Employment Growth Seems to be Slowing, Another Bad Sign

By | July 20, 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

Europe’s stocks and fast charging currencies were left treading water on Friday as EU leaders met in Brussels to try and hammer out a 750 billion euro post-pandemic recovery fund. European and world equity markets were heading for a third weekly gain in a row, but last week was the smallest gain and Friday’s go-slow path involved all asset classes from commodities to bonds. London’s FTSE and Madrid had all sagged in the red in early trading. Investors say that EU leaders will eventually deliver on the stimulus package but there are still details to be completed. Investors are concerned about the increasing tide of new coronavirus cases in the U.S and elsewhere and what effect it will have on the global economy.

The S&P ended higher on Friday as investors weighted the prospect of more fiscal stimulus against fears of more business interruptions due to a record rise in coronavirus cases. For the week, the Dow rose 2.3% and the S&P increased 1.2%. Part of the weekly increase came over optimism over an eventual coronavirus vaccine and hopes of a post-pandemic economic recovery. This helped investors to look past a continuous surge in new COVID-19 cases. The U.S. added 77,000 new cases on Thursday. This upcoming week, earnings reports will come in at a higher gear, as investors will look for clues of an eventual recovery.

More than a million Americans are filing for insurance benefits every week and the rate of decline is slowing. Jobless claims numbered 1.300 million in the week ending July 11, down by only only 10,000 from the previous week. Non-seasonally numbers actually increased. Filings for Pandemic Assistance decreased from 1.046 million to 928,488. Continuing claims are declining steadily and fell from 17.76 million in the week ending June 27 to 17.38 million in the week ending July 4. The insured unemployment rate fell from 12.2% to 11.9%. After weeks of steady declines, jobless claims are now stuck. Employers are waiting for a firming of demand in order to hire more workers and the rising tide of infections and additional shutdowns could not have come at a worse time. Although conditions are not likely to get significantly worse, it may take a longer time to get better. 

Two themes emerged this week that are seemingly in contradiction with each other. The incoming economic data is mostly good. Retail sales increased 7.5% in June and lifted sales within striking distance of pre-COVID-19 levels. Sales look like a V-shaped recovery, but the future may not look so bright if businesses are forced to -re-close. The other theme is negative, new coronavirus cases surged to a record 78,389 on Thursday, a record. Mask mandates are rising and some high frequency data, such as restaurant trackers and cell-phone data, suggest that economic growth is plateauing as more restrictions are enacted. Part of the increased cases of COVID-19 may be coming from increased testing. However, the recent positive rate was 8.5%, up from 4.3% earlier in June. Twice as many people that are being testes are positive. 

Industrial production increased 5.4% in June, on a surge in utility output and a big 7.2% surge in manufacturing as more factories re-opened. Auto and parts production increased 105%. Low oil prices continue to weigh on the mining sector that fell for a fourth consecutive month. We don’t expect a V-shaped recovery for manufacturing but a upward trend is likely. U.S. housing starts continued to rebound in June, rising from 1.011 million to 1.186 million annualized units U.S. housing starts continued to rebound in June, rising from 1.011 million to 1.186 million annualized units. Low mortgage rates are fueling housing activity, another possible V-shaped recovery. However, banks are tightening standards, as delinquencies are trending upward.

The increase in sales is good news but the retail picture may not be so bright in coming months if businesses are forced to re-close. Employment growth seems to be slowing, another bad sign. Total shutdowns are likely not in the cards but mandatory mask restrictions and delayed re-openings may be. Economic activity may slow and the recent data we have seen might be a tale of a what-could have been recovery.

Europe’s stocks and fast charging currencies were left treading water on Friday as EU leaders met in Brussels to try and hammer out a 750 billion euro post-pandemic recovery fund. European and world equity markets were heading for a third weekly gain in a row, but last week was the smallest gain and Friday’s go-slow path involved all asset classes from commodities to bonds. London’s FTSE and Madrid had all sagged in the red in early trading. Investors say that EU leaders will eventually deliver on the stimulus package but there are still details to be completed. Investors are concerned about the increasing tide of new coronavirus cases in the U.S and elsewhere and what effect it will have on the global economy.

