Monday Morning Coffee: Economic Review of Data, May 25 – 30

By | June 2, 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 second release of first quarter GDP was dismal and left markets and businesses on edge. Data over the last couple of weeks has been mostly positive but did not shed a lot of light on the strength of the second -quarter rebound. Incoming data still points to a decent rebound in economic activity in the second quarter. The downward revision to first quarter GDP largely came from a weaker inventory build, which is positive for current growth. The cold winter was a drag on economic activity, probably shaving a percent off of growth. However, it boosted utility spending, which fell back as weather normalized. Thus, real spending fell 0.3% in April, but only 0.1% excluding utilities. Consumer fundamentals continue to improve, as seen in last week’s, Conference Board’s sentiment report and personal income rose 0.3%. Further improvements for the consumer will likely be seen this week in the employment report.

Housing produced some better news. Pending home sales rose 0.4% in April. House price gains are brisk, but well below bubble territory. The Federal Reserve is getting the best of both worlds, that is, stronger growth and lower long-term rates. The 10-year Treasury yield has dropped by 17 basis points over the last month to less than 2.5%. A lack of supply, geopolitical worries, concerns about U.S. growth and Fed policy could all be pushing rates lower.

Next week will see a broader intake of data, including the heavily watch U.S. employment report. Data will continue to point to a rebound in the second quarter after the weak start to the year. We expect the ISM manufacturing and services index to extend recent gains and payrolls to exceed 200k. Economic fundamentals remain intact. Healthy job creation will support consumer activity. Manufacturing is bouncing back after the inventory correction. Events in the Ukraine appear to be slightly calmer and China’s mini-stimulus will help keep a floor in that country’s slowdown. There will likely be bumps in the road, as consumers wrestle with higher food prices and still weak income growth, but the economy appears to be on a solid growth path.

Data for week of: May 26 – 30, 2014

The U.S. Economy:

The Conference Board’s index of consumer confidence rose 1.3 points to 83 in May, from a downwardly revised 81.7 in April. The present situation index advanced 1.9 points to 80.4, reversing half of April’s sharp decline. The expectations index rose 0.9 of a point to 84.8, matching March’s reading. The advance is in line with expectations that economic and job growth will drive confidence higher. Yet, there is some disagreement among shoppers on how the economy will play out this summer and fall. On one hand, more respondents said current business conditions are deteriorating, yet more people said jobs were more plentiful than in April. Future sentiment will partly depend on income growth, which will grow quicker as more advances are made in the labor markets.

New orders for durable goods rose a better than expected 0.8% in April. The bulk of the increase was driven by defense aircraft orders. Excluding defense, orders fell 0.8%. Durable goods shipments dropped 0.2%, weighted down by a 1.4% decline in machinery shipments and a 1% drop in transportation shipments. Capital spending moderated in April. Core (nondefense excluding aircraft), orders fell 1.2%, while shipments slid 0.4%. However, March’s numbers received substantial upward revisions. Even with the April decline, core capital goods shipments and new orders are 5.3% and 7.7% annualized above their first quarter averages. Capital spending on equipment has been trending north for most industrial segments and suggests that 2014 will be a good year equipment investment. The latest data suggests a pickup in business investment after a lull in the third quarter. Firms are getting back to the level of investment that prevailed in the middle of last year. Fundamentals favor additional investment and hiring in coming months.

Real GDP shrank by 1% in the first quarter, according to the BEA’s second estimate, well below the fourth quarter’s 2.6% growth rate. This was the biggest decline since the first quarter of 2011. The slowing was the result of falling equipment and structures investment, exports and a large inventory correction. Consumer spending growth slowed modestly, while the government drag was smaller than in the fourth quarter. While consumer spending contributed 2.1 percentage points to growth, inventories reduced growth by 1.6 percentage points and foreign trade reduced growth by 1%. Recent data suggests that the economy is rebounding in the second quarter. Projections of Q2 growth are in the 3% to 3.5% range.

Personal income rose 0.3% in April, slower than the 0.4% rise in March. Wages led the slowing, rising only 0.2%. Real consumer spending fell 0.3%, the largest monthly decline since 2009. Spending remained healthy on a y/y basis. Spending faltered as the year began because of adverse weather and cuts in government transfer programs. Some of the delayed spending took place in March, making another strong gain unsustainable. Consumer fundamentals remain healthy and supportive of spending increases. Income growth is still slow, but as the economy advances, incomes and spending will pick up the pace.


Japanese retail sales dropped at the fastest pace in 14 years after the first tax increase since 1997 depressed spending. Sales in April declined 13.7% from March. Sales fell 4.4% from a year earlier, with declines in all sectors including autos, clothing, food and beverages. The economy is forecast to shrink an annualized 3.4% this quarter after a 5.9% spurt in the first three months of the year. Some forward gauges are positive. Machinery orders, a leading indicator of private capital expenditures, rose at the fastest pace in March since 1996. Some recovery in household spending is expected in the second half of the year.

German unemployment increased for the first time in six months amid signs of a slowdown in the euro-zone’s largest economy. The number of people out of work rose by 23,937 to 2,905 million in May, according to the Federal Labor Agency. The Bundesbank has said that economic growth will slow this quarter from the first quarter pace. The mild winter boosted economic activity in Q1 and some slowing is expected in Q2. Some form of stimulus is expected for the euro area in June, when the ECB has its next meeting.

A property-market slump threatens to limit any economic rebound and pressure policy makers to do more to stimulate China’s economy. China’s home prices fell 0.3% in May from April, the first monthly drop since June 2012. Measures to stimulate the economy have been taken since April 2, when the State Council outlined steps, including faster railway spending and tax breaks to support growth. Nomura Holdings Inc. said that measures including central bank loans for low-income housing, are :starting to amount to something quite significant.” The company projected that increases in housing and railway investment should boost GDP by 0.8 of a percentage point.

Data to watch this week: June 2 – 6, 2014

This week will be relatively heavy for economic data.

The May ISM manufacturing report will be released on Monday at 10:00 AM EST. May was solid for manufacturing. The index will rise well above its first quarter average of 52.7.

The May Conference Board’s Consumer Confidence Index will be released on Tuesday at 10:00 AM EST. We look for modest rebound in the index given the stronger job market.

April construction spending will be released on Monday at 10:00 AM EST. We project construction spending to advance broadly as more favorable weather aided pent-up building.

April factory orders will be released on Tuesday at 10:00 AM EST. Factory orders should rise for the third consecutive month, but the gain may be a little weaker than the previous two months.

May vehicle sales will be released on Tuesday at 5:00 PM EST. Sales will track near the 16 million mark.

ADP employment report for May will be released on Wednesday at 8:15 AM EST. ADP counted 220K jobs for April. The pace of job creation has picked up 193k over the last six months.

April international trade will be released on Wednesday at 8:30 AM EST. We look for a slight widening of the trade deficit. Look for a slight improvement for both exports and imports.

The ISM non-manufacturing index for May will be released on Thursday at 10:00 AM EST. The services ISM advanced a little more than expected in April and will advance in May.

May employment situation will be released on Friday at 8:30 AM EST. The job market is improving, but a repeat of April’s sizable gain is unlikely. Gains of slightly over 200k are likely.

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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.