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.
Stock markets struggled for direction on Friday as investors worried about a lack of detail in the U.S. Federal Reserve’s policy shift while Japanese markets were riled as Prime Minister Shinzo Abe resigned for health reasons. The Fed’s widely awaited policy shift, unveiled on Thursday, saw the central bank place more emphasis on boosting economic growth and less worries about letting inflation run too high. The policy aims for 2% inflation on average so that a too low a pace would be followed by effort to lift inflation “moderately above 2% for some time.” The Euro STOXX 600 was up 0.03% on Friday. Japanese shares dropped, with the Nikkei 225 down 1.4%. U.S. stocks clawed higher after volatile trading on concerns about the impact of a hurricane that struck the center of the U.S. oil industry.
Stocks closed mostly higher with the Dow Jones Industrial Average erasing its losses for the year to date and the S&P and the Nasdaq carved out fresh record closes, as investors sifted through data on consumer spending and confidence. The Dow Jones closed higher on Friday, up 161.60 points, or 0.6% to close at 28,653.87, while the S&P rose 23.46 points, or 0.7% to close at 3,508.01, The Nasdaq Composite advanced 70.30 points, or 0.6% to 11,695.63. For the week, the Dow gained 2.6%, the S&P was up 3.3% and the Nasdaq increased 3.4%. Stocks put in a choppy performance on Thursday after Federal Reserve Chairman Jerome Powell announced the Fed was shifting to a policy of inflation targeting which would effectively see policy makers end the practice of hiking interest rates to stave off inflation. Inflation has been weak for the last twelve years and worries abut it firing up in the near-term seem antiquated.
Weekly initial claims declined slightly from the previous week but remains at a high level. Seasonally adjusted initial claims decreased by 98,000 to 1.1006 million in the week ending August 22. The seasonal adjusted claims declined by 67,958 to 821,59. New filings for Pandemic Assistance increased from 524,986 to 607,806. Continuing claims increased from 14.76 million in the week ending August 8 to 15.54 million in the week ending August 15. The insured unemployment rate fell from 10.1% to 9.9%. 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. Good news is the ongoing decline in continuing claims. However, with 27 million still collecting UI benefits the cut in the benefits will weigh on consumer spending and slow further job creation.
Consumer confidence as measured by the Conference Board came in at 84.4 in August, lower than expected. This marked a 6.9 point slide from July to the lowest point since 2014. Confidence may be affected by the end of the supplemental $600/week that ended in July. Although confidence is down from February in all income groups, the lower levels saw a distinct decline in August. Confidence and incomes do not always track month to month, but a downward track for confidence is not an encouraging sign for consumer spending. Real spending rose 1.6% in July, better than expected but slower than the 5.7% jump in June. Incomes rose 0.4%, despite a 1.7% decline in government transfers. The personal savings rate dropped from 19.2% to 17.8%. A big question is now surfacing. Despite the small July rise, incomes are falling as the stimulus ends and spending is slowing. How long can this go on before spending is undermined? That is a big question for the fourth quarter and into 2021. With questions about a second stimulus package unanswered, the future of final demand looks uncertain.
Next week, we get a look at the ISM manufacturing and non-manufacturing indexes, construction spending, vehicle sales, factory orders, the trade deficit and payroll employment.
The U.S. Economy:
The Chicago Fed National Activity Index moderated in July after months of sharp upticks. The index fell to 1.18 from a June reading of 5.33, which was the highest reading going back to 1967. Three of the fur broad categories in the index made positive contributions, but all four fell from the June level. The three-month moving average came in at 3.59, up from -2.78 in June. Negative values indicate a slowing of activity and readings below -0.7 historically have been associated with a recession. Production-related indicators contributes 1.09 to the July index, down from June’s2.21 reading. The sales, orders and inventories category contributed -0.31 in July, compared to June’s 0.77 reading. This July’s sole negative reading attributed to firms drawing on existing inventories instead of placing new orders. Employment-related indicators added -.38, down from the 1.94 reading in June. The personal consumption and housing sector added 0.22, down from 0.42 the previous month. The index suggests activity is moderating and the U.S. economy is still weak.
The Conference Board’s index of consumer confidence fell from 91.7 in July to 84.8 in August as the increase in coronavirus infections reduced consumer views of current conditions. The index of present conditions fell from 95.9 to 84.2, well below the 170 reading before the crisis. Expectations fell from 88.9 to 85.2. The decline in the index was inconsistent with other measures f consumer confidence. The index suggests that sentiment is near a recessionary level but remains above levels seen in mild recessions seen before. During the Great Recession, the index dipped into the 20s, setting its record low. Even with higher unemployment, the index is still at relatively high levels.
New home sales increased 13.9% in July to 901 ,000 units annualized pace. Sales had increased a revised 15.1% in June and 20.5% in May. New home sales are now at the highest level since 2006. New homes listed for sale at the end of July totaled 299,000, down from 304,000 in June and was the fourth consecutive decline. Inventories are becoming a problem as the I/S ratio of homes for sales dropped from 4.6 to 4. The median new-house price was up 7.2% on a year ago basis, following a 8.2% gain in June. The housing market is booming and leading the economy in the early stages of the recovery, much different coming out of the Great Recession. There are risks. Constructions costs are increasing quickly and builders are grumbling about the scarcity of lots to build on. Housing will remain positive but will slow as pent-up demand is released.
