It May Take a Vaccine to Get the Consumption Wagon Rolling

By | June 30, 2020

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’s major indexes tumbled more than 2% on Friday, as several U.S. states imposed business restrictions in response to a surge in coronavirus cases. The Dow Jones Industrial Average fell 730.05 points, or 2.48% to 25,015.55, the &P 500 lost 74.71 points, or 2.42% to 3,009.05 and the Nasdaq dropped 259.78 pints, or 2.59%, to 9,757.22. For the week, the Dow fell 3.31%, the S&P lost 2.87% and the Nasdaq shed 1.87%. Some U.S. states that were spared the brunt of the initial coronavirus outbreak or moved to lift restrictions are seeing a resurgence in cases. On Friday, Texas and Florida ordered bars to close down. The closing down of some businesses have raised fears that the economic recovery may be weaker than anticipated. There has been gold news about the economy in terms of employment and spending gains. All the gains may come to mean little if businesses are re-closed and the consumer becomes very cautious.

Over 1 million people a week are still applying for unemployment insurance benefits every week. Initial claims declined by only 60,000 in the week ending June 20 to 1.48 million. The decline was even smaller in the not seasonal adjusted data, with claims decreasing by only 6,000 to 1.457 million. An additional 728,120 people filed for Pandemic Unemployment Assistance, down from 770,920 in the week ending June 13. Continuing claims fell by 767,000 to 19.522 million in the week ending June 13. The insured unemployment rate fell from 13.9% to 13.4%. Initial claims are still declining but the good news ends there. Over 1 million people have files for unemployment claims every week and tops 2 million if you include the Pandemic Unemployment Assistance. With new cases of COVID-19 cases rising, few businesses will want to expand operations and there are risks of localized restrictions being put back in place.

Last week’s economic data remained positive, but most reports were at-or-below expectations. The improvement in weekly unemployment claims continues but the rate of improvement slowed. However, there has been enough improvement in unemployment claims between mid-May and mid-June to produce another large gain in nonfarm payrolls. Housing data remains positive. New home sales rose 16.6% in May to a 676,000-unit annual pace. Existing home sales tumbled 9.7% in May but existing home sales are tallied when the transaction is complete. The May data reflect the April and May period, when the economy was largely shutdown. 

Advance orders for durable goods jumped 15.8% in May, better than expected. May’s orders were influenced by a big increase in orders for autos and light trucks. Assembly plants began to come online in May and re-opened fully in June. Orders excluding transportation rose 4.0% and core capital goods orders rose 2.3%, both roughly twice what was expected. Personal income fell 4.2% in May, following the big-government stimulus driven 10.5% increase in April. The May decline was expected. Spending surprised on the upside in May, rising 8.1%. The increase did follow a 12.2% decrease in April. The outlook for spending is not great. Unemployment is high and the recovery looks now that it may take longer than expected as businesses are being restricted again in some states. It may take a vaccine to get the consumption wagon rolling.

Next week will be busy on the economic calendar. We get a look at pending home sales, the ISM manufacturing index, construction spending, motor vehicle sales, factory orders, international trade and employment data.

Latest Data

The U.S. Economy:

Existing home sales dropped 9.7% in May, adding to April’s sizable losses. The pandemic continued to weigh on consumer’s willingness to search for homes. Annualized seasonal adjusted existing home sales clocked in at 3.91 million units in May, down 9.7% from April and down 26.6% from May 2019. Sales of existing single-family homes came in at 3.57 million units in May, down from 3.94 million units in April and down from 4.75 million a year ago. Existing condominium and co-op sales came in at an annual pace of 340,000 in May, down from 390,000 in April and down from 4.75 million a year earlier. Despite the bad news, leading indicators suggest better days are ahead. Mortgage applications have sustained a sharp recovery from March to April and have regained all the losses during the COVID-19 shutdown by mid-June. Rock bottom interest rates are attracting consumers and an upward trend in sales can be expected.

The May reading of in economic activity rebounded from April’s historic lows. The Chicago Fed National Activity Index showed a sharp uptick in economic activity in May. The index rose to 2.61, its highest reading on record going back to 1967, up from -17.89 in April. All four broad categories used in the index advanced in May. Production-related indicators contributed 0.89 to the index in May, up from April’s -5.94 reading. The sales, orders and inventories category added 0.02 in May, up from April’s -1.59 reading. Employment-related indicators added 1,59, compared to -9.06 in April. Consumption and housing added 0.17, up from -1.3. The three-month average rose to -6.65, up from -7.5 for April. The report shows the bottom for the economy was April. However, with many states showing rising numbers of new OVID-19 cases the future of economic growth is in question.

