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 stocks rallied at the end of last week as the Bank of Japan unexpectedly stepped up monetary stimulus. The Bank of Japan announced it would introduce negative interest rates after disappointing inflation, household consumption, and industrial production reports were released. The MCSI All-Country  index headed for the highest close in two weeks, rising 3.4% for the week. The Shanghai Composite Index jumped 3.1% on Friday, the first advance all week. That did trim January’s decline to 23%, the biggest drop since October 2008 and the worst performance of 93 indexes tracked by Bloomberg Inc.

The Standard & Poor’s 500 Index rallied on Friday to post the biggest advance since September 8. That did not erase the fact that it was the worst January for equities since 2009. It’s been a tough start to the year. Almost $7.8 trillion fell from the markets worldwide in January. About $2.7 trillion was erased from the value of developing-nations in January, with China accounting for 75% of the losses. The GDP report suggests the economy will continue to grow at a slow pace. Domestic companies should be stronger, with the exception of the manufacturing sector. This suggests that the U.S. equity markets, while not racking up sizable gains, will, at least, tread water after the correction is completed.

Last week’s data releases were mixed. The durable goods report was definitely bad. Total durable goods orders fell 5.1% and the core capital goods orders component declined 4.3%. Manufacturing is being hit by an inventory correction, the high dollar and slow global growth. Housing was better, with pending home sales advancing 0.1% and new home sales jumped 10.8%. Fed policy showed a wait-and-see approach. The Fed doesn’t want to spoil markets, but is concerned about global and financial market developments. The Fed is watching inflation and interest rate movements will follow developments on the inflations front, as well as being alert to any impact from the financial markets on the “real economy.”

There was a little of everything in the GDP report. Real GDP increased at an annual rate of only 0.7% in the final quarter of 2015. Inventories, trade and equipment investment slowed growth. However, final sales grew 1.6%, not great, but not terrible. Business investment in equipment was negative, lowering growth by 0.3 of a percentage point in 2015. Consumer spending increased 2.2% in the fourth quarter. If the economy is going to get on board to stronger growth, consumption will have to pick up a little. Both optimists and pessimists will see a lot in this report. Consumption and wages are healthy, but the economy is being held back by weak trade, the strong dollar, low energy investment and an inventory correction.

Inventories rose by $68.6 billion in the final quarter of 2015, following a $113.5 billion addition in Q3. This increase in stocks is unsustainable and suggests the inventory correction will continue into the first quarter. An accumulation of $50 billion is sustainable. This suggests a weak first quarter, but more strength later in the year. If you extend the current weights on the economy, including lower stock prices, low oil prices, a stronger U.S. dollar and mortgage rates, you shave a few tenths of a percent off of GDP growth. It suggests that growth may be slower this year than anticipated, but does not suggest a recession. As long as the current, slow pace is maintained, the recovery will continue. However, the first quarter will look a lot like the last quarter and stronger growth won’t resume until the inventory correction is completed.

Latest Data

The U.S. Economy:

The Conference Board’s Consumer Confidence index rose 1.8 points to 98.1 in January from 96.3 in December. Confidence is still below its late-summer highs. The present situation was unchanged at 116.4, with consumers pulled in opposite directions between lower goods prices and a stock market downturn. The present situation remains above the 201 average of 111.6. Expectations showed the most improvement, rising 2.9 points to 85.9 in January. There across-the-board increases in business conditions, expected employment and expected income. Consumer confidence continues to mend after a big slide in November.

New-home sales jumped in December, rising 10.8% m/m and was 9.9% higher y/y. Sales came in at 544,000 annualized, making up for slight losses the previous six months. With inventories not growing so rapidly, the market tightened, but the median house price is down from a year earlier. Data suggests that prices were a little too high at the start of 2015, but corrected itself in the second half of the year. The short-term trend in prices is not favorable for new home construction. Demand is not strong enough to make buying a new home a profitable enterprise. That leaves demand in the hand of wages, which are starting to move, but not quick enough to create strong demand for new construction.

The Federal Reserve kept its interest rate, balance sheet and forward guidance unchanged in January. The statement made slight mention of financial market conditions since the beginning of the year. It did notice that inflation expectations fell further. The Fed noted that inflation remains low, but that is attributed to transitory factors, including energy prices. All told, the statement was far from dovish. The Committee noted that it was monitoring global economic and financial developments and is assessing their implications for the labor market and inflation and for the balance of risks for the forecast. This was likely a signal that the Fed was not asleep at the wheel. The Fed did not want to highlight financial markets because they can turn on a dime and that is reasonable. The developments don’t appear to lead it to change its expectations for interest rates this year. While markets matter to the Fed, it is inflation that will determine how aggressive they will be this year. This suggests that the fed will raise rates less than the four times penciled in for this year. The hikes may be back-loaded this year, but where inflation goes, so will the Fed. That has become clear.

