Consumers are Feeling Better About Short-Term Financial Prospects

By | August 2, 2021

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

U.S. stocks fell on Friday after Amazon forecast slower sales growth in the next few quarters as customers are expected to venture more outside the home. Data on Friday showed that U.S. consumer spending rose more than expected in June, although annual inflation accelerated further above the Fed’s 2% target. The Dow Jones Industrial Average fell 149.06 points, or 0.42% to 34,935.47, the S&P 500 lost 23.89 points, or 0.54% to 4,395.26 and the Nasdaq dropped 105.59 points, or 0.71% to 14,672.68. For the month, the S&P 500 rose 2.3%, the Dow added 1.3% and the Nasdaq added 1.2%, while all three indexes lost ground for the week. Strong earnings and the continued rebound in the U.S. economy have helped support stocks this month, but the rapid spread of the Delta variant and rising inflation have been concerns.

Data last week highlighted the theme of demand outrunning supply and the ongoing slack in the labor market. In a way, it is the opposite of the previous cycle when policymakers wondered why inflation was so low when the unemployment rate was so high. At the Fed’s Open Market Committee meeting last week, it was clear from the Fed’s chair statements that policymakers are conflicted why inflation is on a tear even as slack remains in the labor market. When it came to the subject of tapering of asset purchases, there was still “a range of views” among members of the FMOC. Logic tells us that if the economy is running hot, inflation should heat up and unemployment should fall. This is imbedded in the Phillips Curve, but in reality over the past decade, this did not actually work out. Initial jobless claims are now higher than in May and the number of those receiving jobless benefits also rose in the latest figures.

New home sales fell to their pre-COVID pace. It seems the high price of building materials and supply shortages of key items are having a negative effect on housing. The drop in sales is helping inventories to increase. At 6.3 months of inventory supply has almost doubled from a low of 3.5 months. We do see housing rebounding modestly as lower lumber prices allow builders to boost construction of more modest priced homes.

Durable goods orders rose 0.8% in June but the reading was lower than the consensus expectation of 2.2%. The fact that the previous month was revised higher took some sting out of the wound. Core capital goods orders did come in closer to consensus, rising 0.5% for a second month. After a difficult 2020, when travel floundered, orders for civilian aircraft are rebounding. The orders strength bodes well for equipment spending, which we found out in the latest GDP report that has expanded at a double-digit pace the last four quarters. Real GDP expanded at an annual rate of 6.5% in the second quarter, lower than expectations. However, the lower figure was attributed to inventories and trade. Real personal consumption shot up 11.8%, stronger than most analysts expected. Durable goods spending rose 9.9%, while nondurable goods jumped 12.6% and services surged 12.0%. The strong increase in consumer spending in the second quarter reflected the fiscal stimulus, plus the re-opening of the economy.

Consumers are feeling better about their short-term financial prospects, as the share who expect their income to increase rose to 20.6%, the highest since the pandemic struck. The brighter outlook comes from a perception that the labor market is improving. Those respondents who say jobs are plentiful rose to a pandemic high of 54.9% and those who see jobs as hard-to-get are at a low 10.5%. As additional jobless benefits expire in the fall, job growth should be healthy and support consumer spending.

This week will provide insight on construction spending, both ISM indexes, the trade balance and the payroll report.

Latest Data

The U.S. Economy:

New home sales fell for a third time as homebuilders contend with high construction costs and a long line of single-family projects. New home sales fell 6.6% to 676,000 annualized units. Furthermore, May sales were revised down to 724,000 from the previous estimation of 769,000. Months’ sully increased to 6.3 from 5.5 in May. June’s sales pace was 19.4% below June 2020’s pace of nearly 9004,000 as the price rose to nearly 6% above last year’s price. The median price in June 2021 was $361,800. The average sales price was $428,700. Builders are competing with sharply higher prices for construction materials and with higher prices for existing homes and are partly contending with these circumstances by selling homes that have not been built. The segment of home sales of homes that have not been built is up 84% from last year. Mortgage applications decreased 23.8% from a year ago in June, suggesting sales could slow in coming months.

