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.
The U.S. economy barely etched out a positive gain in the first quarter and revisions will likely show a small decline. Real GDP only increased 0.1% in the first quarter, according to the BEA. So far, economic growth looks more optimistic in the second quarter with growth likely to hit in the 2.5% to 3.0% range. April’s gain in nonfarm employment was strong at 288,000, but may have showed some winter payback. The overall trend is, however, looking up and employment has increased by an average of 238,000 over the past three months. The ISM showed a modest improvement in April. Auto sales slipped a little from March, but remain at healthy levels, a support for manufacturing this quarter. The trend for business investment looks solid this quarter with the release of the factory orders data. This is another support for industrial activity this quarter.
Last week’s data shows the economy on a solid course for the second quarter. The employment data was positive. Spending and incomes are improving and the prospects for the industrial sector and business investment are also on an upward beat. Housing is troubling, a theme that the Federal Reserve talked about in a recent meeting. Next week, we get a peek at the ISM non-manufacturing index, where we expect a modest advance. Trade also comes into view next week. The fall in exports in the first quarter was worrisome, but we do expect some modest rebound as the global economy is still on a positive trend.
Latest data: April 28 – May 2
The U.S. Economy:
Real GDP grew 0.1% in the first quarter (SAAR), according to the BEA’s preliminary estimate. The increase was well below expectations and followed a 2.6% gain in the final quarter of 2013. The slowdown came from falling equipment investment, exports and a large drag from inventory investment. Real personal consumption rose 3.0%, compared with a 3.1% rise in the final quarter of 2013. Real nonresidential fixed investment fell 2.1%, in contrast to a 5.7% rise in the fourth. Real exports fell 7.6% in Q1, while imports fell 1.4%. Inventories subtracted 0.6 of a percentage point of GDP growth, rising by $87.4 billion in Q1. Final sales increased 0.7% in the first quarter. The first quarter was expected to be soft and weakness was concentrated in the first two months of the year. Weather was a factor, although the Bureau did not quantify the exact impact on growth. It appears a much stronger second quarter is shaping up, with broad advances in spending, manufacturing and job creation. Real GDP should hit 3% in the second half of the year.
It’s smooth sailing for the Federal Open Market Committee. The Fed announced another $10 billion reduction in the monthly pace of asset purchases, bringing it to $45 billion. After overhauling its communicative strategy in March, moving from a quantitative to a qualitative approach, the Fed took a break in April. The Fed still has a communication problem about the first increase in the fed funds rate and the pace of normalization and there was little clarity on that issue in April. There were few changes in the Fed statement, which reiterated that growth in the first quarter was held back by weather and fiscal restraint. The Fed acknowledged that the economy has regained momentum, but sounded troubled by incoming data on housing. To manage market expectations, the latest FMOC statement said the funds rate will remain below normal even as the economy approaches full employment.
The Conference Board’s Consumer Confidence Index disappointed in April, falling 1.6 points to 82.3. The index was led lower by the current conditions component. Buyers’ expectations were little changed from March. There was heightened discontent for job prospects, which was interesting considering the present strength in the labor markets.
Private payrolls increased by 220,000 in April, following a revised 209,000 gain in March, according to ADP. The gains were widespread across all industries in both service and goods producing industries. Goods producing industries rose by 24,000 jobs, down from 30,000 the prior six months. Service producing industries rose by 197,000, up from 181,000 in March. The report is positive for the labor markets and the economy in general.
Personal income rose 0.5% in March, up from 0.4% the previous two months and the fastest pace since August. Real spending rose 0.7%, the fastest since August 2009. Vehicle sales accounted for about half of the spending increase. The increase is positive and shows that the recent weakness in spending and incomes was, at least partly weather related.
Construction spending increased 0.2% in March, slightly worse than expectations. The March increase was 8.4% higher than a year earlier. Private residential construction rose 0.4%, up 8.6% y/y. Nonresidential construction rose 0.2%, up 8.6% from March 2013. Public construction fell 0.6% in March, down 0.8% y/y. The end of the bitter winter helped construction get into positive territory for March, but there are signs the recovery is weak. Private residential construction is showing the greatest strength, but most of the gain has been in the multi-family component. Private non-residential construction was flat the first quarter. Public construction continues on a downhill run. Road construction is doing well, but school construction and renovation are down 35% from its early-2008 peak.
Factory conditions improved in April, as the ISM advanced 1.2 points to 54.9. Details were mixed. Production fell 0.2 to 55.7, failing to offset the January-December declines. New orders held steady at 55.1 in April. Although remaining in positive territory, the new orders index has only recovered 3.9 points of the 13.2 decline in January. Both production and new order were largely unchanged and remain well below the level reached in the second half of last year when manufacturing was doing well.
