Increased Spending May Not Result in More Presents Under the Christmas Tree

By | November 15, 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

Wall Street closed higher on Friday, with market leading growth shares lifting the indexes’ climb as investors looked past a disappointing economic data. It was a slow week for economic data, with highlight on inflation and a University of Michigan consumer survey that dropped to a 10-year low. The Dow Jones Industrial Average rose 179.08 points, or 0.5% to 36,100.31The S&P 500 gained 33.58 points, or 0.72% to 4,682.85 and the Nasdaq Composite added 156.68 points, or 1% to 15,860.96. Markets were worried about the future of holiday consumption, as inflation and high energy prices might crimp spending and the rise of pricing could erode margins. Consumer sentiment is not spending, but investors will be paying attention to big retailers earning this week, such as Walmart, Target and Home Depot for signs that rising prices are hurting margins. 

The inflation train shows no sign of slowing down. The CPI rose a hefty 0.9% in October and brought the year-over-year rate to over 6%, the highest in three decades. Fingers cannot just be pointed at pandemic-related sectors, as price pressures seem to be broadening out. Energy prices have been on a roll, rising 4.8% in October and food prices rose 0.9%. The core COI rose 0.6% in October and 4.6% for the past year. A great deal of the inflationary push emanates from the strong demand for goods. The two stimulus packages led consumers not to hold back on spending and even though spending is shifting to services, core goods prices are still up a whopping 8.4% for the year. Auto prices added to the gain, driven by semiconductor shortages, with new vehicle prices up 1.45 in October and used car prices, which took a breather over the last few months, rise another 2.5%. 

It does seem that goods prices will slow after the outsized gains in recent months. Traditionally. Imports slow after the holiday season and if ports work at holiday levels, congestion could return to more normal levels by late-Spring. Autos are a special sector, as although some analysts expect some progress in attaining chips is expected in the first half of 2022, a meaningful increase is not expected to the second half. This will keep the price elevated until more products are delivered to consumers. Also, there will be a payback by consumers, who are waiting for their favorite models and that will boost pent-up demand, at least for a short-term. 

Service prices rose 0.4% in October, driven in part by the strengthening of travel-related categories. Health insurance price rose 2.0% in October. That sector is trying to stabilize after the shock of the pandemic. Consumer sentiment took an almost five-point dip in October, as consumers are beginning to abandon the belief that prices will come down soon. Consumer now expect prices to rise 4.9% over the next year, the highest in 13 years. Notably, only short-term expectations rose, while five and ten year expectations still expect a 2.9% increase. Consumers will spend this Christmas at a robust pace but are starting to realize that their increased spending may not result in more presents under the Christmas tree. In all, it take some time for the economy to stabilize from the pandemic in terms of production, demand and supply. 

This week, we get a look at retail sales, industrial production, business inventories and housing starts.

Latest Data

The U.S. Economy:

The Chicago Fed National Activity Index registered -0.13 in September, down from 0.05 in August. One of the four broad categories of indicators used to construct the index made a negative contribution and one category fell from August. The 3-month moving average moved down to 0.25 in September from 0.38 in August. The production related indicators contributed -0.37 to the CFNAI in September, down from -0.08 in August. Employment indicators contributed 0.16 to the CFNAI in September, up from 0.09 in August. The sales, orders and housing category contributed 0.07 in September, up from 0.01 in August. The personal consumption and housing category moved up to 0.07 in September, up from 0.01 in August. The report suggest that the economy was growing below potential in September.

The NFIB small business optimism index decreased in October by 0.9 of a percentage point to98.2. One of the ten indexes improved, seven declined and two were unchanged. The uncertainty index fell by 7 points to 67. Owners expecting better business conditions six months from now decreased 4 points to a net negative 37 percent. The economic index declined seventeen points to the lowest reading since November 2021. Forty-none percent said they have job openings that can’t be filled, down 2 points form September. 56% of owners reported capital outlays the last three months, up 3 points form September. The percent of owners that raised prices increased by 7 points to a net 53 percent. The report stressed that lack of labor and uncertainty of the economy’s future and rising prices are the biggest problems facing small businesses, despite an improving economy.

