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.
Asian stocks followed Wall Street lower on Friday as signs of a strengthening recovery boosted bets on higher inflation and an earlier tapering of Federal Reserve stimulus. Japan’s Nikkei fell 0.8% early in the Asian session, while MSCI’s broadest index of Asian-Pacific shares outside of Japan was off 0.3%. U.S. stocks got some relief on reports that President Biden is willing to compromise over a proposed corporate tax rate. While Fed officials have consistently said they expect current inflationary pressures to be transitory and for ultra-easy monetary policy to stay in place for some time, they also are increasingly touting the need to start talking about a tapering of stimulus. Many eyes will be on Friday’s U.S. employment report and its impact on future monetary policy.
Global stocks rallied on Friday and closed near all-time highs after U.S. data was strong but not as robust as expected, easing investor fears the Federal Reserve would soon rein in monetary stimulus. U.S. employers resumed hiring, but the addition of 559,000 jobs was below the 650,000 forecast economists expected. The Dow Jones Industrial Average rose 179.35 points, or 0.52% to 34,756.39, while the Nasdaq added 199.98 points, or 1.47% to 13,814.49. Analysts were watching progress for proposed U.S. infrastructure spending. President Biden rejected a new proposal from Republican Senator Shelley Moore Capito. They were to meet on Monday. Oil rose, with Brent topping $72 a barrel for the first time since 2019 on OPEC supply discipline and recovering demand.
Last week’s data was decent but not as strong as expected. This is, in part, due to the slowness in the supply chains that cannot ramp up fast enough to match demand. The message from the ISM indexes and other economic data, is that it is not enough to juice up demand with fiscal and monetary stimulus, the economy needs the supply chains to function back to normal, in order for the economy to function at full steam. This was evident in the ISM manufacturing survey that kicked off the data flow last week. The total index advanced 0.5 of a percentage point to 61.2 for May. Long wait times for parts is having a reaction and production fell to 58.5 from 62.5. Demand is strong, with new orders advancing 2.7 percentage points. Factories are seeing a once in a decade surge in orders but cannot get raw materials to fill orders. Price pressures are at high levels if you can get the input parts.
The ISM services index shot up to a record high of 64 in May. It is increasingly evident that not only manufacturers are having trouble with supply chains. The supply delivery index rose to 70.4 a figure oof service industries reported growth only exceeded in last year’s lockdowns. It is difficult to grasp the euphoria among service industries. 100% of service industries reported overall growth. 100% reported stronger business activity, 100% of industries reported stringer orders and higher prices.
Employers added 559.000 more workers in May and while that was a near doubling from April, it fell short of expectations. Demand of labor is clearly strong as evidenced by record job openings and elevated hiring plans. Wages are going up beyond pre-pandemic levels is a sign of strong demand for workers. The length of the average workweek is trending higher, but workers are still hard to find. This week will be light on economic data. The NFIB small business index will be released, as well as data on inflation and the trade balance.
The U.S. Economy:
The value of construction put in place rose a modest 0.2% in April, up 9.8% from a year earlier. During the first four months of the year, construction spending amounted to $452.3 billion, up 5.8% from the same time period a year earlier. The April advance was led by private construction, which advanced 0.4% in April. Residential construction increased 1.0% in April, while nonresidential construction fell 0.5%. Public construction fell 0.6% in April. The government had reported earlier that housing starts fell sharply in April. Business investment in nonresidential structures fell in the first quarter as a rebound in mining was offset by a drop in commercial and healthcare buildings. Construction spending is likely to remain under some cooling affects, as the strength in the residential part will be slowed by persistent weakness in the nonresidential sector. The fate of the public sector is tied up in Congress, which is still debating the size and scope of the proposed infrastructure bill. In all, construction spending should stay modestly positive.
The ISM manufacturing index increased from 60.7 in March to 61.2 in May. New orders saw a 2.7% increase in May, up for a 12th consecutive month. 16 out of 18 industries saw an increase in new orders and all six of the largest manufacturing industries. The production index fell 4 percentage points to 58.5, with 13 industries reporting growth in May. The production index stood at the lowest reading since June 2020. Employment fell 4.2 points to 50.9, with nine industries reported growth in employment. An overwhelming of manufacturing industries are trying to increase employment and over 50 percent are reporting difficulties in finding workers. The supplier delivery index increased by 3.8 percentage points to 78.8, the highest reading since 1974 and continuing a long trend of slowing deliveries. Inventories increased by 4.3 percentage points to 50.8, with eight industries reporting higher inventories. The price index fell by 1.6 percentage points to 88. Eleven industries reported higher prices in May. Backlogs registered 70.6 percent, up 2.4 percent from April. The index stood at the highest level since that series began in January 1993. 15 industries reported higher backlogs in May. New export orders moved up 0.5 percentage points to 55.4, with 8 industries reporting higher export orders. The import index advanced by 1.8 percentage points in May.
