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 S&P 500 and Nasdaq Composite closed lower on Friday as disappointing earnings from Snap Inc. and Intel Inc. put pressure on the communications and tech sector. Fed Chair Jerome Powell was speaking during the morning session and said that the central bank was “on track” to begin reducing its purchases of assets. Analysts noted that Powell did not seem to be more hawkish than in recent weeks. However, investors were anxious about weaker earnings at Snap, which attributed some of the weakness in earnings to a loss of advertising business to global supply chain disruptions and labor force shortages, which caused companies to pull back on their advertising spending. Snap fell more than 25% and the fallout hit other advertising communications companies. Facebook Inc. and Twitter Inc, closed about 5% down. Intel share fell about 12% after the company missed its target, while its CEO pointed to shortages of chips holding its processors. For the week, the S&P added 1.6%, while the Dow climbed 1.1% and the Nasdaq added 1.3%.
Last week, the Federal Reserve released the October update of the Beige Book. The report suggested that economic activity was still generally strong in August and September and the future outlook was also optimistic. In the report, the supply chain problems appear to be worsening. In the October report, the term “supply chain” appeared 37 times, compared to 33 in September and 28 in August. In January 2020, before the pandemic, the term never appeared. The latest statement confirm that supply chains are not functioning smoothly and the problem is getting worse and is holding back economic growth.
The latest indicator that reflects the problem of supply chains was the latest industrial production report in September, in which total IP fell 1.3% for the month. While utility output fell because of weather and mining was affected by Hurricane Ida, manufacturing fell 0.7%. The Federal Reserve estimated that total IP was lowered by 0.6% from the hurricane and manufacturing lost 0.3%. Some of the declines noted in other industries were impacted by supply chain shortages. Overall industrial production is still running close to its per-pandemic level. That suggests that demand for businesses and consumers is still solid. While the auto industry is the “poster-child” of the supply chain problem, other industries are also affected in varying degrees of severity.
New home construction is also losing ground to supply issues. During September housing starts and permits lost ground. Down 1.6% and 7.7% respectively. While the multi-family sector was responsible for the September loss in starts, the single-family sector was unchanged after two months of declines. The number of houses started but not completed is at a record, a sign that that shortages and labor and materials are causing activity to slow. Although starts are at a stronger pace than over a decade prior to the pandemic, activity has stalled. While some progress in untangling the supply chain mess is expected in coming months, it will likely be mid-2022 before the semiconductor situation improves and some analysts project that it may take even longer before production can pick up.
This week, new home sales, durable goods orders, Q3 real GDP, personal income and outlays and the PCE deflator is featured.
The U.S. Economy:
U.S. residential investment has cooled lately as housing starts have declined in two of the past three months. Housing starts declined 1.6% in September to 1.555 million annualized units. Single-family starts didn’t budge, remaining at 1.08 million. Multi-family starts fell 5% to 475,000 annualized units. Housing starts in August were revised lower to 1.58 million. Leading indicators were not optimistic as total permits fell 7.7% to an annual pace of 1.721 million units. Single-family permits fell 0.9% to 1.041 million annualized units. The gap between completed houses and houses under construction was the largest on record, suggesting that the lack of labor and shortages of some building materials is slowing activity. We look for a few months of cooler activity until the supply chain and labor problems work themselves out to a better foundation. Demand seems to be sloid, despite high prices. Supply is slowing activity.
Hurricane Ida had a bigger impact on September industrial production than anticipated. Industrial production fell 1.3% in September, after moving down 0.1% in August. Manufacturing output fell 0.7%. The production of motor vehicles and parts fell 7.2%, as the shortage of semiconductors continue to hobble operations, while factory output elsewhere fell 0.3%. The output of utilities fell 3.6% as demand for air conditioning subsided after a warm August. Mining output fell 2.3%. The lingering effects of Hurricane Ida subtracted more than the impact of the decline in mining. The hurricane subtracted 0.3 of a percentage point from manufacturing and 0.6% from total IP. Despite the September weakness, total IP increased at an annual rate of 4.3% for the third quarter, the fifth consecutive quarter of increasing at least 4%. Manufacturing rose 5.3% in the third quarter. Demand remains strong but supply chain problems will continue to restrain production. We look for a slow recovery in most sectors, but the semiconductor problem will likely linger until mid-2022, before any marked improvement will be noticed.
Retail sales increased 0.7% in September, better than expected, following a 0.9% advance in August. Sales were up 13.9% from a year earlier in September. Pricing was an issue in some categories. Sales at gasoline stations jumped 1.8% in September and were up 38.2% in the last 12 months. Auto sales surprised on the upside, rising 0.6% and were up 7.5% from September 2020. Other winners were sporting goods stores, up 3.7% and miscellaneous stores, which increased 1.8%. Losers were electronic products and appliances, where sales fell 0.9%. Spending is shifting back to a more normal ratio between services and goods. The recent rise in infections did slow the process by slowing activity at person-to-person businesses. The report does suggest the American consumer is solid and will be a big contributor to the economy in coming months.
Existing home sales rose 7% in September to 6.29 million units annualized, reversing its recent losses and hitting its most elevated level since January. Rock-bottom mortgage rates and a steady improving labor market is helping boost sales. Single-family sales jumped 7.7% and condo/co-op sales climbed 1.4% for the month. Existing home sales increased in all census regions, especially in the South. The median existing home price in September was $362,899, up 13.3% from a year ago. It was down from August and was the third consecutive decline. Total inventory at the end of September equaled 1.27 million units, down 0.8% from August and down 13% from a year earlier. Unsold inventory sits at a 2.4 months supply at the present sales rate, down 7.7% from August and down from 2.7 months in September 2020. Mortgage rates, which climbed above 3.0% in mid-year, fell back to 2.8% in August, a move that lifted confidence in the market.
Important Data Releases This Week
The September durable goods report will be released on Wednesday, October 27 at 8:30 AM. In September, durable goods orders are projected to slip 0.8%, mainly due to aircraft orders. Being only recorded 27 orders for September, about half the normal September order and that followed 22 for August. Auto production likely also slipped in September. Away from transportation, orders likely advanced 0.5%. The outlook for the industrial sector still looks quite solid.
The Q3-real GDP report will be released on Thursday, October 28 at 8:30 AM. National accounts data for the third quarter is projected to have shown a 3.0% advance, a sharp slowdown from the 6.7% advance in the second quarter. Consumption likely slowed to a 0.7% advance, a sharp correction in spending increases in the two previous two quarters. Inventories will be a question mark for the report, with a slower pace of inventory reduction adding to GDP growth. Business investment will remain solid. The economy will likely remain above trend through 2022, as the supply chain heals and inventories are rebuilt, boosting growth. The September personal income and outlays report will be released on Friday, October 29 at 8:30 AM. We expect that personal income fell 1.0% in September, as enhanced unemployment benefits ended in September. Wages likely increased 0.6%. Spending likely advanced 0.3%, but price is an issue. The PCE deflator likely advanced 0.3%.
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