Monday Morning Coffee: Economic Growth Ready to Shift to a Higher Gear

By | July 6, 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.

Overview

There were increasing signs that growth has returned to the U.S. economy in the second quarter and will accelerate in the second half of the year. Businesses and consumers are stepping up spending. There has been some improvement in housing and foreign trade. Job growth was stronger than expected. Manufacturing is expanding at a healthy rate. Vehicle sales were very strong for the second month in a row. Somehow all this positive data seems to be missed out in the national accounts data. GDP growth in the second quarter will barely make up for the first quarter free-fall. However, most of the current data is decidedly positive. Overall, the economy appears ready to charge forward for the second half of the year. Signs of growth, particularly the labor markets, are strong enough that the Federal Reserve might start moving before the middle of 2015, although statements still convey that the period of interest rate changes are still far off.

The focus of the week ahead will be on Fed minutes of the June FMOC Meeting, jobless claims, and confidence. There could be hints that the Federal Reserve might move in the spring of 2015, rather than mid-year. Fed speakers have hinted of a possible faster rise in rates that currently expected. The Chair, however, made a strong case for continued very low rates in a recent interview.

In all, the outlook for the U.S. economy for the next few quarters is bright. As long as oil prices stay in a moderate range and events overseas don’t disrupt oil supplies. It appears that growth is, not only returning to the U.S. economy, but ready to shift to a higher gear.

Review of Last Week’s Data: June 28-July 3, 2014

The U.S. Economy:

Factory orders fell 0.5% in May, snapping a streak of three monthly gains. Excluding transportation, new orders fell only 0.1%. Total shipments rose 0.1%. While the headline number was disappointing, details were more favorable. Orders excluding defense increased 0.2%. Capital spending accelerated in May. Core (nondefense excluding aircraft) capital goods orders gained 0.7%. Defense orders fell 30.3%, following a 38.2% increase in April. Given the strength in defense orders in March and April, some payback was expected. 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.

The trade deficit narrowed in May to $44.4 billion from a downward revised $47 billion. Exports increased by 1.2%, while imports dipped by 0.3%. The improvement in exports suggests the global economy is gaining traction. The slight dip in imports probably does not mean much, as there have been fairly gains the previous two months. The trend in imports, show the U.S. recovery gaining strength. Against the backdrop of a somewhat weaker trade weighted dollar, the U.S, increased exports to Canada, Mexico, the European Union, China, Japan, India, South America and Africa. The risk to increased trade comes from the political situation in the Ukraine, Russia and China. This could lead to missteps and consequences for the global recovery.

Private sector employment rose by 281,000 in June, according to the ADP. Gains were widespread across industries. Employment gains averaged 222,000 in the second quarter, with net hiring up in every industry in the second quarter compared with the first quarter.

Employment gains blew past expectations in June. The labor market created 288,000 jobs and May and April were revised up by 29,000. The unemployment rate fell to a new post-recession low of 6.1%. The June report shows evidence the economy gained momentum in the first quarter and raised expectations for the second half of the year. The private sector added 262,000 jobs. Strong gains were reports in business/professional services, which added 67,000. Retail trade was up 40,000 and education/healthcare was up by 38,000. The decline in the unemployment rate was driven by a large increase in 407,000 in household employment and only a small increase in the labor force. The second quarter saw an average gain of 272,000, the best quarter since early 2010. We expect employment gains to continue at high levels, a support of consumer spending and economic growth in general.

Vehicle sales surged to annual selling pace of 17 million in June, far above expectations. May’s selling pace was 16.8 million units. The June strength was even more outstanding because there were two less selling days than in May. The June total was the strongest since mid-2006. Both car and truck sales were strong in June. Truck sales were unchanged at 8.7 million units. Car sales increased from 8.1 million units in May to 8.3 million units in June. Pent-up demand, easier credit and an improving job market are helping boost sales. Fleet sales also boosted the June total. Despite recall notices, most of the June advance came from General Motors while sales for the other manufacturers were largely unchanged from May. The June strength is likely push up forecasts for car sales to near 17 million for the year.

Total construction spending was flat in May, growing at only 0.1%, but is up 6.6% above year earlier levels. Atypically, private residential construction faltered in May, while private nonresidential and public construction had a good month. Private residential construction was $354.8 billion, down 1.5% from April but remained up 7.5% y/y. Spending on single-family homes fell 1.4% but is up 10.9% y/y. Private nonresidential construction was $328 billion, up 1.1% m/m and up 10.9% y/y. Public construction equaled $273.4 billion, up 1% from April and 1.2% from April 2013. Although construction activity is up across most of the nation, the recovery remains fragile. Only public construction had a strong and broad increase in May. Fundamentals favor more advances in construction, but the current pace is restrained.

The ISM manufacturing index dipped slightly from 55.4 to 55.3 in June but remained consistent with an acceleration in factory production and healthy GDP growth in the second quarter. The index averaged 55.2 in the second quarter up from the first quarter’s 52.7. Details for June were solid. The new orders index increased 2 points to 58.9. Production dropped one point to 60, but remains elevated. Inventories were unchanged at 53.

The difference between new orders and inventories, a proxy for future production, widened from 3.9 to 5.9 for June. The gap is positive, but not as wide as the second half of last year, when manufacturing got a boost from inventory accumulation. The employment index was unchanged at 52.8. Weakness in the index was concentrated in tow two components. Supplier deliveries fell from 53.2 to 51.9, meaning slower deliveries. Backlogs fell 4.5 points to 48. The trade details were weak. New export orders fell from 56.5 to 54.5. Imports increased from 54.5 to 57. The index fell a little short of expectations, but remained above 55 for a second consecutive month. The outlook for manufacturing is improving. There are signs that business investment is picking up and the hit from the inventory correction was largely confined to the first quarter.

International:

China’s services PMI climbed to 53.1 in June, the highest rate since March 2013, according to HSBC and Markit Economics. The official services’ PMI was 55 in June. The increase was a sigh that China’s economy is gaining some momentum after a series of moves by the central government to boost spending and support economic growth.

German manufacturing orders fell 1.7% in May, but that followed a strong 3.4% rise in April. Recent surveys suggest that the pace of Germany’s economic expansion is cooling and tensions between Russia and the Ukraine are increasing uncertainty. The European Central Bank is trying to fuel stimulus and spur inflation to fuel growth in the 18-nation currency bloc. Exports fell 1.2% in May and domestic orders dropped 2.5%. Despite the May decline in orders, the outlook is still optimistic. April’s orders were strong and orders are still well above first quarter averages. The underlying trend of the German industrial sector is intact.

Important Data Releases This Week

This week will be relatively light 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.

NFIB Survey for June will be released on Tuesday at 7:30 AM EDT. Although services were mixed in June, construction is doing better just enough to nudge the NFIB index slightly higher.

FMOC minutes will be released on Wednesday at 2:00 PM EDT. The minutes will be dovish as there is no indication the Fed will move quicker than anticipated next year.

Jobless claims will be released on Thursday at 8:30 AM EDT. Initial claims are volatile around the 4th of July, but the trend for employment growth and lower unemployment claims has been positive.


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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.