Inflation Strong, Expected to Moderate Next Year

By | October 4, 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 stocks surged to a higher close on Friday as investors were in a buying mood boosted by positive economic data and progress on the government budget. The rally gained momentum after the White House announced that U.S. President Joe Biden was getting more involved in negotiations over the infrastructure spending bill being debated on Capital Hill. Biden also signed a stop gap bill to keep the government running through Dec. 3, as lawmakers only succeeded in kicking the can down the road. The Dow Jones Industrial Average rose 482.54 points, or 1.43% to 34,326.46, the S&P 500 gained 49.5 points, or 1.15% and the Nasdaq Composite added 118.12 points, or 0.82% to 14,566.70. Even so, all three indexes ended below last Friday’s close. A host of economic data released on Friday showed increased consumer spending and elevated inflation growth, which could help nudge the U.S. Federal Reserve to start tightening monetary policy. 

Data released last week indicated that the economic expansion is maintaining some momentum in the face of familiar headwinds, although economic data was largely overshadowed by events on Capital Hill. Durable goods orders rose 1.8% in August, far above the expectations of a 0.7% increase. Aircraft orders dove most of the increase, but core capital goods orders rose a still healthy 0.5%m suggesting that the business investment spendingspree continues on course. While demand remains strong, transportation problems, a lack of labor and procuring raw materials have made it tough for manufacturers to keep pace. The ISM manufacturing report suggests that supply issues are intensifying. The ISM manufacturing index registered 61.1% in September, up 1.2 percentage points from August. New orders were unchanged for the month at 66.7%. Of the 18 industries, 13 reported stronger orders. The production index fell 0.6 of a percentage point to 59.4, with 14 industries reporting stronger production. The employment index increased by 1.2 percentage point to 50.2, crossing the expansionary line. The supplier delivery index increased by 3.9 percentage points to 73.6%, indicating slower deliveries. 

Personal income rose 0.2% in August, following a gain of 1.1% in July. Personal spending grew modestly in August, rising 0.4%. Details showed the impact of COVID infections. There was weakness in food service and accommodation and strength in spending for food at home, which were more consistent with last year’s trends. Other data suggests that the COVID infections is still haunting consumers. The Conference Board’s Index, which has remained solid in the face of new infections and higher inflation, fell for a third month. The University of Michigan’s index showed a modest gain for the month, landing near the level reached in April 2020. Outside of the souring sentiment, the public health picture is looking brighter, with infections slowing from the September peak. Despite downbeat confidence, spending is solid, but inflation remains elevated. The GDP deflator rose 0.4% in August, Food and energy added 0.1 percentage points to the headline deflator number.  Excluding food and energy, the core PCE deflator rose 0.3%, up 3.6% from a year earlier. The price index rose 1.8 percentage points to 79.4. Inflation remains strong, although expected to moderate early next year but pressures are mounting at the Fed to start controlling the increase in prices. 

Next week will be focused on factory orders, the trade balance, the ISM services report and the important payrolls report.

Latest Data

The U.S. Economy:

The U.S. nominal-goods trade deficit widened modestly in August, rising from $86.8 billion in July to $87.6 billion in August. Nominal goods exports were up 0.7% after rising 1.8% in July. Nominal goods imports advanced 0.8%, following a 1.1% decline in July. Exports were supported by industrial supplies and consumer goods. There were declines in capital goods, motor vehicles and food products. Exports are increasing as the global economy continues to recover from the pandemic. Imports were supported by industrial supplies and consumer goods. However, imports of food, capital goods and motor vehicles fell. Motor vehicles are being hurt by the global shortage of semiconductors. 

Some of the increase in imports is ending up in the warehouses of retailers and wholesalers. Inventories at wholesalers increased 1.2% in August following a 0.6% increase in July. Durable goods inventories increased 1.1% and the stocks of nondurable goods increased 1.3%. Retail inventories inched up 0.1%. As has been the case through much of 2021, motor vehicle and parts have a sizable weight on retail stocks, as the global semiconductor shortage has curtailed production. Excluding that sector, retail inventories grew 0.6%. 

U.S. durable goods orders increased 1.8% in August following a 0.5% in July. Transportation did the heavy lifting with orders climbing 5.5% in August after slipping 0.4% in July. Within transportation, orders for nondefense aircraft, a volatile sector, climbed 88.9%. Excluding transportation, orders climbed 0.2%. The key core capital goods and shipments orders were up 0.5% and 0.7%, respectively. Durable goods inventories rose 0.8% for a second consecutive month. 

