Monday Morning Coffee: Economic Review May 5 – May 9

By | May 11, 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 looks more solid. The latest data confirms that real GDP likely contracted in the first quarter, but they also boost prospects for near-term growth. The first quarter was held back by weather, fiscal restraint and an inventory hangover. New data shows that consumer spending was already rebounding by the end of Q1 and leading indicators of business investment have picked up in recent months. The restraint from trade and inventories will likely be confined to the first quarter. Growth in the second quarter may be as high as 3%, with a healthy manufacturing sector, solid job growth and rising business investment. Housing remains a concern.

Janet Yellen reiterated past statements this week on her testimony before Congress’ Joint Economic Committee last week, saying monetary policy isn’t on a preset course. She was upbeat on the economy’s near term prospects, but concerned about housing. Yellen said that interest rates will stay low even if the economy reached full employment, but dropped hints that this was a forecast, not a promise. The financial markets expect rates to rise only gradually in small, predictable steps. However, in the past three tightening cycles, the funds rate was raised more aggressively than the Fed had projected.

Next week, we will see data on retail sales, business inventories, inflation, industrial production and housing starts. Sales will be decent, but unlikely to repeat March’s strong advance. Industrial production will also see a solid advance in manufacturing, but the headline figure will likely drop a bit from last month. Inflation will take on added importance with stronger growth and less slack in the labor markets. Housing will be closely watched, as forecasts for stronger growth in the second half of the year may have to be downwardly revised. In all, the economy remains on a solid growth path, likely to settle in at near 3% for the remainder of the year.

Latest data: May 5 – 9

The U.S. Economy:

Last week was light for economic data, but the non-manufacturing ISM index pointed to a continuing recovery in the service sector. The ISM index improved from 53.1 to 55.2 in April. The index has now fully recovered from February’s 2.4 point slide and rests at the highest level since August. The new orders index rose 4.8 points to 58.2, well above its first quarter average. The business activity index rose from 53.4 to 60.9 in April, while new exports added 7.5 points to 57. Details about the report were positive. The new exports index rose in April after being below for three consecutive months. It appears the drag from Europe’s problems and China’s slowdown may be diminishing. The growth in service is complementing manufacturing growth. Services will contribute to the accelerating national recovery.

The U.S, trade deficit narrowed in March to $40.4 billion from $41.9 billion in February. Exports in real terms increased 2.3% m/m, while imports rose by 1.4%. The March data presents a picture of a strengthening global and domestic economy. Robust increases in exports and imports of capital goods indicate stronger global investment spending. The increase in industrial supplies of both imports and exports point to growing momentum on the production side of both the global and domestic economies. There were robust exports to Europe, Asia, Latin America and Africa. The trade weighted dollar was at a competitive level in March, supporting export growth.

Prospects for trade are improving as there is less fiscal uncertainty in the developed economies, compared with past years. By all indicators, the global economy is gaining traction. Growth is accelerating in Europe. However, interest rate may fall further, as inflation remains very weak there. China financial fragility appears to be contained, but there are risks in the shadow banking system. Japan will turn in a couple of weak quarters because of the tax increase, but the Asia-Pacific region is solid. The greatest risk is the showdown between Russia and the Ukraine. In all, global growth is picking up, led by the U.S., Latin America and East Asia.

International:

U.K. manufacturing expanded more than projected, adding to evidence that the economic recovery is gathering strength. Output rose 0.5% in March, following a 1% gain in February, the Office for National Statistics reported. Economic growth accelerated to 0.8% in the first quarter. In the first quarter, industrial production rose 0.7% and manufacturing increased 1.4%. The Bank of England left interest rates unchanged recently, but speculation is growing that rates may move upwards fairly soon.

The European Commission said that low inflation will remain a threat for at least the next two years, as it trimmed its growth forecast and warned of tensions with Russia. The 18-nation inflation rate will be 0.8% this year and 1.2% in 2015, well below the ECB’s target of 2%. The ECB is taking unprecedented steps to avert the risk of deflation, including negative interest rates, or implementing quantitative easing, which could take place soon. ECB President Mario Draghi said his greatest fear is of protracted stagnation in the euro area that leads to high unemployment becoming structural.

Consumer inflation in China moderated to an 18-month low, giving the government more scope to loosen policies if its growth slowdown deepens. The CPI rose 1.8% from a year earlier in April, following a 2.4% advance in March. The lack of inflation can allow the Bank of China to relax monetary policy if the goal of 7.5% growth is threatened. Domestic demand in China remains muted, with falling commodity prices exacerbating overcapacity in many industries, including steel and cement.

Next Week: May 12 – May 17

This week will be relatively heavy for economic data.

The NFIB Small Business Survey for April will be released on Tuesday at 7:30 AM EST. Look for a small advance as prospects for small businesses slowly gain traction.

Retail Sales for April will be released on Tuesday at 8:30 AM EST. Calendar events and weather will prevent a repeat of the strong March advance, but spending will be solid at a 0.3-0.5% advance.

Business Inventories for March will be released on Tuesday at 10:00 AM EST. Look for a small rise in inventories and a slightly lower I/S ratio.

Producer Price index for April will be released on Wednesday at 8:30 AM EST. Look for a small rise, as commodity inflation is restrained.

Consumer Price index for April will be released on Thursday at 8:30 AM EST. Look for a 0.2% advance, as inflation has yet to gather momentum.

Industrial Production for April will be released on Thursday at 9:15 AM EST. Manufacturing will remain solid, but total IP will be restrained by lower utility output.

NAHB Housing Market index for May will be released on Thursday at 10:00 AM EST. Look for a modest advance as weather has normalized.

New Residential Construction for April will be released on Friday at 8:30 AM EST. Housing starts will likely stay near March’s 925,000 annualized pace, near the first quarter average.

Michigan sentiment for May will be released on Friday at 9:55 AM EST. Look for a small advance, as the consumer feels a little better about job prospects.


FTR is the leader in economic analysis and forecasting for the commercial freight and transportation equipment markets. For more information: Click here

Category: Monday Morning Coffee Tags: ,

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.