Higher Prices May Be the Cure to Higher Prices

By | June 1, 2021

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

A rally in Asia put global equities on track for a seventh day of gains as investors bet the U.S. will lead the world out of the COVID-19 pandemic, with the focus turning to a multi-trillion dollar spending boost by the Biden administration. Tokyo led the advance, with the Nikkei jumping 2.1%. MSCI’s broadest index of Asian-Pacific shares outside of Japan rose 1.1%. The New York Times reported that President Biden will seek $6 trillion in federal spending for the 2022 fiscal year. A separate report confirmed a 6.4% acceleration in annualized growth last quarter, bolstered by the massive fiscal stimulus. Although the scale of U.S. government spending has stoked worries that an inflation spike may force the Federal Reserve to act faster to taper asset purchases and tighten lending rates, more spending is good for global growth.

Global equity markets rose on Friday, while the U.S. dollar rebounded against major currencies as new data strengthened concerns on inflation. A Commerce Department report showed consumer prices accelerated 3.1% in the year to April, blowing past the Federal Reserve’s 2% target and posting the largest gain since 1992. The Dow Jones Industrial Average rose 0.19%, to 34,529.45, the S&P gained 0.08%. at 4,204.11 and the Nasdaq Composite added 0.09%, at 13,748.74. For the month, the Dow added 1.94%, the benchmark S&P 500 rose 0.55% and the Nasdaq shed 1.53%. Oil prices inched higher on Friday, with Brent holding near $70 a barrel as strong U.S. economic data and expectations of a rebound in global demand outweighed concerns about more supply from Iran once sanctions are lifted.

Last week, economic data was light but there was some insight that supply chain disruptions are tugging at economic growth. New home sales are being held back by record low inventories, that has increased the price. This is in addition to sharply higher input costs, and it does appear the housing market may be cooling. House prices have clearly jumped. The median price of a new home jumped 11.4% on a non-seasonally adjusted basis in April and is up 20% over the past year. Both higher lumber prices and shortages of materials, including labor are driving prices upward. Demand is also driving prices skyward, but there does seem to be some cooling in the air. Housing starts also fell in April.

Personal income plummeted 13.1% in April, following a 20.9% surge in March, driven by the stimulus. The 0.6% rise in inflation overwhelmed the 0.5% rise in nominal personal consumption, resulting in a 0.1% drop in nominal personal consumption. The savings rate fell back to 14.9% in April, after surging to 27.7% in March. We expect spending to rebound from April’s drop and end the quarter on a still strong note. Consumers are in the mood to spend but sticker shock is an issue.

Higher prices may be the cure to higher prices. Higher home prices should bring out more existing homes to sell and prompt builders to build more new homes. Further back in the supply chain, higher lumber prices are spurring production at the nation’s sawmills. The price of lumber has eased a little in recent days. The major motor vehicle manufacturers are investing in new equipment to deal with supply bottlenecks. There has been a flurry of announcements from firms planning to increase the production of microchips. The increased emphasis on boosting production capacity and bringing supply and demand back in balance was hidden in the durable goods orders report. Although overall durable goods orders fell 1.3% in April, the drop was for aircraft and motor vehicles. Core capital goods orders rose 2.3%. Whether this is enough to cool inflation, remains to be seen.

Latest Data

The U.S. Economy:

New home sales cooled in April as homebuilders contend with rising construction costs, labor supply issues and a backlog of homes under construction. New sales fell 5.9% to 863,000 annualized units in April, higher than consensus projections. There was a downward revision in March to 917,000 (previously 1.02 million). New home sales declined in all regions, except the West. Month’s supply increased to 4.4 from 4.0 in March. Sales were still up 48.3% higher than a year ago. The median price rose to $372,400, the biggest one-month increase since 2014. The report, along with the slowdown in housing starts, suggest that housing may see some cooling over the next few months. Overall, we still expect housing activity to remain at a fairly high level through the remainder of the year.

The Chicago Fed National Economic Activity Index declined from 1.71 in March to 0.24 in April. Forty seven of the 95 individual indicators made positive contributions to the CFNAI in April, while 38 made negative contributions. Production-related indicators contributed 0.18 to the CFNAI in April, down from 0.92 in March. The personal-consumption and housing category contributed -0.06 to the CFNAI in April, down from 0.50 in March. The index remains in positive territory, but the decrease suggests economic activity moderated in April. After the stimulus made a big jump to the economy in March, some cooldown was expected. The economy still has decent momentum.