U.S durable goods orders have surged in the past few months. Orders jumped 11.2% in July, following a 7.7% advance in June. Transportation provided a big boost to orders, advancing 35.6%. Within the transportation sector, orders for motor vehicles and parts were up 21.9% after jumping 85.6% in June. Excluding transportation, orders only increased 2.4%. Nondefense capital goods orders increased 10.2%. The key core capital goo0ds orders increased 1.9% after rising 4.3% in June. Shipments of core capital goods orders rose 2.4%, the third consecutive monthly gain. Despite the July gain, durable gods orders are still 6.3% below their February level but are 22% above their second quarter average. Core capital goods orders are 5% above their second quarter average, suggesting business investment will to growth in Q3. We expect manufacturing production to improve but risks are weighted to the downside, as COVID-19 cases are increasing. Without another round of fiscal stimulus, the risk of a double-dip recession is increasing
The NAR pending home sales index rose 5.9% to 122.1 in July, reaching the highest level since late-2005.Homebuyers shrugged off the partial re-closures of the California, Texas and Florida economies as well as the pause in re-openings elsewhere and ramped up visits to open houses across the country. All census regions saw increases in July. Pending home sales are now up 15.5% from a year earlier. July marked the third consecutive month of gains. The fixed 30-year mortgage rate dropped to 2.91% in late August, near an all-time low and these rates will continue to fuel sales.
Trade was a drag on growth early this quarter. The nominal goods deficit widened from $70.99 billion in June to $79.32. Nominal goods exports were up 11.8% in July. Within exports, autos jumped 44.6%, while consumer goods were up 21.4%. Nominal goods imports were up 11.8% in July. Imports of autos were up 41.3% in July, after rising 107.8% in June. Capital goods imports increased 8% and industrial supplies were up 10.7%. Despite the July increase, exports were down 15.9% from a year ago and imports were down 7.6%. Trade volumes are bouncing back from the severe declines early this year. Trade will take time to normalize because of the global effects of the pandemic and disruptions to supply chains. The potential of a new wave of coronavirus both here and abroad adds great uncertainty to the outlook
Personal income increased 0.4% in July. The improvement came despite a 1.7% decline in government transfers, which fell 8.8% in June. Personal spending continued to rebound in July, although at a slower pace. Spending increased 1.6% in July, after a 5.7% increase in June. Durable goods spending led the rebound, rising 2.5% in July. Service spending was up 1.6%. The savings rate fell to a still remarkable 17.8% from 19.2% in June. Spending has slowed from record-setting to near normal. With the stimulus ending the future of spending is at risk. A rise in coronavirus infections and a pause in re-openings have raised the uncertainty level. Price increases are modest, with both the PCE and core PCE deflators rising 0.3% in July. Year-ago core inflation rose from 1.1% to 1.3%. With a inflation target of 2%, there will be several months before the fed considers raising rates.
Important Data Releases This Week
The August ISM manufacturing index report will be released on Tuesday, September 1 at 10:00 AM. Manufacturing has been recovering from the shutdowns, supply chain disruptions and trade tensions that existed before the pandemic. The July hit a 16-month high of 54.2. Manufacturing has benefited from stronger consumer spending on goods as consumers have been more restrained on service spending. Factory activity likely firmed in August, with the index coming in at 54.3.
The August construction spending report will be released on Tuesday, September 1 at 10:00 AM. Construction spending slipped in July by 0.7% as outlays for single-family homes faltered, as well as weakness in the nonresidential sector. Spending on single-family homes will perk up and construction spending will pick up 0.5% for August.
The August U.S. vehicle sales report will be released on Tuesday, September 1 in the afternoon. Auto sales have been encouraging hitting 14.5 million. We think sales will hit 15.2 million for August.
July factory orders will be released on Wednesday, September 2 at 10:00 AM. Already released durable goods orders showed a 11.2% advance, largely driven by the transportation sector. Excluding transportation, order rose a more modest 2.4%. Factory orders are projected to rise 6.5% for July.
The trade deficit will be released on Thursday, September 3 at 8:30 AM. Already released goods figures showed the deficit widening to $79.32 billion from $70.99 billion on strong growth in imports and a sizable jump in exports. Still goods exports are still down 15.9% from a year ago and imports 7.6%. Trade has away to go to normalize. The total trade deficit will rise from the $50.7 billion to $56.7 billion.
The August ISM non-manufacturing index report will be released on Thursday, September 3 at 10:00 AM. While the ISM manufacturing index usually gets the headlines, some services data is useful. The need to social distance has hit the service sector hard. The index made broad advances in June and July and August will be a reality check. We loom for the index to dip slightly as the economy has slowed down, with the index falling from 59.1 to 56.4.
The August payroll report will be released on Friday, September 4 at 8:30 AM. Most indicators suggest employment continued to improve in August but at a slower pace. Jobs should increase by 1.4 million, down from the 1.76 million in July. Employment growth will slow down significantly I coming months and there are downside risk if final demand falters.
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