The new home sales market rebounded in May but prior month’s revisions were revised downward. New home sales jumped 16.6% in May to 676,000 at a seasonally adjusted annualized rate, well above expectations. However, sales in April were sharply adjusted to 580,000. All regions saw growth in May except the Midwest. The number of new homes listed for sale totaled 318,000 in May, a 2.2% decrease from April, bringing the inventory-to-sales ratio down to 5.6 months from 6.7. New home prices bounced a bit in May. The not seasonal adjusted median price for a new single-family hoe was $317,900 in May, up from $303,000 in April. The May increase was partly supported by low mortgage interest rates. The average 30-year mortgage rate fell to a record low of 3.2% in May.

The advance trade in goods report showed that COVID-19 continues to take a major hit to international trade in May. The deficit widened for a third consecutive month to $74.3 billion, as exports fell more than imports. Total nominal goods imports fell 1.2%, leaving them down by nearly a quarter from a year earlier. Nominal goods exports fell 5.8% in May, adding to April’s more than 25% drop. Both exports and imports of all major categories of goods are significantly lower than a year earlier as the pandemic has disrupted supply chains, reduced factory output and weighed on demand. Exports were down 34.9% from a year earlier, while imports were 22.9% lower. June’s trade numbers will be better but trade will be slow to normalize.

Durable goods orders rebounded sharply in May, advancing 15.8% in May, the first gain in three months. The positive change was led by the transportation sector. Motor vehicles and parts orders rose 27.5%, while defense aircraft orders advanced 6%. Excluding the transportation sector, new orders were up 4.0% in May, while shipments rose 1.8%. The key core capital goods orders advanced 2.3%, but that did not offset the large 6.5% decrease in April and the 1.3% decline in March. Progress will be slow in the industrial sector as the global economy is weak and the wave of new infections will keep business investment at cautious levels.

Personal income fell 4.2% in May. The decline was expected as incomes increased 10.8% in April. Boosted by the stimulus checks, which provided a $2.6 trillion boost to personal income in the prior month. With the bulk of the economic impact payments already disbursed, unemployment insurance benefits will do the heavy lifting for government support over the next few months. Congress is debating another round of stimulus-checks, which may be necessary to avert a decline in total personal income in the fourth quarter.

Real personal spending did turn sharply higher in May, reversing more than half of the declines the previous two months. Real spending rose 8.1% in May, following a 12.2% decrease in April. Goods spending was the strongest, rising 14.1%. The outlook for spending is not good, with such a large percentage of unemployed people. At best, the outlook for spending will be slow and gradual until the economy can generate more employment. Inflation is not a problem but some of the disinflationary pressures eased in May. The PCE deflator rose 0.1% in May, after falling 0.5% in April. The core deflator also rose 0.1%. Food prices rose 0.8%, following the 2.4% surge in May. Demand shocks do suppress pricing. While incomes and spending are expected to gradually rise, it may take time to totally rule out disinflation.

Important Data Releases This Week

May pending home sales will be released Monday, June 29 at 10:00 AM. Housing demand fell a sharp 21.8% in April but we do expect that a pickup did start in May. Pending home sales are forecast to have increased 10%.

The ISM manufacturing index will be released on Wednesday, July 1 at 8:15 AM. The ISM index staged a partial recovery in May from April’s free-fall. The index rose from 41.5 to 43.1 but remained deeply in contraction territory. New orders rose from 27.1 to 31.8. Manufacturing started to bounce back in late-May and in June as factories re-opened. We look for the index to improve to 48 in June. Manufacturing will see a gradual recovery but the pace back to the 50 mark will take some time.

May construction spending will be released on Wednesday, July 1 at 10:00 AM. Construction spending fell 2.9% in April, as building activities too a long shut-down period. The outlook for construction is mixed. Residential activity is expected to rebound in coming months, fueled by low interest rates. However, business caution will limit the nonresidential side and weak state and local government finances will slow the public-sector. We do expect total construction spending to have advanced 1% in May.

June vehicle sales will be released on Wednesday, July 1. The timing varies. U.S. auto sales bounced back in May, with sales rising to 12.1 million, up from April’s depressed 9 million reading. We expect sales to rise to 14 million for June.

The June payroll will be released on Thursday, June 2 at 8:30 AM.  The U.S. has shed nearly 20 million jobs since its February pre-COVID-19 peak. Employment did bounce back in May, adding 2.5 million jobs. We project that 3 million more jobs were added in June, reducing the unemployment rate to 13%.

The May factory orders will be released on Thursday, June 2 at 10:000 AM. The already released durable goods orders were decent rising a stronger than expected, rising 15.8%. The increase was largely driven by transportation but core capital goods orders were decent. Total factory orders are expected to rise 11% for May.

 The May trade deficit will be released on Thursday, June 2 at 8:30 AM The advance trade in goods showed steep declines in both exports and imports, but the export decline was larger. The goods deficit rose from $69.7 billion in April to $74.3 billion in May. Goods imports fell 1.2%, while exports fell 5.8% in May. A similar pattern will follow then total trade deficit number. Trade volumes will be weak for some time.

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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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