Shortage of truck drivers are starting to affect operations

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 Review

Asian shares retreated from a two-and-a-half month high on Friday as investors retreated from emerging markets due to uncertainties over trade relations, expectations of more U.S. rate hikes and a wind down of the massive monetary stimulus in Europe. MCSI’s broadest index of Asia Pacific shares outside of Japan fell 1.1% on Friday after six straight gains took it to the highest level since March. The index remained on track for a weekly gain of over 1%.


U.S. equities held on to a Friday afternoon rally as the risk-off sentiment that gripped investors late in the week subsided. Brazil’s real surged after the central bank pledged to support the currency, helping to reduce fears of an emerging market contagion. The S&P 500, the Nasdaq and the Dow Jones all finished the week in positive territory. Emerging markets remained turbulent. The real jumped as much as 4%, leading world gains after the central bank pledged to flood the market with swaps. Investors earlier in the week ignored central bank attempts to bolster the currency sending the real to a two-year low. Data releases from Germany and France continued a run of poor economic gains in the euro-area.


European Central Bank policymakers have a meeting on June 14 to discuss whether to end bond purchases this year. The Federal Reserve holds a two-day meeting starting June 12 that is widely expected to result in the second rate increase of the year. Before those meetings, markets will have to digest the fallout from this past weekend’s Group of Seven meeting. U.S. trading partners have been furious over Donald Trump’s decision to impose tariffs on steel and aluminum from Canada, Mexico and the European Union. Some countries have retaliated with their own levies on U.S. imports.


U.S. economic growth could face a challenging slowdown in 2020 as the Trump Administration’s powerful fiscal stimulus fades, according to former Federal Reserve Chairman Ben Bernanke. Bernanke said the $1.5 trillion in personal and corporate tax cuts and the $300 billion increase in federal spending signed by President Trump “makes the Fed’s job more difficult all around” because its coming at a time of very low unemployment. “What you are getting is stimulus at a very wrong moment,” Bernanke said at a policy discussion at the American Enterprise Institute. “The economy is already at full employment.” The stimulus “is going to hit the economy in a big way this year and next and then in 2020 Wile E. Coyote is going to fall off the cliff.” Bernanke said. He was referring to the hapless character in the Road Runner cartoon series. The Congressional Budget Office projects the stimulus will lift growth to 3.3% this year and 2.4% in 2019. GDP will slow to 1.8% in 2020. The degree of slowdown is a matter of debate among economists. Some say economic growth could be stronger if the U.S. boosts its capital stock and upgrades its workforce in the next two years. Congress could also write new spending laws. With the stimulus coming at a period of low unemployment, inflation may overshoot the Fed’s target and result in a more restrictive monetary environment.


This week was light on economic data. April factory orders declined 0.8%, reversing part of March’s 1.7% gain. The closely watched core capital goods orders climbed 1.0% and shipments rose 0.9%. Data from the order’s report and the ISM manufacturing and non-manufacturing reports show a definitive lack of slack in the economy. Backlogs are rising and delivery times are increasing. Both the manufacturing and non-manufacturing ISM reports suggest that a shortage of truck drivers, are starting to affect operations. There are signs of strain in the supply chains as the number of unfilled orders has climbed in five out of six months. In this environment, the risks of price pressures are growing.


May’s non-manufacturing index notched another gain, rising to 58.6 from 56.8 in April, showing strength in the service sector. The trade deficit shrank in April to $46.2 billion from March’s $47.2 billion. Imports in April fell 0.2%, while exports picked up 0.3%. The surprising strength in exports is likely to add to GDP growth in the second quarter. Looking ahead for the remainder of the year, it is unlikely trade will add to growth. Our trading partners are willing to match and perhaps exceed the types of goods subject to tariffs. The net result is a downside risk for exports and greater risk to the economy if a trade war continues and expands. Inflationary pressures could be fanned, particularly in the intermediate stage of the production process.


Next week will be busy on the economic calendar. Inflation will be featured, with the PPI and CPI reports, The NFIB small business survey, retail sales, business inventories and industrial production. Also, the spotlight will be on the FMOC meeting, where rates are widely expected to be increased by 25 basis points. Economists will search for clues for future rate hikes and what risks to the economy exist because of Donald Trump’s tariff policies. The economy remains in a solid position, but trade has raised a lot of uncertainty. The tariffs on steel and aluminum by themselves are not an immediate threat. However, the specter of protectionist barriers going up across the globe are a real danger.

Latest Data

The U.S. Economy:

Factory orders fell 0.8% in April, but that followed a 1.7% advance in March. The monthly headline number was driven by a 6% decline in transportation orders, which remained 7.8% above year earlier levels. Details were brighter than the headline number. Core capital goods orders rose 1.0% in April, but that followed a 1.0% decline in March. Durable rose 0.1% in April. Durable goods orders fell 1.6% in April, following a 2.7% advance in March. Nondurable goods orders rose 0.1% in April. Shipments were unchanged in April, after a 0.7% rise in March. The latest report provides evidence that factory activity is remaining strong. There are some blemishes. Factory owners are experiencing trade jitters. Trade-tensions appeared to have faded a few months ago, but have resurfaced with the Trump administration decision to implement tariffs on Canada, Mexico and the EU. Our allies will retaliate with tariffs on U.S. goods. Trade aside, fundamentals remain solid, but rising interest rates and worker shortages will hurt production going forward.


