Housing is a Bright Spot, but the Broader Economic Recovery May Be Starting To Lose Steam

By | August 10, 2020

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

Global shares slid further from five-month peaks on Friday as a bounce back in European business activity did little to ease concerns surrounding Sino-U.S. tensions. Investors took little comfort from PMI data that showed euro-zone business activity bounced back to growth as more parts of the economy that were locked down to stop the spread of the virus re-opened. British business had the fastest growth in five years. MSCI’s broadest index of Asia-Pacific shares outside of Japan lost 1.9%. The euro-zone manufacturing PMI rose from 47.4 in June to 51.1 in July and the services PMI rose from 48.3 to 55.1. The composite index rose to 54.8, a 25-month high.

World stocks ended four days of gains on Friday after U.S. President Donald Trump cranked up simmering tensions with China by banning U.S. transactions with two popular Chinese apps, Tencent’s WeChat and ByteDance’s Tiktok. MSCI’s broadest index of world stocks fell m0.2% on Friday after four days of gains. It was less than 3% away from a late-February peak. Asia-Pacific stocks outside of Japan fell 1% on Friday with Mainland Chinese stocks down more than 1%. Risk taking was also subdued on Friday with hopes fading on a quick deal by U.S. policymakers on stimulus worth at least $1 trillion. 

The Nasdaq closed lower on Friday, as data showed a sharp slowdown in U.S. employment growth and investors worried lawmakers would fail to agree on another fiscal stimulus bill to bolster the economy from a coronavirus-induced recession. The S&P 500 and the Dow Jones index ended flat to slightly higher on the day. The U.S. Labor Department’s closely watched report showed nonfarm payrolls increased 1.76 million in July, much lower than the record 4.8 million in June. However, the figure still topped economists’ expectations and analysts said it could take the pressure off Congress to agree on a relief bill after weeks of wrangling. Differences have partly centered around continuing an extra $600-per-week in unemployment benefits .Congressional Democrats on Friday offered to reduce a proposed coronavirus aid package by $ 1 trillion if Republicans would add a trillion to their counter-offer, but President Donald  Trump’s negotiators rejected the idea on Friday as the latest round of talks ended without a deal. The Dow Jones Industrial Average rose 46.5 points, or 0.17%, to 27,433.48, the S&P 500 gained 2.12 points, or 0.06%, to 3,351.28 and the Nasdaq Composite dropped 97.09 points, or 0.87%, to 11,010.98. The declines snapped the Nasdaq’s seven-session streak of gains, with the Dow and S&P falling after rising for five straight days. Each of the three major averages posted weekly gains.

The pausing and reversal of multiple state re-opening plans is keeping unemployment high. Jobless claims numbered 1.316 million in the week ending July 18, up by 109,000 from the previous week. Non-seasonally numbers decline by 141,816 to 1.371 million. Filings for Pandemic Assistance increased by 974,999 from 955,272 the week before. Continuing claims fell by 1.107 million to 16.197 million in the week ending July 11. The insured unemployment rate fell from 11.8% to 11.1%. After weeks of steady declines, jobless claims are not encouraging. The only good news is that rehiring is outpacing layoffs but that trend my not hold as more restrictions are added. The fact that initial claims are edging higher suggest the resurgence of the virus may be taking a toll on the labor market recovery.

It was a light week for economic data. Record low mortgage rates have spurred a rebound in the housing market. Existing home sales jumped 20.7% and new home sales rose 13.8%. More positive news may be following as weekly mortgage applications were up nearly 20.7% for the year ending July 17 and rates have tested record lows in recent weeks. Housing is a bright spot, but the broader economic recovery may be starting to lose steam. The resurgence of COVID-19 cases in many parts of the country have led to tighter restriction and businesses and consumers appear to be getting more cautious. The leading Economic Index (LEI) rose 2.0% in June, slightly less than the 3.2% increase in May, when many parts of the country started to re-open. In short, the economic recovery continues, but the pace is improvement appears to be slowing.

Next week, we get a look at personal income and outlays, durable goods orders and second quarter GDP.

Latest Data

The U.S. Economy:

The June reading for the Chicago Fed’s National Activity Index showed another sharp increase from April’s historic low. The index rose to 4.11, its highest reading on record dating back to March 1967. Three out of fur broad categories made a positive contribution to the index. The three-month moving average was -3.49, up from -6.36 in May. Production related indicators contributed 2.22 to the index, up from May’s 0.84 reading. The sales, orders and inventories contributed -0.24, compared with May’s 0.04 reading. This was in response to firms drawing down existing inventories rather than placing new orders. Employment related indicators added 1.74, similar to May’s 1.73 reading. The personal consumption and housing category contributed 0.4, down from 0.89 the previous month. Like the economy, the index has seen wild swings the last few months and will likely settle down to smaller moves. With rising infections and more restrictions, big gains in employment and spending will be curtailed. The manufacturing sector is positive but faces a long road back to pre-COVID-19 levels. 

Construction spending put in place disappointed in June, declining 0.7%, Weakness was widespread among components but the residential sector was particularly weak, falling 1.5% from it’s May level. New single-family construction tumbled 3.6% and was 1.9% lower than a year earlier. Spending on multifamily homes fell 3% in June and was 2,1% lower than a year ago. The nonresidential sector advanced 0.2% in June. Public construction fell 0,7 in May but was up 6.2% from a year earlier. Since peaking in February, private residential construction has declined nearly 10%, Although we expect a quick recovery, risks are weighted to the downside. The job market is slowing as new coronavirus cases increase. Interest rates are low, but credit conditions are starting to tighten. The hits from weakness in stores and offices from the virus will keep the nonresidential sector weak for years. 

