Solid Economic Fundamentals But Policy Mishaps Persist

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

Calm returned to world markets on Friday, after a rollercoaster week that has seen oil break $80 a barrel. Emerging markets were battered by a pumped-up dollar. Stocks in Europe slipped 0.3% lower on Friday, but still headed for an eighth week of gains, with the euro near a 5-month low. The dollar hit a 5-month peak against a basket of currencies and bearing pressure on emerging nation’s currencies. Brent broke through the $80 a barrel level on Thursday. Investors were also concerned with China and the U.S. locked in trade talks and Donald Trump’s decision to dump the Iranian nuclear deal still causing fallout. A rapid slide in oil supply from Venezuela and the fear that U.S. sanctions will disrupt exports from Iran and lower global inventories have pushed up oil prices nearly 20% in 2018. Markets tend to forget one-time events, but geopolitical events that might linger make traders uncertain about the long-term direction of stocks amid current events that are making markets uneasy.


The S&P ended lower on Friday after a choppy trading session as bank and chipmaker stocks weighed on the index and investors grappled with U.S.-China trade talks. China denied reports by some U.S. officials that it had offered a package to slash the U.S. trade deficit by up to $200 billion, but said the consultations were “constructive.” The Dow Jones Industrial Average was essentially flat on Friday and the S&P lost 7.16 points, or 0.26%.


U.S. consumers put the first quarter behind them and the consumer is starting to bounce back modestly. Retail sales rose 0.3% in April. Excluding autos, sales also rose 0.3%. Higher gasoline prices provided a boost to nominal spending at gasoline stations by 0.8% in April. Rising gas prices could begin to hurt spending. If retail gas prices remain little changed for the remainder of the year, they will average $2.96 per gallon in 2018, up from $2.59 per gallon in 2017. This would reduce consumer spending over the course of the year by $33 billion.


Industrial production rose 0.7% in April and details pointed towards healthy equipment investment. Manufacturing rose 0.5% after being unchanged in March. April’s gain leaves manufacturing production up 7.9% annualized over the prior three months, better than the 3.3% gain in March and one of the strongest readings in years. Housing starts slid. April’s gain leaves manufacturing production up 7.9% annualized over the prior three months, better than the 3.3% gain in March and one of the strongest readings in years. Housing starts slid.7% to 1.287 million units in April. The decline was led by the multi-family sector. Single-family starts rose 0.1%. Single-family sector permits rose 0.9%, but that followed a 4% decline in March. Single-family permits are running below starts, a factor that suggests that rising mortgage rates may be cooling the housing industry.


The economic calendar cools off a little next week. The minutes from the May FMOC meeting should be mostly uneventful. We look for a modest drop in both new and existing home sales. Durable goods orders will likely fall 1.5% on transportation orders but rise 0.3% excluding that sector. The economy looks good and should bounce back modestly from a lethargic first quarter. There are a number of risks emanating from the geopolitical stage. Oil prices have increased and the big question is whether they stick to near $70, or continue upwards. Gasoline at $3.00 a gallon will not likely have a big impact on consumption, but if gas hits $4.00 a gallon, there will be significant repercussions. Businesses felt fairly confident about the near-term, but trade tensions are throwing them off-track. The price of steel and aluminum is up sharply and little or no corn and soybeans are moving to China. Trade talks take time and Mr. Trump may not allow the nation the luxury of waiting. The economy looks solid, but policy mishaps are threatening to erode confidence. The economic expansion could go on several more years, but geopolitical concerns and bad trade policy are keeping the economy on edge.

Latest Data

The U.S. Economy:

Retail sales growth remained modest in April, following a strong March. Sales rose 0.3% in April, following an upward revised 0.8% jump in March. Sales were led by apparel stores, gasoline stations, miscellaneous stores and furniture stores. Cooler sales were exhibited at restaurants, drug stores and electronic stores. Sales excluding gas and autos rose 0.3% in April. Sales were up a healthy 4.7% from a year earlier. Retail sales have stepped up in the last two months after a weak start to the year. Given the support from the tax cuts, more improvement should be coming. Cooler than normal weather in April may have limited sales, but a warm May should be a plus. Higher gasoline prices in May will boost total sales, but limit the purchasing power for other goods. Incomes are still slowly rising. Sales should be decent, but there are some risks associated with the weak stock market. Tariffs and trade wars could lift prices and reduce overall spending.