Construction spending was virtually unchanged in August from the month preceding. Private construction spending inched up 0.1%. Residential construction spending rose 0.4% in August, while nonresidential construction spending fell 1.0% in August. New single-family construction spending fell0.7% m/m but was up 38.3% from a year earlier.  Total nonresidential construction spending was down 2.3% from a year earlier. Manufacturing construction spending fell 1.7% m/m, and office construction spending was up 0.2%. Public construction spending was up 0.5% in August , down 4.0% from a year earlier. Highway construction increased 1.5% m/m and spending on education structures 0.8% from July. For the first eight months of the year, construction spending was up 7.0% from the same time period in 2020. The same patterns that drove the August report will likely persist through the remainder of the year. Residential construction spending will be modestly positive and the nonresidential sector slightly negative. The public side has been modestly negative this year, but the August report does suggest some modest improvement. 

The ISM manufacturing index registered 61.1% in September, up 1.2 percentage points from August. New orders were unchanged for the month at 66.7%. Of the 18 industries, 13 reported stronger orders. The production index fell 0.6 of a percentage point to59.4, with 14 industries reporting stronger production. The employment index increased by 1.2 percentage point to 50.2 with six industries reporting higher employment. The supplier delivery index increased by 3.9 percentage points to 73.6%, with 13 industries reporting slower deliveries. The inventory index rose 1.4 percentage points to 54.2 with 10 industries reporting higher inventories. The price index rose 1.8 percentage points to 79.4, with 17 out of 18 industries reporting higher prices. Backlogs fell 3.4 percentage points to 68,2 with 14 industries reporting higher backlogs. New export orders fell 3.2 percentage points to 53.4, with seven industries reporting higher export orders. Imports rose by 0.6 of a percentage pointto 54.9, with 9 industries reporting higher imports. The report reflects that struggle manufacturing industries have in trying to meet stronger demand. There are record lead time, continued shortages of raw materials, rising commodity prices, difficulties in transporting goods and difficulties in finding qualified labor. Despite the problems, optimism remains strong, with three positive comments for every negative one. 

Comments from industry executives were informing. The electronics and computer industry reports shortages of inputs,resulting from port congestion and lack of containers. They are watching COVID infections, but nothing is shut down yet. Hurricane IDA hurt the petrochemical industry. Labor shortages is hurting the transportation industry and the food and beverage industries. Ocean freight delays are causing disruptions in many areas. Lack of labor is widespread in almost every industry. High prices for inputs are a major problem in determining pricing. Despite higher prices, demand does remain very strong. 

Personal income rose 0.2% in August, following a gain of 1.1% in July. Compensation of employees grew 0.5% as the labor market continues to heal. Government transfers, which drove July’s strength in personal income, grew modestly at 0.3%. The personal savings rate inched down from 10.1% in July to 9.4%. Personal spending grew modestly in August, rising 0.4%. Details showed the impact of COVID infections. There was weakness in food service and accommodation and strength in spending for food at home, which were more consistent with last year’s trends. The increase in spending followed a decline of 0.5% and a gain of 0.6% in June. Goods spending rose 0.6%, with broad strength outside of vehicles. The GDP deflator rose 0.4% in August, Food and energy added 0.1 percentage points to the headline deflator number. Excluding food and energy, the core PCE deflator rose 0.3%, up 3.6% from a year earlier. Year-over-year growth is expected to moderate early next year.

Important Data Releases This Week

The August factory orders report will be released on Monday, October 4 at 10:00 AM. Already released durable goods orders showed strength in the factory sector. U.S. durable goods orders increased 1.8% in August following a 0.5% in July. Transportation did the heavy lifting with orders climbing 5.5% in August after slipping 0.4% in July. Within transportation, orders for nondefense aircraft, a volatile sector, climbed 88.9%. Excluding transportation, orders climbed 0.2%. We project that factory orders will increase 1.0% for August. 

The August trade balance report will be released on Tuesday, October 5 at 8:30 AM. We expect personal income to have increased 0.1% in August and it would have been larger except for fading stimulus. Excluding transfers, income growth from salaries and wages is remain quite strong. Personal spending should rebound to 0.6%, up from the 0.3% advance in July. Retail sales advanced 0.7% for the month. Service spending was likely hurt by the rise in COVID cases but each advance in the virus has resulted in a less impact on the economy. 

The September ISM services report will be released on Tuesday, October 5 at 9:45 AM. During August, the services index fell to a still elevated 64.1. The decline was likely influenced by rising COVID infections. Economic data in September still showed an effect from the pandemic in some person-to-person businesses We expect a small decline to 59.2 for the month.

The September employment report will be released on Friday, October 8 at 8:30 AM. Rising COVID cases likely weighed on the August employment count. Employers only added 235,000, a result well below expectations. In September, the survey week falls later in the month in September, allowing some time for to have gained some confidence in a month that saw improvements in infections rates as the month progressed. Dining reservations picked up in the month, suggesting the leisure/hospitality sector bounded back in September. We expect some 650,000 new jobs were created in September.

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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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