The pending homes index inched up 0.1% in December to 106.8. The index remains 4.2% higher than a year earlier. The recovery in sales has been touch-and-go, but sales are up significantly after bottoming out in mid-2010. Buyer traffic has been driven by trade-up and trade-down respondents. First-time buyer traffic remains weak. Although mortgage applications have improved over the course of 2015, they remain well below pre-recession levels. The modest pace of sales should pick up modestly as wages start to accelerate. This should help the first-time buyer.

Durable goods orders fell 5.1% in December, far more than expectations. Details on capital goods and shipments were both negative. Shipments fell 2.2% and core capital goods orders declined 4.3%. Durable inventories rose 0.5%. The only good news was that excluding transportation, durable goods orders fell a less 1.2%. The weakness in orders was widespread, with a 29.4% decline in nondefense aircraft orders. December’s report hints at first quarter weakness. The strong dollar and soft overseas growth have hammered manufacturing. With exports showing signs of life, the biggest hurdle for manufacturing is inventories. Progress in flushing out inventories has been slow, which explains the current weak factory conditions despite better underlying demand. The weight from the international sector will be slow to lift, but better output should follow after the inventory correction is completed.

Real GDP increased at an annual rate of 0.7% in the final quarter of 2015. Much of the weakness of the quarter was concentrated in inventories and trade, which reduced growth by 0.45% and 0.47% of a percentage point, respectively. Real consumer spending added 1.5 percentage points and residential investment added 0.3 of a percentage point. Government made a small positive contribution to growth. Inventories rose by $68.6 billion annual rate, compared with $85.5 billion in the third quarter. This suggests the inventory correction will linger into the first quarter. Final sales rose 1.6%, not impressive, but not alarming. Consumer spending rose 2.2% and residential investment rose 8.2%. Real disposable income rose 3.2%, the third time in four quarter, income has exceeded 3%. Real GDP increased 2.4% in both 2014 and 2015. The report has a little bit for everybody, both optimists and pessimists. Employment growth suggests the economy is doing well. Manufacturing, trade and the fall in the equity markets suggest the economy is losing steam.

International:

Euro-area inflation accelerated in January, providing a reprieve for ECB officials looking for signs of inflation. Consumer prices rose 0.4% in January after a 0.2% rise in December. This report does contain a technical factor, with a slight uplift from “base-effects.” That is, gas prices dipped at the end of 2014 and the start of 2015, weighing down inflation figures. They dipped in January 2016, but not as much as the previous two years. Core inflation rose 1% in January from a year earlier, up from 0.9% in December. Energy prices declined 5.3% annual rate. The forecast for inflation is for 0.7% growth in 2016 and 1.4% for 2017.

Important Data Releases This Week

December personal income and spending will be released on Monday, February 1 at 8:30 AM EST. We look for personal income to increase 0.2% in December, compared with 0.3% in November. Personal spending likely fell 0.2% in December on slower sales of cars, gasoline and a slight drag from utilities.

December construction spending will be released on Monday, February 1 at 10:00 AM EST. Construction spending likely increased 0.6% in December following the 0.4% decline in November. Residential construction probably gathered strength in December, after a 0.3% advance in November. Nonresidential construction probably rebounded a little after the 0.7% decline in November.

January ISM manufacturing index will be released on Monday, February 1 at 10:00 AM EST. The ISM is projected to come in at 48 unchanged from December. Reginal Fed manufacturing surveys were mixed. Changes in the ISM are not strongly correlated with changes in stocks or oil prices.

January vehicle sales will be released on Tuesday, February 2 at 4:00 PM EST. Vehicle sales probably declined from 17.3 million to 17 million. This will be the third consecutive monthly decline, but the weather was a factor, more than equities. The storm that hit the East Coast will have buyers out of showrooms.

January ISM non-manufacturing index will be released on Wednesday February 3 at 10:00 AM EST. We look for the index to decline from 55.8 in December to 55 in January. This doesn’t mean weakness in the service sector, but a slightly lower reading because of declining equities.

December international trade will be released on Friday, February 5 at 8:30 AM EST. We look for the trade deficit to widen from $42.4 billion in November to $43.5 billion in December. The advance goods report showed exported fell 1% in December. Imports were unchanged.

January employment report will be released on Friday, February 5 at 8:30 AM. We look for a gain of about 200,000 in January. The first month is usually slow for hiring and weather was a factor. The unwinding of seasonal jobs is big in January. This is a hard month to ascertain employment because of seasonal adjustments. Also, on Friday, the government will release its benchmark revisions, which can change the look of the year.


You can now follow the Monday Morning Coffee Blog via podcast.

iTunes: FTR On the Go

Listen to Stitcher


FTR is the leader in economic analysis and forecasting the commercial freight and transportation equipment markets. For more information: Click here

image_pdfOpen as PDFimage_printPrint Commentary