks likely to be the driving force.

Real GDP for the euro-area expanded at an annual rate of 0.3% in the final quarter of 2015. Growth was driven by Germany, who expanded at the same rate as the greater euro-area. Growth in Italy slowed to 0.1%, the weakest in a year and Greece slipped back into recession. Even as the euro-area economy showed signs of resilience, modest growth may not be enough to offset deflationary forces. This may prompt the ECB to unleash new measures to stimulate the economy. Euro-area industrial production slipped 1% in December, the biggest decline since August 2014. The European Commission sees inflation at just 0.5% this year and 1.7% next year.

Important Data Releases This Week

January producer prices will be released on Wednesday, February 17 at 8:30 AM EST. Producer prices probably fell 0.1% in January, the fifth decline in six months. Lower oil prices will be a drag, but service prices probably increased 0.2%.

January housing starts will be released on Wednesday, February 17 at 8:30 AM EST. Housing starts likely bounced back in January, better December’s 1.149 million total. The multi-family component likely will provide most of the January lift. The single-family sector won’t see much of an increase because permits have been behind starts for the last two months. Weather is a factor as the climate turned cold in January, delaying starts.

January industrial production will be released on Wednesday, February 17 at 8:30 AM EST. Industrial production probably rose 0.4%, as cold weather in January boosted utility output. Manufacturing will rise 0.1%. Manufacturing is weak, but faintly positive. Manufacturing still has to contend with a strong dollar, weak global growth, declining energy investment and excess inventories.

February NAHB housing market index will be released on Wednesday, February 17 at 10:00 AM EST. The NAHB index probably dipped from 60 in January to 59. Builders are not immune to the decline in the equity markets. Although the trend may soften, the index will remain at high levels.

January consumer prices will be released on Friday February 19 at 8:30 AM EST. The CPI probably fell 0.1%, but the core index will rise 0.1%. Core year-over-year growth in services has accelerated the last few months, but the overall index is still restrained by falling goods prices.


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