The producer price index rose 0.6% in October, following increases of 0.5% in September and 0.7% in August. The final demand PPI number was up 8.6% from a year earlier, the highest in nearly 11 years. Final demand goods prices rose 1.2% in October, the third consecutive gain of at least 1%. Final demand services rose 0.2% in October for a second consecutive month, led by construction. Over 60% of the October increase in the index for final demand can be traced to the increase in goods prices, three/-fourths of the increase in goods prices came form a 4.8% advance in energy prices. . The price of diesel fuel, fresh and dried vegetables, gas fuels and plastic resins also moved higher in October. In contrast, prices for beef and veal decreased by 10.3%. Nearly two-thirds of the increase in services came from trade services, which rose 0.4%. Excluding the price of food, energy and trade, the PPI advanced 0.4% in October, after a 0.1% advance in September. Although inflation has accelerated significantly in recent months, the Fed still regards the increase as a “transitory” situation, largely driven by shortages in inputs, supply chain disruptions and energy increases and is not likely to move quickly.

The consumer price index increased 0.9% in October, following a 0.4% advance in September. The 12-month increase, at 6.2%, was the biggest jump since 1990. The October increase was broad based, Energy prices soared 4.8% during the month and food prices rose 0.9%. Excluding food and energy, the core index rose 0.6%, following a 0.2% rise in September. The core index was up 6.2% during the month. , the largest increase since August 1991. There were increases in the prices of shelter, used cars and trucks and new vehicles in the month. The increase in the energy index was driven by a 6.1% rise in gasoline prices and natural gas, which rose 6.6%. Energy prices are up 30.0% over the past 12-months. With demand still strong and supply is having a hard time catching up, inflationary forces are likely to hold on longer than the Fed had expected. The Fed will start reducing its monthly bond buying purchases in the first step to reduce the stimulus this year. In addition, Fed officials forecast that they would raise the interest rate from near-zero by the end of 2022, much earlier than forecast a few months earlier. If higher inflation numbers persist, the Fed is likely to raise rates perhaps as much as two additional times next year. Most economists expect inflation to slow down as the supply chain problems lessen next year.

Important Data Releases This Week

The October retail sales report will be released on Tuesday, November 16 at 8:30 AM. High frequency data suggests that some holiday spending began in October and boosted sales in October. COVID cases continue to fall, helping consumers get out. Consumer confidence is a bit shaky because of higher prices. Retail sales are reported on a nominal basis, so increased prices do boost spending. It will be a good holiday season, but higher prices may hurt the consumer early next year. For October, sales are projected to advance 1.0%

The October industrial production retail sales report will be released on Tuesday, November 16 at 9:15 AM. The severe supply chain problems have limited the pace of industrial activity and there were little signs of improvement in October. Transportation problems are long in the transportation sector. Costs are elevated, inventories are lean and workers are in short supply. In addition, the effects of Hurricane Ida cut about half of total output in September’s 1.3% decline. For October, a still elevated ISM suggests that manufacturing did pick up some speed. Total IP is projected to have increased 0.6%. The pace is expected to remain modest until the supply chain problems start to ease. 

The September business inventories report will be released on Tuesday, Nov. 16 at 10:00 AM. Despite supply chain problems, inventories did advance by 0.6% in August. The supply chain problem will keep inventory accumulation down from what is needed to start balancing supply with demand, but another 0.6% advance is projected for September.

The October housing starts report will be released on Wednesday, Nov. 17 at 8:30 AM. Housing starts slid 1.6% in September to a 1.555K unit annual pace. Hurricane Ida did weigh on activity in the South. The decline in activity was centered by volatile multi-family sector. Starts should advance in October to a 1.585 pace for October. Supply chain problems should ease slightly in the fall as activity normally slows in the fall-winter months. This should increase supply and slow the rise in pricing.

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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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