The S&P ended higher on Friday as investors weighted the prospect of more fiscal stimulus against fears of more business interruptions due to a record rise in coronavirus cases. For the week, the Dow rose 2.3% and the S&P increased 1.2%. Part of the weekly increase came over optimism over an eventual coronavirus vaccine and hopes of a post-pandemic economic recovery. This helped investors to look past a continuous surge in new COVID-19 cases. The U.S. added 77,000 new cases on Thursday. This upcoming week, earnings reports will come in at a higher gear, as investors will look for clues of an eventual recovery.

More than a million Americans are filing for insurance benefits every week and the rate of decline is slowing. Jobless claims numbered 1.300 million in the week ending July 11, down by only only 10,000 from the previous week. Non-seasonally numbers actually increased. Filings for Pandemic Assistance decreased from 1.046 million to 928,488. Continuing claims are declining steadily and fell from 17.76 million in the week ending June 27 to 17.38 million in the week ending July 4. The insured unemployment rate fell from 12.2% to 11.9%. After weeks of steady declines, jobless claims are now stuck. Employers are waiting for a firming of demand in order to hire more workers and the rising tide of infections and additional shutdowns could not have come at a worse time. Although conditions are not likely to get significantly worse, it may take a longer time to get better. 

Two themes emerged this week that are seemingly in contradiction with each other. The incoming economic data is mostly good. Retail sales increased 7.5% in June and lifted sales within striking distance of pre-COVID-19 levels. Sales look like a V-shaped recovery, but the future may not look so bright if businesses are forced to -re-close. The other theme is negative, new coronavirus cases surged to a record 78,389 on Thursday, a record. Mask mandates are rising and some high frequency data, such as restaurant trackers and cell-phone data, suggest that economic growth is plateauing as more restrictions are enacted. Part of the increased cases of COVID-19 may be coming from increased testing. However, the recent positive rate was 8.5%, up from 4.3% earlier in June. Twice as many people that are being testes are positive. 

Industrial production increased 5.4% in June, on a surge in utility output and a big 7.2% surge in manufacturing as more factories re-opened. Auto and parts production increased 105%. Low oil prices continue to weigh on the mining sector that fell for a fourth consecutive month. We don’t expect a V-shaped recovery for manufacturing but a upward trend is likely. U.S. housing starts continued to rebound in June, rising from 1.011 million to 1.186 million annualized units U.S. housing starts continued to rebound in June, rising from 1.011 million to 1.186 million annualized units. Low mortgage rates are fueling housing activity, another possible V-shaped recovery. However, banks are tightening standards, as delinquencies are trending upward.

The increase in sales is good news but the retail picture may not be so bright in coming months if businesses are forced to re-close. Employment growth seems to be slowing, another bad sign. Total shutdowns are likely not in the cards but mandatory mask restrictions and delayed re-openings may be. Economic activity may slow and the recent data we have seen might be a tale of a what-could have been recovery.

Next week will be light on the economic calendar. We get a look at existing home sales, leading economic indicators and weekly jobless claims

Latest Data

The U.S. Economy:

Small business optimism is recovering but remains depressed because of COVID-19. The NFIB small business optimism index increased 6.2 points in June to 100.6. Eight out of ten components improved for the month. Earnings trends fell to the lowest since 2010, while expected credit condition also declined for the month. The net percent of respondents that plan to increase employment improved from 8% in May to 16% in June, still well below pre-COID-19 levels, which tracked north of 20%. Expectations for the economy to improve the next six months improved to 39%, up five percentage points from May. Expectations for real sales also improved in June to 13% from -24% in May. Earnings trend were the biggest drag on the headline index. Earnings trends for the last three months declined to -35%, the lowest since March 2010. The NFIB said the Paycheck production Program helped small businesses. Small business optimism should continue to improve but the recent wave of new infections and renewed shutdowns pose a real downside risk.

Disinflationary pressures are easing. The consumer price index rose 0.6% in June, after declining the previous three months. The June gain was driven by a big 5.1% increase in energy prices. Food prices also increased in June, rising 0.6%. That was the weakest gain in three months. The core index increased 0.2%, following three months of declines. The CPI was up 0.7% and the core index 1.2% from a year earlier. The policy implications from the report are not that significant. The Fed is not going to remove stimulus or raise rates anytime soon.

