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 U.S. economy is showing continuing signs of recovering from the abnormally harsh winter. Retail sales came in better than expected and consumption is on a favorable trajectory heading into the second quarter. Early data on April employment was upbeat, with initial claims near the 300,000 mark for the first half of the month, far below the average of 343,000 for 2013. Manufacturing looks stronger, with industrial production up 0.7% in March. The investment details were solid and equipment investment appears ready to rise at a healthy level in Q2. Inflation remains restrained, with the CPI rising 0.2% in March and core CPI only up 1.6% from a year ago.
The picture for housing is more troubling. Housing starts did rise 2.8% to an annual rate of 946,000, below expectations. Economists expected a stronger rebound in March after harsh winter weather disrupted construction during preceding months. The March weakness was centered in the multi-family sector, which sank 3.1%. Single-family starts did rise 6%. However, the single-family sector has been basically treading water for several months. Fundamentals argue for a stronger rebound in housing, supported by healthy job creation, falling interest rates, and rising confidence. However, rising input costs, low inventories and other supply constraints could post-pone any meaningful rebound in housing.
In balance, the outlook is positive. The industrial sector is healthy and consumption is rising. Fundamentals are pointing to stronger business investment and the labor market is picking up from the winter woes. In the week ahead, we look for durable goods to corroborate the growing momentum in industrial activity. Existing home and new home sales will reflect a stable recovery poised for growth. Everything is pointing to an economy gathering strength going into the second quarter.
The University of Michigan’s sentiment index rose 2.6 points, the highest reading since July and suggesting consumers are shaking off the winter blues. Inflation picked up in March with a strong advance of the PPI index. The advance was fueled by services. Commodity prices are restrained and will limit the advance of overall inflationary pressures. Fed policymakers were worried about the lack of inflation in the economy. This may assuage some of their fears. Financial market conditions are becoming turbulent and somewhat less supportive for growth. The recent slide in the stock market does not seem to correspond with economic data. For a time, the stock market and the economy are heading in different directions.
Latest data: April 14-18
The U.S. Economy:
Residential construction came in softer than anticipated in March, although the weakness was concentrated in the multi-family component. Housing starts came in at 946,000 annualized units in March, 2.8% above February’s upward revised figure. Permits dropped 2.4% to a 990,000 units pace. Compared to this time last year, starts are down 5.9%, but permits were up 11.2%. Multi-family starts dropped 3.1%, but single-family construction rose 6.0% in March. The March construction numbers were soft and there are few signs of any impending surge in homebuilding. The current pace is still 14% below the November level. The steady upward trend in completions and permits suggest some room for growth. However, the single-family component is basically treading water. Homebuilding may still pick up some additional strength this year, but it may take several months of stronger income gains to re-kindle momentum in the market.
The Federal Reserve’s Beige Book report depicts an economy where activity is improving and recovering from the severe winter weather. The report, which covered mid-February through March, showed that economic activity expanded at a modest pace across most districts with the expectation of some Midwest districts that reported weaker results. A majority of districts reported stronger sales after weakened revenues earlier in the year, likely hurt by the severe weather. Manufacturing improved in all districts. Manufacturing firms are mostly optimistic about the remainder of the year. The reports of housing are uneven. The weather did depress sales in many districts. Inventories are reported low, but most districts expect stronger homebuilding the remainder of the year. Agriculture was mixed, with severe weather and drought affecting several districts. Overall, growth is modest, but improving and the pace of growth looks solid for the remainder of the year.
