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.
Global stocks enjoyed cautious gains on Friday, but tepid economic data and lofty valuations reined in the advances in the wake of the big rally that wiped out the coronavirus losses. Global stocks advanced 0.2% on Friday while the European STOXX 600 climbed 0.4%, despite a muted European purchasing managers’ index releases from France and Germany showing slowing momentum in the recovery. The euro-zone composite PMI sank to 51.6 from July’s 54.9 reading. The latest PMI in August for France and Germany would appear to point to a plateauing in economic activity, particularly in the services sector, where rising infection rates may be curtailing activity.
The S&P 500 and Nasdaq closed at record highs on Friday, with both lifted by Apple after data pointed out some pockets of strength in the economy. U.S. business activity snapped back at the highest since early 2019 in August, according to HIS Markit surveys, as companies in both manufacturing and services saw a resurgence in new orders. Another report showed U.S. home sales rose at a record pace for a second straight month and home prices hit all-time highs. The Dow Jones Industrial Average rose 0.69% to end at 27,930.33, while the S&P added 0.34% to 3,397.16. The Nasdaq climbed 0.42% to 11,311.80. For the week, the Dow was nearly unchanged, the S&P rose 0.7% and the Nasdaq added 2.7%.
The rise in the Markit surveys was a pleasant surprise to a trend of economic data in recent weeks that showed a slower pace of recovery from the initial burst of activity when the country went back to work. The Markit Composite Output Index rose from 50.3 in July to 54.7, an 18-month high. The Markit U.S. Manufacturing PMI rose from 50.9 to 53.6l a 19-month high. Manufacturers cited a noted increase in both new orders and production. Firms also recorded the first rise in foreign client demand since December 2019.
The one sad news of last week was a rise in the number of people filing for unemployment claims, which crested back to above a million after declining on trend for several weeks. However, the sad news on employment was partly offset by good news on housing. Housing starts jumped 22.6%, with single-family starts rising a solid 8.2% and multi-family starts surging 58.4%. Further activity is encouraging as permits increased 18.8%. Adding to the optimism about housing, sales of existing homes came in at a 5.28 million annualized pace in July, up from 4.26 million in June.
Weekly initial claims bucked expectations and turned higher again. Seasonally adjusted initial claims increased by 1,358,000 to 1.106 million in the week ending August 15. The increase was driven by seasonal factors as non-seasonal adjusted rose by 52,776 to 891,510, the third straight reading below 1 million since the pandemic began. Filings for Pandemic Assistance increased from 489,639 to 542,797. Continuing claims fell from 15.48 million in the week ending August 8 to 14.84 million. The insured unemployment rate fell from 10.6% to 10.2%. The outlook for labor is mixed. After weeks of increasing, COVID-19 cases seem to be plateauing in many places. Still, the numbers are higher than in the early days of the pandemic. There is a lot of uncertainty on the odds of another fiscal stimulus package. Final demand and employment gains could falter without more stimulus.
Next week, we get a look at new and pending home sales, initial durable goods orders a second quarter GDP release and personal income and outlays.
The U.S. Economy:
The housing sector is booming and one of the sectors in a V-shaped recovery. Housing starts jumped 22.6% in July to 1.496 million annualized units. Starts in June were revised upwards to 1.22 million annualized units. Single-family starts increased 8.2% to 940,000. The multi-family sector saw a 58.4% increase to 556,000. Total permits increased 18.8% to 1.495 million. This suggests further increases in starts activity the next few months, but activity is likely to slow as pent up demand is released. Single-family permits rose 17% in July and the multi-family sector saw a 22.5% increase. Housing is recovering nicely but there are risks going forward. The secondary effects of new coronavirus cases and lack of fiscal support will start to weigh on the economy. That suggests mortgage credit quality will deteriorate and banks will tighten standards. Housing is strong now, but there will be tests ahead.
Leading economic indicators point to improving conditions. The Conference Board’s Leading Economic Index increased 1.4% in July to 104.4. The July increase followed a 3% gain in June. Six of the 10 components were positive, while four were negative. The July reading was above March’s level but still well down from February’s 111.8 reading. The slowing growth of the July reading and widespread weakness of some components suggest a recovery with little momentum. Growth in manufacturing hours worked was the strongest positive contributor to the index. New construction and building permits have proven resilient throughout the crisis. The biggest drag was consumer expectations for business conditions, manufacturers’ new orders for nondefense capital goods and manufacturers’ new orders for consumer goods and materials. The economy has slowed and maybe will slow significantly without a stimulus package.
Existing home sales jumped 24.7% in July, extending June’s sizable gain and hitting the highest level since late-2006. Homebuyers continued to enter the market in force in the wake of the end of shutdowns in additional states across the country. The market is also being fueled by rock bottom interest rates. Single-family and cond0/co-op sales both advanced by 23.9% and 31.8%, respectively. In addition, sales were uniformly positive across census regions, with the Northeast and West locking in the strongest gains. Sales of existing homes came in at a 5.28 million annualized pace in July, up from 4.26 million in June and 4.81 million a year earlier. Inventories are still at the lowest level since the late-1990s. This means affordability might be an issue going forward. Nonetheless, we expect strong sales to continue for the next few years.
The World Trade Organization said that its goods trade barometer hit a record low in the second quarter, as the coronavirus pandemic raged. The barometer came in at 84.5, down 18.6 points from a year earlier. The reading was the lowest on record on data going back to 2007 and was on par with the nadir of the 2008-09 financial crisis. It was broadly consistent with WTO statistics issued in June, which estimated an 18.5% decline in merchandise trade in the second quarter of 2020 as compared with the same period last year. The WTO said that additional indicators point to a partial uptick in world trade and output in the third quarter, but the strength of the recovery is highly uncertain. An L-shaped, rather than a V-shaped recovery cannot be ruled out.
Important Data Releases This Week
The July new home sales report will be released on Tuesday, August 25 at 10:00 AM. Housing has been resilient to the economic chaos caused by the coronavirus. Sales slipped in the initial lockdowns but have bounced back. Fundamentals suggest the recovery will continue with sales rising from 776,000 in June to 789,000 in July.
The July durable goods report will be released on Wednesday, August 26 at 8:30 AM. Durable goods orders likely will be positive in July but with millions of workers unemploy6ed and businesses conserving cash a full recovery for manufacturing remains a way off. Auto production has been a bright spot. Although slower than the 7.6% jump in orders in June, orders are projected to increase 4.0% in July.
The July personal income and outlays report will be released on Friday, August 28 at 8:30 AM. Incomes have seen some big swings lately and July will be no different. The $600/week supplemental benefit ended at the end of July and the $300/week added benefit will likely only last a monthly and will not go to everyone. This means without a move by Congress, there will be an upcoming fiscal cliff. Spending has held up but could be undermined. For July, incomes are projected to fall 0.5% and spending increase 1.5%.
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