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.
The Nasdaq ended Friday at a new peak but the other Wall Street indexes fell, reflecting sentiment stemming from a disappointing U.S. jobs report which raised fears about the pace of the economic recovery but weakened the argument for near-term tapering. The virus and its impact on the pace of the economic recovery was evident in the Labor Department report that showed nonfarm payrolls increasing by only 235,000 jobs in August, widely missing the consensus expectation of 750,000. The main weakness was in the leisure/hospitality sector, where employment was unchanged, and the slowdown was largely blamed on the increase in infections of the Delta variant. The S&P 500 index fell 0.03% on Friday and the Dow Jones Industrial Average declined 0.2%. Meantime, Euro-zone business activity remained strong, and data suggests the bloc’s economy could be back to pre-Covid levels by year’s end, despite the rise of the Delta variant.
The job report was a major miss at a critical time. However, this is not a sign the labor market is in trouble. Like so many things in this pandemic era, it is a supply problem, not a demand problem. The NFIB small business report showed the share of businesses reporting jobs are hard to fill rose to its highest level in August. Employers are willing to hire, but a variety of reasons are keeping workers off the market. The labor participation rate did not budge in August at a still low 61.7%. It is a sellers’ market, as reflected in the increase in average wages in August, which rose 0.6%, twice the expected increase. This brought the year-over-year increase to 4.3%. any number of factors are keeping employees off the market, from COVUD fears, lack of childcare, or extended benefits diminish the want to find work. Higher pay and the end of extended benefits might help some. For now, it is very unlikely the Fed will start to taper its bond purchases anytime soon.
The rest of the economic data released last week show an economy that is experiencing cross currents as it transitions from the initial vaccine and stimulus fueled surge to a yet-to-be-determined new ‘normal.” The first sign of a transition is that spending seems to have shifted from goods to services. Spending on durable goods and automobiles have faded, although autos are a special category because of low inventories caused by a lack of microchips. The savings rate has decreased as Americans shifted spending from goods to services but nowhere is the kind of retreat seen that matches the steep decline in consumer confidence seen recently. News about COVID and events in Afghanistan had a negative effect on confidence. Although consumer confidence fell, the number of people who think jobs are plentiful remains near the highest level in two decades. Still, household are worried about the future, although they see plentiful jobs.
The ISM manufacturing index rose to 59.9 and showed the factory sector is finding ways to thrive in a still difficult environment. Apart from a noted miss in employment, other categories improved in August. Inventories and customer inventories moved upward by more than five points, suggesting some improvement in the level of depleted inventories. The prices paid index moved back suggesting although prices are still rising, it is at a slower pace. The supply delivery index still showed slowing deliveries, but it too was a slower pace. Demand for goods is still strong, but the slower pace of orders will help the supply; chains catch up.
Next week will be light for economic data, with JOLTS data, and inflation in the spotlight.
The U.S. Economy:
Construction spending rebounded in July after posting a modest decline in June. The value of construction put in place increased 0.3% in July. Private residential construction spending increased 0.5% in July, with new single-family construction spending increasing 0.9%. The multi-family sector was unchanged in July. Nonresidential construction spending fell 0.2% for the month. Public construction spending increased 0.7% in July. In the nonresidential sector, construction spending increased for healthcare, educational sectors and amusement and recreation sectors, but fell for communication, power generation, lodging and office construction. Highway and street construction spending made a decent 1.9% m/m gain. Housing is cooling off a bit but should remain positive, while weakness will continue in the nonresidential side. The public side will depend a lot on passage of the infrastructure bill opposed by most Republicans in Congress.
The ISM manufacturing index increased by 0.4 of a percentage point to 59.9 in August. The new orders index increased by 1.8 percentage points to 66.7. All of the six largest industries expanded at strong levels and increased above the 60 mark for the 14th consecutive month, matching the last manufacturing expansion that began in February 2016. The production index increased 1.6 percentage points to 60 in August, with 13 industries reporting greater production. The employment index fell 3.9 percentage points to 49, returning to contraction after one month in the positive zone. Supplier deliveries fell 3 percentage points to 69.5, the third straight month of slowing expansion. The inventory index increased by 5.3 percentage points to 54.2, with 10 industries reporting higher inventories. The price index fell 6.3 percentage points to 79.4, a third consecutive month of slower price increases. Prices are still going up, as 16 out of 18 industries reporting paying higher prices. Backlogs rose by 3.2 percentage points to 68.2, with 15 industries reporting higher backlogs. New export orders rose by 0.9 pf a percentage point to 56.6, while new import orders rose by 0.6 of a percentage point to 54.3, with eight industries reporting higher imports.