The pending home index dropped 3.3% to 106.2 in April, more than giving up its March gain and falling to the lowest level since May 2020. Lower affordability driven by strong demand has started to erode housing. Pending home sales fell in all census regions, except for a small gain in the Midwest. The index remains still up 51.7% from a year earlier due to the pandemic-related effects.

The advance durable goods report showed that orders unexpectedly fell 1.3% in April. The volatile transportation sector contributed to the April decline. Motor vehicle and parts orders fell 6.2%, likely hurt by the shortage in semiconductors. Defense aircraft orders dropped 8.5%. Nondefense aircraft orders were up 17.4% in April. Excluding transportation, durable goods orders rose 1%. The key core capital goods orders and shipments rose 2.3% and 0.9%, respectively. Inventories increased 0.5%, the third consecutive increase. Demand for durable goods remains solid. The decline in April can be attributed to supply problems, that continue to constrain production, especially in the transportation sector. As supply problems improve, production will be stronger.

After March’s massive fiscal stimulus boost, nominal personal income fell 13.1% in April. The decline was smaller than consensus expectations. March’s gain was revised slightly downward from 21.1% to 20.9%. Transfer payments drove the April decline, falling 41.1% from March’s level. Compensation of employees increased 0.9%, a similar gain to March’s advance. Real spending slipped in April, declining by 0.1% after surging 4.1% in March. Durable goods spending led the decline, falling 0.9% and nondurable goods spending fell 1.6%. The GDP deflator rose 0.6% in April, identical to the March increase. Food prices were up 0.3% after rising 0.2% in each of the prior two months. Energy prices fell 0.2% in April. Excluding food and energy, the PCE deflator was up 0.7%, stronger than expected. On a year ago basis, the PCE deflator was up 3.6%, following a 2.4% rise in March and the core PCE deflator was up 3.1% in April and 1.9% in March.

Trade could be a smaller drag on the second quarter than previously anticipated. The advance goods trade deficit narrowed from a revised $92 billion to $85.2 billion for April. Nominal goods exports were up 1.2% in April, while imports dropped 1.2%. Both imports and exports of automobiles fell in April, likely attributed to the global shortage in semiconductors. Trade volumes will continue to increase as the U.S. and global economies accelerate. Imports will be strong in the U.S. in the near term and exports will accelerate while global growth becomes more solid. Shortages in semiconductors and other raw inputs are constraining production. As the supply base ramps up and employment climbs, trade volumes will pick up.

Important Data Releases This Week

The May ISM manufacturing report will be released on Tuesday, June 1 at 10:00 AM. The ISM manufacturing index slipped four points in April after notching a high not seen since the 1980s. Supply chain difficulties are constraining production, but demand is still strong. The May index should slip a little more to a still strong 61. Higher input prices paid by manufacturers may linger longer than the Federal reserve wants after the initial pop.

The April construction spending report will be released on Tuesday, June 1 at 10:00 AM. Construction spending did advance 0.2% in March, but we are seeing a softer tone for housing for April. We think construction spending will rebound 0.4% for April.

U.S. May vehicle sales will be released on Wednesday, June 2 at a varying time. Sales in April were strong at 18.5 million units. Some fall back in sales can be expected after such a strong showing. Sales are projected to come in at a 17.9 million annualized rate.

The May ISM services index will be released on Thursday, June 3 at 10:00 AM. Supply shortages are not limited to the manufacturing sector. The service sector is also having problems getting materials and help they need. After recording a 62.7 reading for April, May will record a still decent 63 reading for May.

The April employment report will be released on Friday, June 4 at 8:30 AM. Employment weakened in April as demand for labor outran the number of people who wanted to work. The labor forces has not fully recovered from the pandemic hit, as workers still face closed schools and other issues. The April employment report did stand out as being weaker than other reports suggest. We think 800k jobs will be added in Mat and the unemployment rate will fall to 5.9%.

The April factory orders report will be released on Friday, June 4 at 10:00 AM. Factory orders are projected to rise 0.2% for the month, weaker than March’s 1.1% advance.

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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.