Monday Morning Coffee: Don’t Ignore 1st Quarter, But Economy Still Expanding

By | June 30, 2014

Coffee and Economic ReviewWelcome 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 large downward revision in first quarter GDP should not be ignored and the second quarter is coming in short of expectations of a very strong rebound. There are important considerations to keep in perspective. First, the economy is currently growing at a decent rate, in the 2.5% to 3% range. Second, most of the negative forces that weakened first quarter growth were temporary in nature. In particular, the inventory adjustment that dragged down first quarter growth is a plus for the second quarter. The strength of the second quarter is most evident in job creation, where payrolls are picking up velocity. Manufacturing is doing well, supported by rising business investment. Even housing, which has been lagging, is showing signs of life.

There are some problems. Spending was anemic in April and May and the first half of the year will be lucky to show any growth at all. Global oil prices are rising more quickly than anticipated, as the conflict in Iraq has raised concerns about supply disruptions. Moody’s calculates that a sustained 10% will slow GDP growth by 0.6% over a year and a permanent 25% increase in oil prices would slice 1% off of growth. Another problem has surfaced recently. Inflation has surfaced in the wrong direction, creating issues for the Federal Reserve. While some policymakers have discounted the recent pickup in inflation; it does represent a threat to spending, as rising prices erode final demand.

This week will be relatively heavy for economic data. We expect payrolls to well exceed 200,000 in June, a foundation that will support future spending. The ISM and Markit PMI’s will show manufacturing on solid ground. After four months of increases, the ISM might retreat a little, but remain well above the expansionary level. Construction spending likely jumped in May, with positive advances in both residential and nonresidential sectors. Vehicle sales jumped in May and that level is not sustainable, but the sales level will be healthy for June. Factory orders likely fell in May after three consecutive gains, but the capital goods orders may be positive. Also, we get a peek at trade. April’s imports were strong and will likely fall a little. Exports probably didn’t move much.

In balance, the economy is currently expanding at a solid rate. We expect that growth will exceed the 2.5% mark in the second half of the year. Healthy job creation will support a modest increase in spending. Housing will contribute a little and manufacturing will follow final demand. If oil prices don’t rise too high, the economy will shrug it off. Business and consumer confidence remain high. Most of the pieces of the economy are operation in tandem. The result is slightly stronger growth than we’ve seen over the past five years, but not robust.

Review of Last Week’s Data: June 23-27, 2014

The U.S. Economy:

Real GDP plunged in the first quarter by 2.9% (SAAR), according to the BEA’s third estimate, well below the fourth quarter’s 2.6%growth rate.  This was the biggest decline since the first quarter of 2009. The preliminary estimate was 0.1% growth and the second was a 1% decline. The lower number came from falling equipment and structures investment, exports and a large drag from inventory investment. Consumer spending growth was revised from 3.1% to 1.0%. The revision largely came from consumer spending on healthcare and trade. Final sales fell 1.3%. The first quarter was a disaster for economic growth, but most of the decline was either temporary or one-time events. These included severe winter weather; the end of emergency unemployment benefits and temporary weakness overseas. There was a large inventory correction, but that is positive for current growth. The economy has strengthened dramatically since the first quarter. Job gains have accelerated to well over 200,000 per month. Growth should accelerate to 3% in Q2 and proceed at near that rate for the remainder of the year.

Durable goods orders fell 1% in May. Excluding transportation, new orders fell only 0.1%. Total shipments rose 0.1% and inventories added 1%. While the headline number was disappointing, details were more favorable. Orders excluding defense increased 0.6%. Capital spending accelerated in May. Core (nondefense excluding aircraft) capital goods orders gained 0.7% and shipments increased by 0.4%. Defense orders fell 31.4%, following a 38.2% increase in April. Given the strength in defense orders in March and April, some payback was expected. Transportation orders fell 3% in May. Weakness was in nondefense aircraft/parts. The motor vehicles/parts segment rose 2.1%. Although the headline number was disappointing, 2014 is shaping up as solid for investment. The core capital goods orders and shipments suggest a real pickup in equipment investment. Firms are getting back to the level of investment that prevailed in the middle of last year. Fundamentals favor additional investment and hiring for the remainder of the year. This is a good sign for freight in general and particularly truck freight.