The ISM report reflects the strong level of business activity in the manufacturing sector, along with its challenges. Demand is strong, reflected by the increase in new orders. However, problems in the supply chain and difficulties in finding labor are hurting production, which fell in May. Backlogs are at record levels. Employment fell, with almost every industry wanting to expand employment and a large majority of companies having troubles finding workers. Prices are still a problem but there was some ease in May. Companies are reporting troubles with finding raw materials and with transportation. Both exports and import orders increased but there are still holdups in the supply chains. There was some improvement in ports of entry, but overland-transport and container shortages challenges persist across the global supply chains. Overall, manufacturing is strong, but would be stronger if supply chain and labor problems could be resolved.
New vehicle sales tapped the brakes in May. Supply constraints and decreased fiscal support slowed sales from their break-net pace of the past two months. Sales equaled a 17 million seasonally adjusted annualized pace in May, down 9.1% m/m but were up 40.3% above the pandemic-laden totals of May 2020. Both cars and light truck sales fell. Seasonal adjusted annualized unit sales of light trucks and SU
Vs decreased by 10.4% from April but were up 4.1% above May 2020. Car sales fell 6.4% from April. Car sales were up 47.7% from a year earlier but were down 17.5% of sales in May 2019, as consumer tastes for light trucks have been robust. We project sales to track near 17.5 million for the remainder of the year.
The ISM services index increased to64 in May, up from April’s 62.7 reading. The business activity index rose 3.5 percentage points to 66,2 percent, with all 18 industries reporting an increase in business activity. Employment fell to 55.4, down 3.5 percentage points from April. 10 industries reported an increase in employment in May. The supplier delivery index registered 70.4%, 4,3 percentage points from April. 17 industries reported slower deliveries in May. Inventories increased by 2.4 percentage points to 51.5, with seven industries reporting higher inventories. The price index rose to 80.6%, up 3.8 percentage points from April. It was the second highest reading in that series. Respondents noted increased demand and supply chains gaps and problems with finding labor. Container shortages are hampering activity in a significant way at ports. Prices are going up everywhere. The report shows a strong economy and some are noting the supply chains are starting to ramp up in an effort to match demand.
Factory orders slipped 0.6% in April, following a 1.4% increase in March. Excluding transportation, orders grew 0.5% New orders for transportation declined 6.6%, constrained by the global semiconductor chip shortage. Inventories added 0.3%, following a 0.8% increase in March. Orders were up 14.2% on a year-on-year basis. Manufacturing accounts for 11.9% of the U.S. economy, is being supported by a shift toward gods and from services in the pandemic. Motor vehicle and parts orders fell 6.15 in April. Orders for electrical equipment, appliances and components fell 0.7%. Backlogs gained 0.2%. Core capital goods orders surged 2.2% in April. The manufacturing sector is strong and would be stronger except for supply shortages. Business investment in equipment has enjoyed double-digit growth over the last three quarters, driven by the massive fiscal stimulus to help soften the blow by the global pandemic.
Job gains rebounded by 559,000, a decent gain but less the 650,000 expected by consensus. That leaves employment about 7.6 million below its peak in February 2020. Last month’s hiring was led by the leisure and hospitality, which added 292,000 jobs, with restaurants and bars accounting for 186,000 of those positions. Local government education employment increased by 53,000 as the resumption of in-person learning and other school activities resumed in parts of the country. Manufacturing increased by 23,000 jobs, but construction fell by 20,000. The unemployment rate fell to 5.8% from 6.1%, mainly due to 53,000 people leaving the labor force. The labor participation rate fell to 61.6% from 61.7%. Average hourly earnings rose a solid 0.5% after increasing 0.7% in April. Year-over-year growth surged to 2.0% from April’s 0.4% gain. Employment gains are expected to be strong, but the labor market has still not recovered from the pandemic. Labor constraints are still a problem with many industries.
Important Data Releases This Week
The May NFIB small business optimism report will be released on Tuesday, June 8 at 6:00 AM. The NFIB index has been making steady progress, reaching 99.8 in April. Small businesses are having trouble finding employees and are noting price increases for inputs. We expect the index to hit 100.2 for May.
The April trade balance report will be released on Tuesday, June 8 at 8:30 AM. According to the advance goods report, goods exports rose 1.2%, while imports slipped 2.2%. This implies weaker import growth than expected. Autos are a supply chain problem and it appears consumer goods imports slipped in April after a strong March. Trade volumes will pack up in coming months as firms try and restock inventories. The trade balance will narrow to $69 billion from $74.4 billion in March.
The May CPI report will be released on Thursday, June 10 at 8:30 AM. We expect the CPI to rise 0.6%, bringing the yearly rate to 4.9%, the highest since 2008. Services have now joined manufacturing with supply chain problems. A weaker than expected reading would help calm fears that inflation is out of control. The Fed is starting to talk about plans and timing for a taper.
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