The ISM manufacturing index increased from 52.6 in June to 54,2 in July, suggesting a broadened manufacturing economy. New orders increased from 56.4 to 61.5. of 18 industries, 13 reported growth in new orders, compared to 11 in June. The production index increased from 57.3 to 62.1. 13 industries reported higher production in July. The employment index inched higher from 42.1 to 44.3, still mat depressed levels. He supplier deliveries index was down from 56.9 to 55.8 in June. A reading below 50 indicates faster deliveries. Disruptions in supply chains are still causing problems for manufacturers. The inventories index dropped from 50.5 to 47, indicating lower inventories. The customer inventories index fell 3 percentage points to 41.6, indicating customer stocks are too low. Prices rose from 51.3 to 53.2. Manufacturing is improving but the rising numbers of coronavirus cases will be a test. If consumer spending can hang on, the economy might keep on growing, but if there is no second government stimulus plan, downside risks increase significantly.

U.S. vehicle sales took off in July as consumers hit the road for summer. Sales equaled a seasonal adjusted annual rate of 15 million in July, up from 12.7 million in June. Year-over-year sales were still down 11.6% but much improved from the 46.2% decline in April. Unit sales of light trucks increased 15.9% from June, down 6.25 y/y. Car sales were up 25.6%, but down a mirror-image 25.6% year-over-year. The July jump was inspiring, but the rising number of coronavirus cases may slow consumer spending. Car sales are holding up because much of the damage caused by the virus has concentrated in the lower income brackets. However, if consumer spending falters, layoffs may make inroads at higher income levels. Because of the economic uncertainty, the range for new sales is wide, between 14 million to 16 million if things go right.

The trade deficit narrowed for the first time since the CVID-19 crisis began. June’s trade deficit came in at $50.7 billion, down from May’s $54.8 billion deficit. The narrowing came in a 9.4% jump in exports.  As the global economy began recovering from April and May’s flattening. Imports increased for the first time this year, up 4.7%, but were still down 20% from a year earlier. Exports were down 25% from am year earlier. Nominal goods exports jumped 14.5%. Of the major categories, only foods, feed and beverages declined, down 4.6%. Industrial supplies and capital goods increased 9.5% and 12% respectively. Goods imports grew 5.4%. Industrial supplies declined by 19% but consumer goods rose by 10.4%. Trade volumes have been hard hit by the virus. The volume of imports and exports was down nearly 25% in the second quarter from a year earlier. The road back will belong for trade.

The ISM non-manufacturing index increased by a percentage point in July to 58.1. Details were generally better. The business activity increased from 66 to 67.2, with 14 industries reporting an increase in business activity. The new orders index rose 6.1 percentage points to 67.7, 12 industries reported an increase in new orders. The employment index decreased from 43.1 to 42.1. Supplier deliveries fell from 57.5 to 55.2. The inventory index fell from 60.7 to 52. Comments from respondents included “Increased demand for repair, maintenance and operating supplies” and “Increased stock for customer-driven activity and seasonal increase due to storm season.” The non-manufacturing economy broadened in July, but business activity will be tested over the next few months as new coronavirus cases mount. 

Payroll employment increased slightly above the consensus, adding 1.763 million jobs. Leisure/hospitality and retail accounted for most of the gains, adding 850,000 together, about half the gain. Healthcare also rebounded with the addition of 200,000 jobs. Temp help increased by 215,000 as employers tested the durability of the recovery. The unemployment rate fell by a full percentage to 10.1%. In total, employment has increased by 9.2 million during the past three months. That still leaves employment down 12.9 million from February. The July number was good but many parts of the country have throttled back the last few weeks as coronavirus cases have increased in many states. Hidden in the employment report is that while leisure/hospitality jobs are returning, job for more skilled workers in business/professional services are making little headway and are declining in computer services, management and advertising. These are aftereffects of the stressed economy. Also, the PPP plan is expiring and the $600 weekly benefit plan for workers has already expired. This will hurt consumer spending. Payroll gains will weaken in August and September and there may not be any gains later in the year.

Important Data Releases This Week

The June durable goods orders report will be released on Monday, July 27 at 8:30 AM. Orders rose by 15.7% in May and core capital goods orders were up 1.6%. We expect another strong rebound got June with orders rising 7.0%. 

The June advance trade in goods report will be released on Wednesday, July 29 at 8:30 AM. Trade volumes have been pounded by the coronavirus. Exports are off by a third and imports by a quarter from a year earlier, keeping the goods deficit high at $74.3 billion. Only a slow Improvement is expected as global economies re-open, with the deficit coming in at $70 billion.

The first estimate of second quarter GDP report will be released on Thursday, July 30 at 8:30. The second quarter us terrible with output projected to fall 35% annualized. The third quarter will be better, with a robust rebound. There are risks as new coronavirus cases are spiking and many states have started new restrictions. We do not think there will be a total lockdown will follow but high frequency data suggests the economy is slowing.

The June personal income and outlays report will be released on Friday, July 31 at 8:30 AM. Personal spending likely increased 6.2% in June, in line with retail sales data. Personal income likely fell 1.3% as job income rose but government payouts fell sharply.

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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.