The ISM report suggests that manufacturing companies are still struggling with record long raw material lead times, critical shortages of critical basic materials, rising commodity prices and difficulties in transporting products. There are also labor shortages and a high turnover rate as workers move to better jobs. Disruptions from COVID are leading to ports congestion and transportation companies are felling stress. Demand remains strong and confidence is high, despite the difficulties. Comments from executives include the fact that production is restrained because of chip shortages in the transportation equipment sector. Steel and aluminum is in short supply. Machinery companies see backlogs continue to climb because of slow production because of worker shortages and lack of access to key inputs and price increases that neve seem to stop. Despite still increasing, there were improvements in supply deliveries and prices as greater output is slowly starting to balance with demand.
Annualized vehicle sales fell again in August. U.S. sales of cars and light trucks equaled an annualized pace of just 13.1 million. Total sales were down 14.4% from August 2020, when the auto rebound began in earnest. Sales of both cars and light trucks both fell in August. Light truck and SUV sales fell 10.2% from July and were 14.7% below August 2020m while car sales fell 12.2% m/m and were down 13.1% from a year earlier. Underlying demand remains strong, but sales will suffer until the chip shortage is solved. The timing of that improvement is unknown but there should be some improvement by year’s end.
The nominal trade deficit narrowed more than expected in July, falling from $73.2 billion in June to $70.1 billion in July. Nominal exports were up 1.3% in July, while imports slipped 0.2%. June’s trade balance was revised from $75.75 billion to $73.2 billion and the revision was driven by the Olympics being moved from June to July. Charges for the use of intellectual property increased by $900 million. July’s imports included the rights to broadcast the 2020 (2021) Summer Olympic games from Japan. The deficit with China fell by $8.4 billion to $82.0 billion in the second quarter. Exports to China increased by $1.3 billion to $47.8 billion in the second quarter and imports decreased $7.0 billion to $130.7 billion. The trade deficit remains wide, but as spending shifts from goods to services, the deficit will narrow.
Factory orders rose 0.4% in July, following a 1.5% increase in June and a 2.3% increase in May. Excluding transportation, orders were up 0.8% in July the fifth consecutive monthly gain. Core capital goods order rose 0.1% in July, following a 1.0% jump in June. Orders were up 18.0% from a year ago basis. Shipments were up 1.6% in July. Unfilled orders rose 0.3%, following a 0.8% increase in June. The unfilled order-to-shipments ratio was 6.79, down from 6.90 in June. New orders for durable goods decreased 0.1%, following two consecutive monthly increases. New orders for nondurable goods increased 0.9% in July. Transportation equipment orders fell 2.1%, following two consecutive monthly increases. The outlook for the factory sector is good, excluding the transportation equipment sector. that is seeing a microchip shortage hurt production. Other sectors are still struggling with the supply chain problem but there are some tentative signs of a slow movement towards balance.
The ISM services index fell 2.4 points in August to 61.7. The business activity index fell 6.9 points to60.1, with 15 industries reported stronger business activity. New orders fell 0.5 of a percentage point to 63.2, with 13 industries reporting increased orders. Employment fell by 0.1 pf a percentage point to 53.7, with nine industries reporting higher employment. The supplier deliveries index fell 2.4 points to 69.6, with 17 industries reporting slower deliveries but at a slower pace. Inventories fell 2.3 percentage points to 46.9, with seven industries reporting increased industries. The price index fell from 82.3 in July to 75.4, indicating price increases but at a slower pace. Comments from respondents show that supply chain and labor problems are still prevalent. Cost increases are hurting business, especially in transportation equipment. Chip shortages are hurting both near-term and longer-term projects. Steel shortages are pushing delivery times out. The service industries are doing okay but are seeing much of the same bottlenecks as the manufacturing sector.
Payroll employment dropped sharply in August to 235,000, well below expectations. However, gains for July were revised up to 1.053 million and June was revised to 962,000. The number of unemployed persons edged down to 8.4 million, following a large decrease in July. The unemployment rate fell to 5.2%. Both levels are well below the recession peaks of February-April 2020 but well above the 5.7 million and 3.2% unemployment rate before the pandemic began. The main weakness was in leisure/hospitality, which was unchanged in August. Government payrolls fell after July’s outsize gain. Other sectors of the economy faired better, with manufacturing adding 37,000 jobs and business services added 74,000. Transportation and warehousing added 52,000, bringing that sector 22,000 jobs above its pre-pandemic level. The average workweek was unchanged at 34.7 hours for a third consecutive month. The average wages rose by 17 cents to $30.73 in August. The report was disappointing and showed that COVID still stalks the land and economy. Expanded unemployment benefits end in September and that could add workers, However, some analysts say that COVID fears could dampen that optimism. The labor market is still in transition because of the virus.
Important Data Releases This Week
The August PPI report will be released on Friday, September 10 at 8:30 AM. While consumer prices moderated in July, the PPI expanded 1.0%. There is some evidence that inflation may have slowed a bit in August, but many eyes will be on the PPI report for some evidence to support that conclusion.. We think the PPI will rise 0.6% in August and the core rate rising 0.5%.
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