Stockpile growth took a breather in March. Business inventories were mostly unchanged in March, following a 0.6% rise in both January and February. In the three categories, wholesales and manufacturers each gained 0.3%, while retailers fell 0.5%. Motor vehicles and parts fell 1.1% in March. Retailers excluding the auto sector fell 0.1%. Weakness was wide spread, with department store’s stocks declining 1.2% and food and beverage stores dropping 0.9%. Business sales increased 0.5% in March and the inventory-to-sales ratio fell to 1.34 months from 1.35 in February. Business stocks took a small correction in March. Stocks did not advance and decent sales brought the I/S/ ratio down. Sales are likely to remain healthy this year. The I/S ratio is not far from its year ago reading. Inventories remain fairly high for this late in the business cycle and more work to reduce inventory levels may be needed.


Residential construction pulled back in April as a reduction in apartment building offset gains in single-family housing. Total starts fell 3.7% in April, but did remain 10.7% from a year earlier. Declining construction in three Census regions offset gains in the South. Total starts came in at an annual rate of 1.287 million. Single-family starts rose 0.1% to an annual pace of 894,000. Multi-family starts fell 11.3% to 393,000. Total permits fell 1.8% to 1.352 million units. Single-family permits rose 0.9%, while the multi-family sector fell 6.3%. Construction in April was better than the headline number. Single-family starts held their own and are up solidly from a year earlier. Multi-family construction is operating at full capacity, with starts slightly exceeding the average before the Great Recession. Multi-family starts did fall below 20 months of completions, but the backlog is higher than the historical average. Demand indicators are decent. The rental vacancy is less than 4%. The market for new homes is less tight, but the current I/S ratio is below the historical average. If the tight market for existing homes leads to accelerating prices, demand will spill over to new homes. Still, labor capacity is tight and interest rates are rising, the advance forward may be slow.


Industrial production advanced 0.7% in April, the third consecutive gain. March was also revised upwards to a 0.7% increase. Gains were broadly based across industries. Mining increased 1.1% and utility output rose 1.9%. Manufacturing increased a solid 0.5%, up 2% y/y. Durable goods output rose 0.4% and nondurable goods were up 0.5%. Auto and parts production fell 1.3%. Non-auto production rose 0.6%, up 1.4% from a year earlier. Business equipment production advanced 1.2% and was up 0.2% from April 2017. Industrial production is on a healthy streak, an indication of solid fundamentals.. Manufacturing is gearing up for stronger demand fueled by the fiscal stimulus. Total work-in-progress inventories are growing robustly, advancing at the fastest pace since 2012. Inventories in the nondurable goods segments are growing at a double-digit clip, the best pace since 2011. This is a sign of healthy near-term demand. There are some concerns about labor shortages and rising interest rates and oil prices. Trade remains a major area that is making businesses nervous. Companies are factoring in not just the impact of higher prices of steel and aluminum, but are fearful of a full blown trade war. Some see the tit-for-tat messages of the Trump and Xi administrations as a negotiating tactic, but others are fearful that American companies will become collateral causalities for political purposes.


China reported weaker than expected investment and retail sales in April. Fixed investment growth moderated to 8.4% in the January-April period from a year earlier. Growth in April cooled to around 6%. Private sector investment moderated to 8.4% from 8.9% in the previous three months. Growth in infrastructure spending last year, slowed to 12.4% in the first four months from 13% earlier in the year. That trend is likely to continue as Beijing forces local governments to scale back spending to control debt and home sales cool due to strict government controls to fight speculation and tame home prices. China’s property market is showing signs of fatigue as mortgage rates rise. Real estate investment rose 10.2% in April, slowing from a 10.8% reading in March. Retail sales growth slowed to 9.4% in April, down from March’s 10.1% rate. Industrial output rose 7.0% in April, up from 6.0% in March, as industrial activity was lifted by the easing of pollution controls over the Winter season. Automobile and steel output surged in April.

Important Data Releases This Week

April Chicago Fed National Activity index will be released on Monday, May 21 at 8:30 AM EDT. The consumer was modest, but April was good for the industrial sector and employment. The index is likely to come in at 0.25 versus the 0.10 reading in March.


April new home sales will be released on Wednesday, May 23 at 10:00 AM EDT. New home sales surged in March and will slow a little in April. Sales will come in at an annualized 677,000 in April, down from March’s 694,000.


April existing home sales will be released on Thursday, May 24 at 10:00 AM EDT. Existing home sales are projected to equal 5.600 million units in April, holding on to the strong gains in March and February. Recent gains aside, resale trends have been flat with year-on-year readings still in the negative zone.


April durable goods orders will be released on Friday, May 25 at 8:30 AM EDT. The industrial sector is exhibiting underlying strength. Total orders are expected to fall 1.5% on declining transportation orders after a strong advance in March. Excluding the transportation sector orders will rise 0.3%.

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