Monday Morning Coffee: Economic Growth has Slowed in Recent Quarters

By | September 12, 2016

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

Coffee and Economic Review

The tranquility that has boosted financial markets over the last two months was broken last week as central banks started to question the benefits of further monetary easing.  The prospects of no new stimulus and the prospects of higher rates in the U.S.  sent government debt, stocks and emerging market assets to the biggest decline since June.  The dollar jumped.  The S&P dropped 2.5% on Friday to 2,127.91, the lowest level in two months.  The Dow Jones lost 394.4 points, or 2.1% to 18,085.51.  The MSCI world index fell 2.1% on Friday.  The Stoxx Europe 600 index slid 1.1% taking its weekly loss to 1.4%.  The MSCI Emerging Markets index fell 2.2% on Friday.

Markets are reacting to comments by dovish members that warned that waiting too long to raise rates could threaten to overheat the economy.  Although the probability of a September hike is still low at 25%, the probability of a rate hike in December is over 60%.  In addition to Federal Reserve officials adding to market volatility, statements from the European Central Bank that central banks are starting to question the benefits of further monetary easing, which added to global uneasiness.  The turbulence is likely to persist until the end of the Fed’s Open Market Committee meeting in September and even if they don’t move at that meeting, any statements involving future moves will keep the markets on edge through the remainder of the year.

Last week was light on economic data.  Wholesale inventories were unchanged in July, but were revised up in June, implying that the inventory loss in Q2 was less than estimated.  This suggests a little less friendly ground for greater production in Q3.  The ISM non-manufacturing index fell from 55.4 in July to 51.4.  August’s drop was the largest since 2008.  A fall that dramatic goes against other consumer data.  Although spending could slow in Q3 after a big Q2, the consumer remains on solid ground.  Initial claims and the latest JOLTS data suggest the job market is doing well.

The Fed is entering its blackout period before the next meeting, so attention shifts to economic data.  Retail sales, industrial production, business inventories and the CPI have implications for third quarter growth.  From the Fed’s perspective, the CPI and the University of Michigan’s measure of inflation expectations carry the most weight.  Year-over-year growth in the CPI will likely moderate in August, giving Fed officials that desire more information before moving a stronger hand.  Other data will likely be soft.  Retail sales will be unchanged and industrial production will drop 0.3% after a strong 0.7% advance in July.

The economy continues on its slow near 2% trend march forward.  Economic growth has slowed in recent quarters, with real GDP growth just 1.2% over the past year.  The composition of growth is the story.  U.S. personal consumption is growing at a robust rate, while business investment is lagging.  A more balanced combination is projected for the future.  Consumption will still be the prime driver, but grow at a more moderate pace.  Business fixed investment will pick up a little as the weight of the oil price declines fades and corporate profits show some mild improvement.  Job growth will still be healthy, but as the economy approaches full employment, monthly job gains will slow.  However, income gains will replace slower employment and keep spending healthy.  The income gains will help boost inflation towards the 2% Fed target and provide a basis to raise rates in December.  Fed hikes will be passive, with just two hikes in 2017 and two in 2018.

Latest Data

The U.S. Economy:

There was little to like in the ISM non-manufacturing survey, but one-month does not make a trend.  The non-manufacturing index fell 4.1 points to 51.4, well below expectations.  The details were weak, with business activity falling from 59.3 to 51.8.  New orders fell from 60.3 to 51.4, the largest monthly decline since 2008.  While the August decline is worrisome, there doesn’t seem to be a driving development in all the measures of consumer behavior to justify such a decline.  This would be more worrisome if this turns out to be a trend.  There were anecdotes concerning labor costs and availability, which can be expected. Fundamentals remain solid for the consumer, so we will be watching to see if this Month’s survey has any weight.

The Federal Reserve’s Beige Book covering mid-July through mid-August suggests that economic growth is expanding at a modest pace across most districts.  The exceptions were Kansas City and New York, where activity did not change.  Retail sales changed little over the reporting period, but some districts reported modest gains.  Manufacturing was flat to slightly up on most districts.  Both residential and nonresidential real estate improved over the reporting period.  Agriculture was mixed with higher volumes, but lower prices.  Employment expanded at a modest pace.  Labor markets are tight.  The economy seems to be moving in the right direction.  Energy is a weight but that effect is fading.  Labor markets are tightening and wages are increasing in response.  Credit markets are favorable, but rising rates will limit that impact on the next two years.  Fundamentals are favorable, but the pace of growth is still near the 2% rate we’ve seen for seven years.

International:

China’s exporters were cushioned by a weaker currency last month, while imports rose for the first time since 2014.  Property and infrastructure investment has helped prop up growth and stronger demand is signaling the expansion is starting to stabilize.  Overseas shipments slipped 2.8% in U.S. dollars from a year earlier, but did increase 5.9% in yuan terms, the sixth straight rise as the weaker currency is boosting receipts.  Imports rose 1.5% in dollar terms, the first increase since late-2014 and climbed 10.8% in yuan terms.  Strong property sales and a major push by Beijing to keep expanding infrastructure construction have increased demand for industrial goods and materials and upstream commodities.  Exports were little changes to the U.S., Japan and the European Union, while those to Russia climbed.  Imports form the U.S. slipped, but they increased 13.2% from Japan and 12.7% from the European Union.

Japan’s economy expanded more than the government initially reported in the second quarter, helped by upward revisions in capital spending, private inventories and public investment.  Real GDP expanded by an annualized 0.7% in Q2, more than the initial 0.2% increase.  Business spending declined 0.1% in Q2, less than the preliminary reading of -0.4%.  Public investment’s contribution was revised to 2.6% from an initial reading of 2.3%.  The report comes before this month’s closely watched Bank of Japan meeting where the board will decide whether to expand easing.  The report is good news for Prime Minister Shinzo Abe and BOJ Governor Haruhiko Kuroda as they seek to boost the economy and spur inflation.  The report suggests the economy is expanding, but there isn’t much strength there yet.

Important Data Releases This Week

August non-manufacturing ISM will be released on Tuesday, September 6 at 10:00 AM EDT.  We expect the non-manufacturing ISM to retreat a point from 55.5 in July to 54.5 in August. Employment and wage growth slowed in August, but basically, fundamentals are supportive for the consumer and the index will remain at a high level.

July NFIB small business survey will be released on Tuesday, September 13 at 6:00 AM EDT.  We look for small business confidence to inch higher in July after the 0.1 increase in July.  The details will show a slight improvement for the economy and employment.  The presidential election is creating some uncertainty among small businesses.

August retail sales will be released on Thursday, September 15 at 8:30 AM EDT.  We look for sales to remain unchanged for the second month.  Auto sales fell in August removing some support, but non-auto sales will likely gain 0.3%.

August industrial production will be released on Thursday, September 15 at 8:30 AM EDT.  We look for industrial production to fall 0.3% after the strong 0.7% rise in July.  The ISM was weak in August, implying some moderation in production.  Details on business equipment production will be important as clues to see if business investment is picking up from a dismal first half of the year.  Non-auto production is looking better and the August report will provide clues to that trend.

August CPI will be released on Friday, September 16 at 8:30 AM EDT.  We look for the CPI to rise 0.2%, after being unchanged in July.  The core CPI is projected to also have increased 0.1%, leaving it up 2.1% an annual basis, compared to 2.2% the previous three month.  Food prices have been on a downward track.  The low track of inflation will actor in the Fed September meeting.


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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.