Employment rose 3.6 points to 54.7. Of 18 industries, 15 reported growth in employment. The inventory index gained 0.5 of a point to 53 in April. The difference between inventories and new orders slid to 2.6 to 2.1. This is well shy of the 13.1 gap averaged over the second half of 2013. Prices paid fell from 59 to 57 in April and now has fallen for three consecutive months. That suggests tame inflation. New export orders rose from 55.5 to 57 in April, well above the six-month average of 55.8. Imports rose 3.5 points to 58. The improvement in exports is positive, as exports were weak in the first quarter. The report was positive, suggesting that manufacturing is gaining momentum after being derailed by the abnormal cold weather in the first quarter. A majority of lost momentum in the first quarter has been made up, but that doesn’t necessarily mean a robust future. Still, look for positive momentum for the next few months and fundamentals argue for a decent year.
Vehicle sales fell short of the 16.4 million units pace in March, but did etch a respectable 16.0 million pace in April. March sales were juiced up by strong incentives and a bounce back from the cold winter weather that derailed activity for several months. Sales of light trucks reached 8.5 million units SAAR, down from 8.6 million in March, but well above the 12-month average of 7.9 million units. Sales of cars declined from 7.8 million to 7.5 million. Expectations are for modest growth in vehicle sales, as employment gains, easier credit and pent-up demand will support sales of vehicles.
Payrolls blew way past expectations by rising by 288,000 jobs in April. March payrolls were revised up to 203,000 and February to 222,000 jobs. Some of the details of the report were mixed. The unemployment rate fell from 6.7% to 6.3%, but much of the decline came from a large 806,000 drop in the labor force. This pushed the labor participation rate to 62.8%, matching the post-recession low. Some of March’s strength may haven a payback for the winter weather. Growth in hourly earnings and average workweek were unchanged, also not a sign of strength. The payroll numbers were very optimistic, but the average workweek and decline in the labor market does raise some questions about durability of the market. Still, the report was positive and employment has averaged 238,000 over the past three months. Employment growth should average between 225,000 and 250,000 for the next few months.
Factory orders rose 1.1% in March after a 1.1% gain in February. Growth in durable goods was revised upward to 2.9% from 2.6%. Shipments of durable goods were revised up to 1.2%. Unfilled orders rose by 0.6% and inventories rose by 0.1%. Revisions to core capital goods data were strong, showing a 3.5% gain, rather than the initial 2.2% gain. Core capital goods shipments were revised up from 1% to 1.5%. The March gain in orders was widespread across construction and transportation equipment. Nondurable goods orders dropped 0.6%. The report suggests that a modest trend in business investment will follow this year. Revisions to durable goods data showed that winter weather was mainly responsible for the February weakness. The 3.3% increase in core capital goods orders over the past three months, show an improving trend in business investment. Orders for core capital goods have trod a steady trend of recovery since September, except for February’s winter weakness. Capital spending plans are noticeably higher in Fed surveys in recent months. Transportation remains strong. Boeing had another month of strong orders in March and auto sales have been strong. Fundamentals favor solid but modest business investment going forward.
China’s manufacturing grew less than anticipated in April. The PMI stood at 50.4, according to the National Bureau of Statistics. Weakness in exports and construction are hurting Chinese manufacturing. Growth remains soft and the weakness is expected to continue through the second quarter. China’s State Council has pledged extra efforts to support trade through financing and export rebates. Last month the Council outlined a package of spending on railroads, housing and tax relief to support growth.
Manufacturing in the U.K. grew more than economists expected in April. The PMI advanced to 57.3 from 55.8 8 in March. The increase adds to evidence that the economic recovery is broadening. Manufacturing is strong, supported by a healthy domestic market and improving global economic conditions.
The euro-area unemployment rate held at 11.8%, only a slight improvement from the record 12% last year, despite stronger economic growth. The rate ranged from a low of 4.9% for Austria and 5.1% for Germany to Spain’s 25.3% and Portugal’s 15.2%. There are fears of structurally high unemployment in the euro-zone. The unemployment rate is projected to fall, but it may take several years.
Next Week: April 28-May 2
This week will be relatively light for economic data.
The ISM non-manufacturing index for April will be released on Monday, 10:00 AM EST. Look for a modest advance as weather affected the last few months reading.
International Trade for March will be released on Tuesday at 8:30 AM EST. We expect the trade deficit to narrow. Lower inventory build held back imports and exports will rebound modestly.
Productivity and costs will be released for the First Quarter 2014 at Wednesday at 8:30 AM EST. Productivity will likely have fallen in the first quarter as hours worked fell and weather was an impact. The longer term trend looks better at around 1.5% y/y.
FTR is the leader in economic analysis and forecasting the commercial freight and transportation equipment markets. For more information: Click here