The ISM non-manufacturing index increased from 56.8 in April to 58.6 in May. Details were slightly more upbeat in May and the rise snapped a three-month consecutive streak of declines. The business index rose from 59.1 to 61.3, with thirteen industries reporting increased business activity, while two reported a decline. New orders edged higher, rising from 60 to 60.5. The employment index rose from 53.6 to 54.1. Supplier deliveries increased from 54.5 to 58.5. Respondent’s comments included that driver shortages delayed schedules deliveries to the point it impacted operations. Trade details were less encouraging. New export orders fell from 61.5 to 57.5. New import orders dropped from 54.5 to 54. The prices paid index remained elevated at 64.3. The non-manufacturing index suggests the economy is still doing well. Anecdotes noted trade issues. A respondent in mini noted that trade discussions over NAFTA and with Korea and the EU will have critical impacts on our spending on steel products. Elsewhere, there were mention of supply constraints. A person in wholesale trade said the supply chain in shuttering because of lack of drivers and equipment causing delays in multiple modes of transportation.


The trade deficit narrowed to a seven-month low of $46.2 billion in April, down from $47.2 billion in March. Total imports dropped 0.3%. Nominal goods imports declined for a second consecutive month, dropping 0.2%. Industrial supplies imports rose 2.5% on higher energy prices and capital goods increased 0.7%. Consumer goods imports tumbled 5.1% and auto imports fell 2.9%. Nominal goods exports edged up 0.2% and services rose 0.4%. Food and beverage exports surged 5.6% higher on increased soybean and corn exports. Industrial supplies exports increased 3% on higher oil prices. Capital goods exports fell 3%. Although the deficit remains fairly wide, exports have been hitting record heights in recent months. Imports have gained ground because the healthy U.S. economy. Petroleum exports have shot up 40% in the past year, while petroleum imports have only increased 25%. Trade tensions have not yet, shown up in the April data, but unless tensions recede, we will see an impact in coming months.


Revisions showed that productivity growth was not as strong as previously estimated. Nonfarm productivity was revised down from 0.7% to 0.4%. The good news was that productivity growth from a year earlier was unchanged at 1.3%. Manufacturing productivity fell at a 1.2% annual rate in the first quarter, as hours rose 2.9% and output only increased 1.7%. Unit labor costs rose 2.9% annualized rate in the first quarter and were up 1.3% on a year-ago basis. Productivity has moved up from post-recession lows, but still remains disappointingly low. The good news is that productivity is picking up and firms are getting more output out of an hour of labor. Overall, productivity growth does remain weaker than in some decades and some further investment in machinery and training is needed to produce higher results.


China’s producer price inflation picked up for a second month in a row to a four-month high, boosted by stronger commodity prices. The PPI rose 4.1% year-over-year in May, compared to a 3.4% rise in April. The increase suggests the world’s second biggest economy is maintaining momentum despite rocky trade relations with the U.S. On a month-to-month basis, the PPI rose 0.4%, up from 0.2% in April. Raw material prices jumped 7.4% supported by rising demand for steel. The higher rate of inflation at the factory gate comes as Chinese authorities are implementing tougher pollution controls on “smokestack” industries and cash-strapped local governments cut back on big investment projects.

Important Data Releases This Week

May NFIB will be released on Tuesday, June 12 at 6:00 AM EDT. The survey is expected to come in at 105.3 in May, up from April’s 104.8. Strength in this index has come from business investment and earnings.


May PPI index will be released on Wednesday, June 13 at 8:30 AM EDT. The PPI rose 0.1% in April, as energy prices subsided. We expect the PPI to rise 0.3% in May and the core to increase and 0.2% for the core index. Steel and aluminum prices are rising, but not enough to change the whole index.


May CPI index will be released on Tuesday, June 12 at 8:30 AM EDT. Forecasters are calling for only modest pressure in the consumer report, with the CPI and the core CPI to rise 0.2%, respectively. The year-over-year rates are projected to be 2.8% for the headline number and 2.2% for the core.


June two-day FMOC meeting starts on Tuesday, June 12 and finishes on Wednesday, June 13. An incremental 25 basis point rate hike is projected at the June meeting of the FMOC. The strength of employment will be cited as a reason for the interest rate hike, offsetting a still slow inflation environment and a subpar consumer sector.


May retail sales will be released on Thursday, June 14 at 8:30 AM EDT. Retail sales are projected to increase 0.4% in May, with ex-auto sales increasing a stronger 0.5%. The consumer is expected to be bouncing back after a weak start to the year, despite slower auto sales.


April business inventories will be released Thursday, June 14 on at 10:00 AM EDT. Business inventory growth has been solid in recent months. Stocks are expected to post a 0.3% increase for April.


May industrial production will be released on Friday, June 15 at 8:30 AM EDT. Industrial production rose 0.3% in April and manufacturing rose 0.5%. We expect total IP and manufacturing to only rise 0.1% in May. Mining has been strong and utilities have been up the previous two months.

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