Monday Morning Coffee: Economic Review, June 23

By | June 23, 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

The second quarter is proving to be resilient, but is falling short of expectations of a very strong bounce-back from the first quarter weakness. Fundamentals are solidifying. Manufacturing is doing better than expected. Spending is holding up, although falling a little shy of expectations. Homebuilding was lagging, but the modest upward trend does suggest that underlying fundamentals are having a positive effect on activity. The outcome of the Federal Reserve Open Market Committee was largely expected with the taper continuing and post-meeting statements little changed. Financial conditions are supportive of growth, with the stock market climbing to record highs. In balance, the economic recovery turns five years old in June and not only is ready for several more years of growth, but may attain the next step of jumping to a stronger near 3% growth path.

There are headwinds. The situation in Iraq has resulted in higher global oil prices. This week oil prices surged and then fell back modestly to have the WTI end up slightly over $106 a barrel. Higher oil prices have an impact on consumer spending and also fuel inflation. It is expected that with the strong domestic production and the American consumer’s power to scale back gasoline consumption at times of high prices; that a lid will be placed on prices here. Still, high oil prices are a threat to both the domestic and global economies. Inflation rose higher than expected last month, although some of the driving forces were temporary in nature. Any speed-up in inflationary forces will have adverse repercussions.

There is one more potential problem and that is the notable lack of volatility in the stock and bond markets. Financial stability should be of greater concern than inflation to monetary authorities. Investor complacency can be signaled by below-average levels of volatility. Stock and bond market volatility are below the average of the last twenty years, which could signal undesirable risk taking. Fed officials have become more vocal about the importance of financial market conditions, but there aren’t enough red flags to warrant any change in policy. Still, Fed eyes will be watching events in coming weeks.

The focus next week will be on durable goods and personal income and spending. We will also get several housing and consumer sentiment reports. All this will fill out the picture of the second quarter. The mixture is likely to be cloudy enough to keep the economy’s speed elusive. That is, are we ready to shift gears to a sustained 3% growth rate, or just keep on more like the speed of the last five years, that is 2%.

Data for Week of June 16 -20

The U.S. Economy:

Industrial production rose 0.6% in May, following a upwards revised 0.3% decline in April. The important manufacturing component also rose 0.6%. Manufacturing activity is strengthening after an inventory correction and harsh weather dampened activity at the beginning of the year. Motor vehicles and parts production rose 0.5% in May. Away from the auto sector, “other” manufacturing rose 0.5% in May. Business equipment production rose 0.4% in May, the fourth consecutive monthly increase. Recent manufacturing surveys and data on hours worked show a strengthening of the manufacturing sector. Now that the inventory correction is largely completed, final demand will determine the course of production. Consumer and business spending remains modest, but positive. Trade flows are questionable, but should pick up some momentum. The outlook for the industrial sector looks bright.

The National Association of Home Builder’s index rose from 45 to 49 in June. All three subcomponents rose, led by 6 point surge in the current sales index. Three out of four regions of the country advanced in June. Still, the index remains below levels from a year earlier.

Housing starts pulled back 6.5% in May to a seasonal adjusted annual rate of 1 million units. Disappointingly, single family starts fell by 5.9%. Permits declined by 6.4% to a 991,000 annual rate. Permits are down 1.9% from a year earlier. Housing starts are up 9.4% from a year earlier. The May decline came as no surprise after the strong April advance. However, the results are disappointing for those expecting a rebound in housing activity. As been the case for several months, the housing market is largely treading sideways. There was some hope in the May report. Single-family permits rose 3.7%, but remain down 0.8% from a year earlier. Fundamentals argue for a modest uptick in housing activity. Job growth is accelerating and credit is getting easier for those with led than non-stellar credit. These positive forces should propel housing forward. However, the pace of housing remains slow at the moment.

Consumer prices rose 0.3% in May, the strongest gain in almost a year. Headline prices have now advanced for three straight months. Sustained rallies in food and energy drove the advances. The core CPI rose 0.3%, with broad gains in several categories. The energy index rose 0.9% led by a 0.7% rise in gasoline prices. Electricity prices rose sharply, affected by a rise in rates in California after being held back by climate credits in April. The CPI for food and beverages rose 0.5%. Inflation is now returning to a normal rate of increase after an extended weak phase. The increase in inflationary pressures could be ominous, but the global economy remains weak, limiting the impact on most industrial commodities. Crude oil prices increased sharply during the first few days of the Iraq crisis, but fell back modestly. If the situation in the Middle East occurs without damaging oil supplies, the market should adjust. Still, the potential for sharply higher oil prices and accelerating inflationary pressures does exist.

The Federal Reserve Open Market Committee announced another $10 billion reduction in asset purchases, bringing it to $35 billion and reiterated its pledge that interest rates will stay low for an extended time. The Fed’s projections showed a little less GDP growth and lower unemployment this year. There were a few tweaks to the statement’s message, but the forward guidance was unchanged. The Fed’s description of inflation did not change. The Fed’s estimate of GDP growth for 2014 was lowered from 2.9% to 2.2%, reflecting the very weak first quarter. Estimates for 2015-16 were unchanged. The Fed will end QE this year, but the timing of the first interest rate increase is not set in stone. They will likely re-invest their balance sheet for several months before actual tightening. Of course, a lot depends on how strong the economy is and how fast inflationary pressures are building, will impact their schedule.

International:

Japan’s exports fell in May for the first time in 15 months on weak demand to the U.S and Asia. Outbound shipments decreased 2.7% from a year earlier. Imports dropped 3.6% with the trade deficit narrowing 909 billion yen ($8.9 billion). Slowing demand from the U.S. and China are weighing on shipments. Exports are still projected to increase over the course of the year, but are unlikely to have a big impact on economic growth.

German investor confidence fell for a sixth month in June even after the ECB announced a round of stimulus aimed at preventing deflation and rekindling growth in the euro area. The ZEW Center for European Economic Research’s index of investor confidence slid to 28.8 in June from 33.1 in May. German economic growth has slowed this quarter after output was buoyed at the start of the new-year by a mild winter. Expectations are slightly more optimistic about future conditions after the ECB announced its stimulus efforts. The Bundesbank projects that GDP will grow slightly in Q2 after a 0.8% advance in Q1.

Data to Watch This Week: June 23 -27

This week will be relatively light for economic data.

Existing Home sales for May will be released on Monday at 10:00 AM EDT. We expect a modest rise in sales as homebuilding is bouncing back from the harsh winter.

New Home sales for May will be released on Monday at 10:00 AM EDT. We expect a modest fall after last month’s strength

The Conference Board’s consumer confidence index for June will be released on Tuesday at 10:00 AM EDT. The improving job market will nudge the index slightly higher.

Durable goods orders for May will be released on Wednesday at 8:30 AM EDT. We expect a modest rise in orders following the upward trend of the last three months.

GDP First quarter-third report will be released on Wednesday at 8:30AM EDT. The first quarter will likely be revised down from miserable to worse. Look for a -2.0% contraction.

Personal income for May will be released on Thursday at 8:30 AM EDT. Nominal income will rise at a modest 0.3%, slightly below the 0.4% average so far this year. Spending will be healthy at 0.5%.

Michigan sentiment for June will be released on Friday at 10:00 AM EDT. We expect a slight improvement for the final reading.


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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.