The advance report by the Census Bureau announced that June orders for durable goods increased 0.8%, up thirteen of the last 14 months. Excluding transportation, new orders increased 0.3%. Transportation equipment orders rose 2.1%. Shipments, up three of the last four months, increased 1.0%, following a 0.4% increase in May. Unfilled orders, up five consecutive months, increased 0.9%, following a 1.0% increase in May. New orders for core capital goods increased 0.5% in both June and in May. June orders were up 15.5% from a year earlier. For the most part, orders were up across the spectrum of industrial sectors. Orders for primary metals were up 0.4%. Machinery orders increased 0.6% and communications equipment orders saw a 6.4%. Fabricated metal orders fell 0.8%. Manufacturers are grabbling with shortages of supplies and labor, problems that are likely to extend until the end of the year, at least.

Personal income inched up 0.1% in June and May’s number was revised from a 2% decline to 2.2%. Compensation of employees grew 0.7%, a trend that will persist as the labor market heals further. After whipsawing for several month as stimulus was facilitated and faded, federal transfer payments declined 2.0%. Real personal spending rose 0.5% in June after falling 0.6% in May. Falling spending n vehicles and price increases limited spending in recent months. Durable goods spending fell 2.5%, while nondurable goods spending rose 1.2%. Goods spending fell 0.2% but service spending rose 0.8%. The saving rate fell to a still high 9.4% from 10.3% in May. The GDP deflator rose 0.5% in June. Goods prices rose 0.7% in June and food prices gained 0.8%. the core index increased 0.4%. Inflation is high but the Fed still believes much of the push is transitory.

International:

China’s factory activity expanded in July at the slowest pace in 17 months as higher material costs, equipment maintenance, and extreme weather weighed on business activity. The official PMI eased to 50.4 in July from 50,9 in June, it was the lowest figure since February 2020 when it equaled 35.7 during the lockdowns imposed by the pandemic. The production index slipped to 51.0 from 51.9. New orders fell to 50.9 from 51.5, reflecting a slowdown in demand. The index for new export orders dropped to 47.7, the third consecutive decline. The index for raw material costs stood at 62.9 in July, pointing to increased costs. Hit by extreme weather, construction dropped to 57.5 from June’s 60.1. Manufacturers are grabbling with higher raw material costs and global supply chain bottlenecks. Record flooding likely weighed on business activity. The non-manufacturing PMI eased to 53.3 in July from 53.5 in June.

Important Data Releases This Week

The July ISM manufacturing report will be released on Tuesday, August 3 at 10:00 AM.  The ISM manufacturing index slipped to a still elevated reading of 60.6 in June. New orders and production remain strong but difficulties in finding raw materials and workers have become massive constraints for producers. The employment component of the index fell into negative territory in June. There are some tentative signs of easing as supply deliveries improved. We expect a modest decline in the index for July as supply and labor shortages are still a problem. The index should come in at 60.5 for July.

The June construction spending report will be released on Tuesday, August 3 at 10:00 AM. Construction spending slipped 0.3% in May on the weakness in nonresidential building. Despite soaring costs for building materials, we think the nonresidential side is set for some small advances and the residential side makes modest advances. Construction spending should advance 0.5% for the month

The July ISM services index will be released on Wednesday, August 4 at 10:00 AM. Supply shortages are not limited to the manufacturing sector. The service sector is also having problems getting materials and help they need. After recording a 60.1 reading for June, May will record a still decent 60.5 reading for July.

The July employment report will be released on Friday, August 6 at 8:30 AM. Employment is gaining momentum. Employers added850,000 jobs in June, the strongest gain since last August. The recent improvement in wages is drawing workers off the sidelines. We project that 850,000 workers will be added to payrolls in July.

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About Steve Graham

Steve is one of the premier analysts in the transportation equipment industry. On a monthly basis Steve tracks and analyzes in detail the trailer and heavy-duty truck industry. Aside from following these two sectors he is also instrumental in helping our customers analyze the economy and its impact on transportation and transportation equipment.