Personal income growth remained healthy in May. Income rose 0.4%, in line with the 0.4% average for the first four months of the year. Nominal spending rose 0.2% after being unchanged in April. Prices rose 0.2%, for the third straight month. The savings rate rose to 4.8%, the highest rate since August. Consumer fundamentals remain healthy and supportive of spending. Job growth will eventually support spending increases.

The Chicago Fed National Activity increased to 0.21 in May from -0.15 in April. Three out of the four broad categories that make up the index improved as the economy continues to recover from the weak first quarter. The three-month moving average improved to 0.18 from 0.31, signaling that the economy is growing above its historical trend. Consumption and housing remain the sole negatively contributing category. The economy is improving at a moderate pace. Most of the ingredients to accelerated growth are in place, but momentum has been slow to build.

Existing home sales improved markedly in May, increasing 4.9% to a 4.89 million annualized units, the highest monthly gain since August 2011. Revision also inched up April’s level upward to 4.66 million units. The increase is encouraging as sales show signs of accelerating. However, sales remain 5% below May 2013. Months of supply inched down to 5.6 from 5.7 and the number of homes for sale is up 6% from this time last year. The increase in inventories is slowing price appreciation which is up 5.1% from May 2013, compared year-to-date appreciation of 12-to13% in mid-2013.

Sales of new single-family homes surprised on the up-side, clocking in at 504,000 annualized units in May. The 18.6% increase was the strongest pace since mid-2008. This data does tend to be volatile and is often revised. Months of inventory declined to 4.5 and sales were up 16.9% above year earlier levels. The May surge in housing sales is another step in the right direction for housing. Demand for new houses should strengthen over the course of the year.


China’s manufacturing gauge rose to a seven-month high in June, supporting Premier Li Keqiang’s contention that the economy will avoid a hard landing as the government steps up efforts to spur growth. The preliminary Purchasing Managers’ index from HSBC and Markit Economics was at 50.8, up from, 49.4 in May. The index showed increases for output and new orders, a faster drop in stocks of finished goods and a slower decline in jobs. New exports orders expanded at a slower pace and input prices rose. The government’s PSI will be announced July 1.

The Purchasing Manager’s index for services slipped to 54.8 from 56 in May for Germany. However, the factory PMI rose to 52.4 from 52.3. While economic growth slowed in Q2 after output in Q1 was buoyed by a mild winter, the Bundesbank said that economic prospects are solid. The euro-area’s PMI index fell to 51.9 in June from 52.2 in May. Data from Europe supports the view that economic growth will come in at 0.4% in Q2, twice as much as in Q1.

Important Data Releases This Week

This week will be relatively heavy for economic data.

The June ISM manufacturing report will be released on Tuesday at 10:00 AM EST. After four consecutive increases, we expect a mild decline. Manufacturing will remain at a healthy level.

May construction spending will be released on Tuesday at 10:00 AM EST. We project construction spending to advance broadly in both residential and nonresidential sectors.

June vehicle sales will be released on Tuesday at 5:00 PM EST. Sales will track slightly over 16 million, down slightly from May’s strong level.

April factory orders will be released on Wednesday at 10:00 AM EST. After three consecutive gains, factory orders will fall modestly. Capital goods orders should rise.

ADP employment report for May will be released on Wednesday at 8:15 AM EST. ADP may decline slightly. ADP has been below the BLS by an average of 30,000 lately.

May international trade will be released on Thursday at 8:30 AM EST. We look for a slight narrowing of the trade deficit because of strong imports in April. Exports will see little movement.

The ISM non-manufacturing index for June will be released on Thursday at 10:00 AM EST. Services are doing well, with a modest rise expected.

June employment situation will be released on Thursday at 8:30 AM EST. We expect a gain of 225K, the fifth consecutive month in excess of 200K.

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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.