Industrial production is rising after historic declines during the apex of the recession. Industrial Production rose 5.4% in June, following a 1.4% advance in May. Total IP declined 12.7% in April and 4.4% in March. Manufacturing output increased 7.2% in June but remains 11.1% below its pre-COVID-19 apex. Motor vehicle and parts output surged 105%, as major automakers re-opened plants. Excluding the auto sector manufacturing production advanced 3.9% in June. Warm weather contributed to a 4.2% jump in utility output. Mining production fell 2.9%, the fourth consecutive monthly decline. Business equipment production rose 11.8% in June after increasing 7,4% in May but did not offset the 23.4% decline in April. Other signs of manufacturing are positive but modest. The ISM manufacturing index is above the 50 mark. Manufacturing is improving but with a weak global economy, progress is likely to be slow. Tensions with China are increasing and may impede the recovery. 

Retail sales continued to rise at a sharp pace in June but that was before a rise in infections that may have slowed sales growth. Retail sales increased 7.5% in June, following a 18.2% jump in May. That did not offset the 14.7% decline in April and the 8.2% drop in March. Sales in June were up 1.1% above its year ago level, but down 0.6% from February. Motor vehicle ad parts sales increased 8.2% in June and furniture and home furnishings sales jumped 37.4%. Building material sales fell 0,3% in June and food and beverage sales declined 1.2%. Looking forward, the new wave of infections and the closure of some stores and restaurants is likely to slow sales growth. The shock wave caused by the virus has changed spending. Mall traffic is down but non-store retailers have seen some decent growth. Sales of motor vehicles have rebounded but remain well below the pre-COVID-19 levels. Retailers have to work to get consumers back on stores and that means offering price discounts. The outlook is likely positive but modest and the re-closure of some businesses will hurt sales.

Inventory build stumbled further in May, with business stockpiles contracting 2.3% for the month. Among the categories, retail contracted 6.2% and manufacturing rose 0.2%. Wholesale stocks fell 1.1%. Business sales bounced back after a disastrous April. Wholesale sales rose 5.4%, retail increased 17.1% and manufacturing sales gained 3.1%. The inventory-to-sales ratio fell from 1.67 to 1.51 for May. For reference, the I/S ratio for May 2019 was 1.4. The cycle low was 1.25 and the previous recession high was 1.49. We expect sales to continue improving and some inventory build to follow. The risk is the spike in new coronavirus cases and further lockdowns. 

U.S. housing starts continued to rebound in June, rising from 1.011 million to 1.186 million annualized units. Single-family starts rose 17.2% to 831,000 annualized units, the highest total since March. In addition, the multi-family sector rose 17.6% to 355,000 units. Leading indicators remain positive but modest, rising 2 to 1.241 million annualized units. Single-family permits rose11.8% but the multi-family sector saw a 13.4% decline. Housing activity was decent in June and suggests a modest recovery may continue. Other indicators of housing activity are positive, including a sharp rebound in pending home sales and the upward trend in mortgage applications suggest activity will continue. Nevertheless, the re-closures of businesses in Texas and California and the increased wave of infections is likely to give the consumer some pause. There may a slowdown in several key areas. We do think the worst is over and housing will continue to advance.

International:

China’s economy rebounded in the second quarter after a deep slump at the start of the year. However, there was weakness in domestic consumption that underscored the need for more policy support to bolster the recovery after the shock of the coronavirus crisis. Gross domestic product rose 3.2% in the second quarter after falling 6.8% in the first quarter, the worst downturn since the early 1990s. The second quarter increase is viewed as being driven by government stimulus, largely aimed at the industrial sector. Consumption remains weak. A separate release of retail sales showed a decline of 1.8% on-year in June, the fifth month of decline. Output increased 4.8% in June from a year earlier, the third month of growth, following a 4.4% rise in June. The government is expected to continue its stimulus efforts.

Important Data Releases This Week

The June Chicago Fed National activity index will be released on Tuesday, July 21 at 8:30 AM. The index has been gaining some lost ground and that process likely continued in June. The index is projected to rise from 2.61 to 2.85.

The June existing home sales report will be released on Wednesday, July 22 at 10 AM. Sales improved by 44% to an annual pace of 3.91 million in May. We expect a further jump to 4.75 million for June.

The June leading economic indicator report will be released on Friday, July 24 at 10:00. The index may be a little dated these days as cell phone and TSA screenings are closely watched as high frequency data. Still, the indicators may give some insight. In May, the LEI advanced 2.8% and is projected to have advanced 2.4% for June.

The June new home sales report will be released on Friday, July 24 at 10 AM. New home sales improved to 676,000 in May. Sales should jump to 725,000 in June.

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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.

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