Monday Morning Coffee: Economic Review of June 9 – 13, 2014

By | June 16, 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 latest incoming data shows the economy growing slightly over 3% in the second quarter, a big improvement over the weak first quarter. The second quarter is not excessively impressive, considering the steep 1.0% fall in Q1, a rate that is likely to see further downward revisions. Retail sales were disappointing in May, but the April upward revision gave a stronger hue to the present quarter. Business inventories were a little stronger than expected in April, up 0.6%, but sales accelerated, suggesting businesses will dip into stockpiles in coming months. Confidence is mending, as the NFIB Small Business Optimism Index climbed 1.4 points in May. This suggests a broadening of the recovery. In balance, the economy is gaining ground and appears to have transferred from a recovery to a self-sustaining expansion. The question is of speed and strength. Will the economy shift gears to a self-sustained 3% level, or stay at that 2% mark we’ve seen over the past five years?

Next week will be relatively heavy for economic data. The focus ahead will be on the Fed meeting and the chair’s press conference. The central bank will maintain the status quo, but new faces and updated forecasts for growth, inflation and interest rates suggest an eventful meeting. We will see a solid report for industrial production after the disappointing weather-influenced April report. The release of the housing market sentiment index and housing starts numbers will give us insight to a sector of the economy that is causing concern. In order to shift gears to higher economic growth, housing must contribute. Continued weakness there may force the economy to a slower growth path. We also get a peek at consumer prices, next week. Rising oil and food prices are raising concerns about inflation.

In all, the economy is doing well. Employment, spending and manufacturing remain positive, driving the economy forward. Rising geopolitical tensions over the past week adds some downside risks. The Iraq fighting is raising oil prices and gasoline prices will follow. Without a sudden and sustained spike, the hit to discretionary spending should be modest. However, gas prices at $4.00 a gallon, or more and the consumer starts to cut spending elsewhere, with implications for the broader economy. Except for a few clouds, the outlook for the economy is still bright.

Data for Week of June 9 – 13, 2014

The U.S. Economy:

The National Federation of Independent Business small business survey added 1.4 points in May to 96.6, the highest reading since September 2007. May was the third consecutive increase. The improvement was broad based. A larger share of respondents indicated improving sales and earnings and improved hiring plans. The outlook for the economy and sales growth also improved and small companies indicated credit was flowing more freely. Overall, small businesses are doing better than they have so far in the recovery. The index should trend higher as the economy improves.

Retail sales rose a modest 0.3% in May, lagging expectations. However, sales in April were revised up significantly to 0.5%, rather than the 0.1% initially reported. Auto sales drove most of the May gain, rising 1.4%. Excluding autos, sales were up only 0.1%. Sales were up 4.3% above year earlier levels, well above winter lows. Overall, sales have been above 4% from year earlier levels for three straight months for the first time since last summer. Sales were led by auto dealers, building supply shops and miscellaneous retailers. Non-store retailers, furniture stores and gasoline stations posted healthy growth. Most other segments saw modest declines. Department stores led the negative side, falling 1.4%, but that followed a 1.9% gain in April. Fundamentals remain strong for the consumer, with the exception of still weak income growth. The trend for spending remains favorable.

Business inventories increased by 0.6% in April, above expectations. Retail inventories gained 0.5%, manufacturing inventories notched 0.4% and wholesale inventories gained 1.1%. Business sales maintained their upward momentum, rising 0.7% for the month. The inventory-to-sales ratio was 1.29, with the previous months ratio being revised from 1.30 to 1.29. Inventory accumulation on a y/y basis checked in at 5% and the I/S ratio is slightly below year ago levels. This means that businesses remain well positioned to accumulate inventories and contribute to economic growth in the second quarter. Overall, inventories have grown at a steady clip, while a pickup in sales in the near term appears likely.

Producer prices for finished products fell by 0.2% in May, after rising strongly the previous two months. Weakness was widespread across most categories. The energy index fell 0.2%, the second decline in three months. The food index also fell 0.2%. Excluding food and energy core final demand goods were flat after advancing the previous two months. At earlier stages of production, the processed intermediate goods index fell 0.1%. The outlook for a rebound in commodity prices is challenging. The global economy is only advancing at a slow pace. Oil prices did not move much because of the geopolitical crisis in the Ukraine. The story in Iraq may be different, especially if the fighting spreads south towards the oil regions. Saudi Arabia has extra reserves, so any short-term price lift may be short lived. The outlook for inflation is subdued.

The University of Michigan’s consumer confidence fell to 81.2 in June’s preliminary report. The current conditions subcomponent rose 0.9 to 95.4. However the expectations subcomponent fell 1.5 points to 72.2. Ongoing tensions in the Ukraine and the outbreak of violence in Iraq may be lowering confidence further out. On the bright side, buyers are more confident in their current financial position than in May. Further advances in confidence are expected as the economy continues to add jobs and incomes heal.

International:

Chinese auto sales rose 13% last month, led by GM and Ford, as foreign brands continue to gain market share in the world’s largest auto markets. Retail deliveries of cars, multipurpose and sport utility vehicles climbed to 1.5 million units in May. Separate data from the state-backed China Association of Automobile Manufacturers showed May sales climbed 13.9% from a year earlier to 1.59 million units.

The World Bank projected that real GDP for the globe will expand 2.8% this year, compared to January’s forecast of 3.2%. The U.S. forecast was reduced to 2.1% from 2.8%, while outlooks for Brazil, Russia, India and China were lowered. The Bank cut Russia’s forecast to 0.5% from January’s projection of 2.2%. They see the Ukraine falling 0.5%. The Bank cut Brazil’s expansion to 1.55 from 2.4%. India was seen as growing 5.5% instead of 6.2% and China was lowered to 7.6% from 7.7%.

China’s exports rose more than expected in May, rising 7% from a year earlier. Imports fell 1.6%, leaving the trade surplus at $35.92 billion, the biggest in five years. Stronger exports may bolster Chinese leaders confidence that a recovery in demand in the U.S. and Europe will support economic growth and reduce the need for more stimulus.

Data to watch this week: June 16 – 20, 2014

This week will be relatively heavy for economic data.

The May NFIB Industrial production report will be released on Monday at 9:15 AM EDT. May’s IP report should be solid, undoing April’s weakness.

NAHB housing market index for June will be released on Monday at 10:00 AM EDT. We look for a slight improvement, as the industry regains some ground lost to weather.

Consumer price index for May will be released on Thursday at 8:30 AM EDT. Higher gas and food prices in May likely drove the CPI up 0.2%.

Housing starts for May will be released on Tuesday at 8:30 AM EDT. The multi-family sector will see s small drop, while single-family starts make a small advance.

The FMOC meeting statement will be released at 2:00 EDT. The Committee will reduce its monthly asset purchases by another $10 billion. Economic forecasts will be updated.

Leading Indicators for May will be released on Thursday at 10:00 AM EDT. The Conference Board’s index will show a modest rise. Financial components will provide some lift.


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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.