Industrial production is probably the single most important economic link affecting freight in the U.S. economy. Industrial production rose 0.7% in March and February’s increase was revised up to 1.2%, double the initial estimate. Manufacturing rose 0.5% in March following a 1.4% gain in February. Mining rose 1.5% in March and utility output added 1.0%. Factory output was soft last quarter, but the March report suggests an accelerating trajectory heading into the second quarter. Manufacturing rose 1.5% in Q1, but the three-month annualized growth rose to 4.2% in March. Severe weather in the first quarter is making it difficult to see clearly the underlying strength of the industrial sector. Motor vehicles and parts output fell 0.8% in March, but with sales picking up, we can expect a pickup in activity in Q2. Excluding the auto sector, manufacturing rose 0.6% in March. An inventory correction and bad weather held back production in the first quarter. Overall IP was boosted by huge gains in mining and utility production in Q1. As the inventory correction fades, manufacturing should pick up. There is positive momentum heading into the second quarter of the year. The stronger business equipment number for March, suggest that business investment will hold up. An encouraging note, as orders for capital equipment, both domestic and overseas has been weak lately. Industrial activity will turn in a positive, but still modest expansion this year, an important source of truck freight.
Retail sales soared in March, led by surging auto sales. Sales rose 1.1% in the month and 0.7% excluding autos. February growth was revised up to 0.7%. Sales in March were up 3.8% from a year earlier, up from 1.8% in February. The March report suggests that consumers began returning to stores after the severe winter disrupted spending patterns. Sales were widespread, led by a 3.1% jump in auto sales. General merchandise and building supply stores turned in a solid performance. The severe weather and the move from March last year to April of Easter, made the seasonal adjustment more difficult to recognize the underlying trend. However, consumer confidence is mending and there is pent-up demand for consumer durables. Fundamentals are strong for growth, but income growth is still lagging. We expect a gradual improvement in consumption over the course of the year. Consumer gods are also an important source of truck freight.
Consumer prices rose 0.2% in March, up from a 0.1% advance in February. The decline in energy prices moderated and food prices advanced, boosting overall inflation. Core inflation rose only 0.2% in March. Total CPI is up only 1.5% in March Y/Y and the core index is up 1.6%, both well below Federal Reserve policy thresholds. Some upward pressure in inflation is welcome at the Federal Reserve, whose minutes revealed concerns about the low inflation rate recently. Input prices are being restrained by the slow growth in the Chinese economy and higher capacity of several industrial metals. Oil prices have increased the last two months, but remain below year earlier levels and prospects are weakening for further near-term gains. Food prices are up, a result of the lingering drought in the West. Overall, we expect subdued inflation this year and a mild pickup next year.
China’s growth moderated to the weakest pace in six quarters and property construction plunged testing leaders’ commitments to rein in credit in as risks mount of a deeper slowdown. China’s GDP rose 7.4% in Q1, down from 7.7% in Q4 last year. Several economists question the accuracy of the numbers, citing the recent industrial production and retail sales reports suggest real growth was closer to 7%. Property development investment rose 16.8% in Q1, the weakest first quarter since 2009. Industrial production rose 8.8% in March and retail sales were up 12.1%, both weak readings, but suggesting that growth could be bottoming out. The biggest risk to China is the property sector, where leaders are trying to rein in credit to curb overcapacity and curb a $6 trillion shadow banking industry. Leaders are expected to adapt some measures to cushion the slowdown, without resorting to stronger monetary and other strong measures that would over value the property sector. How long and deep the Chinese slowdown exists will have a big impact on both the global and the U.S. economies over the course of the year.
Next Week: April 14-18
This coming week will be relatively light for economic data.
The Conference Board’s Leading Economic Indicators for March will be released on Monday at 10:00 AM. Look for a small increase, held down by the stock market.
Existing Home Sales for March will be released on Tuesday at 10:00 AM. Look for a small rise and pay attention to the single-family component, which has barely moved for several months.
New Home Sales for March will be released on Wednesday at 10:00 AM. Look for a small rise and look for clues about housing.
Durable Goods for March will be released on Thursday at 8:30 AM. We expect a healthy gain in the durable goods report. Look for the core capital goods data for clues about business investment.
The University of Michigan’s Sentiment Index will be released on Friday at 9:55 AM. Look for a small rise in the final release for April.
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