Monday Morning Coffee: Economic Review

By | May 19, 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 forecast still calls for a return of healthy GDP growth this quarter, but the latest data suggests a somewhat more subdued pace than expected earlier this month. Retail sales were positive, but fell short of expectations, lowering the trajectory of consumer spending. Industrial production also disappointed in April, but upward revisions to prior months still leaves the trend quite strong. Recent Fed surveys for manufacturing also suggest that manufacturing is firming after a weak first quarter. Housing sentiment was weak, but the housing starts number was strong. However, most of the strength came from the multifamily sector. Single-family starts are still treading water, suggesting that more than weather is holding back an expected rebound in housing.

Recent data on inflation was ominous. The CPI rose 0.3% and the PPI rose 0.6% in April. The CPI gain was almost the strongest in a year and the PPI had two strong months. Most of the gain in the PPI came from food, which is expected to be temporary. Energy prices are stable and considering the international situation in Russia and the Ukraine, are representing a restraining influence on overall inflation. Still, any spike in inflation is going to represent problems for the Open Market Committee, whom are currently wrestling with timing issues for the first increase in interest rates in many years.

Next week will see more data on housing, with data on new and existing home sales. Fundamentals for housing are still intact, but the timing of a rebound will cloud economic forecasts going forward. Data on jobless claims will support the ongoing healthy rebound in the labor markets. The economy’s fundamentals still support an acceleration in growth and when the Conference Board’s index of leading economic indicators come out on Thursday, they will reflect this. The second quarter still looks healthy, but expectations have fallen a bit. Real GDP is still forecast to hit the 3% mark in the second half of the year, but the probability that Q2 will hit that mark, has fallen a little.

Data: Week of May 12-16, 2014

The U.S. Economy:

The National Federation of Independent Business small business survey added 1.8 points in April, rising to 95.2. The April reading was the highest since October 2007. Details were favorable. A net 20% of small firms reported falling earnings over the past three months, the smallest share of negative responses in two years. A net 2% said sales volumes fell in the last three months, also the smallest share in two years. A net 10% expect sales to improve over the next six months, a slight drop from March’s 12%. A net 9% of respondents see the economy deteriorating over the next six months, down from 18% in March and the smallest share since August. A net 12% of respondents raised prices in the past three months, up from 9% in March and most in three years. The survey is reflecting the economy’s positive direction and improving confidence. Sales are improving and leading to a willingness to expand employment. Credit is also starting to loosen up for small businesses, making it easier to expand operations.

Retail sales rose at a weak 0.1% rate in April. However, March sales were upwardly revised to a 1.5% jump in March. March sales were aided by the shift of the Easter date and the bounce back of consumers after a difficult winter. Sales in April were 4% higher than a year earlier, well above winter lows. Excluding autos, sales were unchanged and excluding both autos and gas, they fell 0.1%. The April weakness was partly offset by upward revisions in previous months. February’s sales were revised from 0.7% to 0.9% and March’s gains were revised from 1.1% to 1.5%. Fundamentals for spending remain positive, with the exception of income growth. The Stock Market is near a record high, employment gains are healthy and rising house prices generate wealth effects. We expect a modest, positive trend for consumption going forward.

Producer prices for finished products rose 0.6% in April, accelerating from the 0.5% increase in March. The index was largely driven upwards by a 2.7% rise in the food index, the third strong increase in as many months. Final demand for energy goods inched up only 0.1% after slumping 1.2% in March. Excluding food and energy, core goods prices rose 0.3%, up from a 0.1% rise in March. The outlook for inflation is restrained. Food prices have drove the index higher, but the rally should slow, as there are better prospects of drought relief in California later this year and good growing conditions elsewhere. Energy prices appear calm considering the situation in Russia and the Ukraine. Most industrial commodities are under price pressure due to the slowdown in China and better supply conditions across the globe. Inflation will pick a little velocity as the global and domestic economies slowly gain momentum.

The CPI rose 0.2% on broad gains across several categories. The CPI for food and beverages rose 0.4%, matching the strong gains the previous two months. The energy index rose 0.3%, ending a two-month slide. The recent momentum in consumer prices will likely hold for another month, or two, because input prices rose in March and April. The medium term outlook is likely weaker. A big surge in farm prices was a major contributor to the PPI index in the last two months. That is unlikely to hold. Energy prices are holding firm and import prices were weak last month. In the longer term, inflation will likely strengthen to the historical rate in the second half of the year, as the economy is gaining acceleration and confidence is building. Overall, inflation is expected to be moderate. The Federal Reserve will be watching the inflation data closely.

Business inventories rose by 0.4% in March, within expectations. Retail inventories were unchanged, manufacturing inched up 0.1% and wholesale inventories rose 1.1%. Business sales rose 1% in March, continuing their upward momentum. The I/S ratio was unchanged at 1.30. The manufacturer I/S ratio was unchanged from a year earlier, while the retail I/S ratio is markedly higher than a year earlier, while the wholesale I/S ratio is slightly above a year earlier levels. As weather conditions improved businesses began preparing for spring sales. Businesses are gaining confidence but are still wary and are adding only modestly to stockpiles. Businesses will try and match inventory build with final demand.

Industrial production fell 0.6% in April after big gains the prior two months. The return of normal weather led to an outsized 5.3% drop in utility output. Manufacturing was also weak, falling 0.4%. There were upward revisions to manufacturing for both February and March. Mining production was strong, rising 1.4%. The April weakness in manufacturing was widespread, with the production of consumer goods and business equipment down 1.3% and 0.5%, respectively. Motor vehicles and parts output inched up 0.1%. Even with the April weakness in manufacturing, the trend still looks healthy. The upward revisions countered the April dip. Manufacturing is tracking a 3.6% annualized rate so far in the second quarter, stronger than the 2.1% increase in the first quarter. Mining was strong, up 1.4% in April and the 8.3% increase over the past year the strongest since early 2012. In all, the topline was a disappointment but the trend looks solid and prospects are favorable for growth. The biggest concerns about manufacturing are housing and fixed business investment.

Residential construction rose 13.2% in April, equaling an annualized rate of 1.072 million units in April. Starts were up 26.4% above year earlier levels. The multi-family sector drove most of the increase. Single-family starts increased 0.8% to 649,000 units. Permits increased 8% in April, equaling 1.080 million units, up 3.8% y/y. The multi-family sector also drove the permit numbers higher. Single-family permits increased 0.3% and down 3.2% from a year earlier. The strong increase in the starts numbers was good news. However, digging deeper in the report tempers some of the positive news. The strength largely came from the multi-family sector. The single-family sector is still treading water. The preconditions for a housing rebound are still intact. Job growth is accelerating and lenders are even offering mortgages to those with less than stellar credit. These positive drivers should drive the housing sector upwards for the next few years. However, there are risks that the housing rebound may fail to launch. This could lower growth forecasts for the next few years.


German investor confidence fell for a fifth moth in May in a sign that threats from low inflation due to a strong euro may undermine the recovery. The ZEW Center for Economic Research’s index of investor expectations, which aims to predict economic developments six months in advance, slid to 33.1 from 43.2 in April. The gauge is at the lowest level since January 2013. Investor caution in Europe’s largest economy reflects concern that the slow recovery in the 18-nation area is vulnerable to shocks.

China’s economic slowdown deepened with an unexpected deceleration in industrial output and investment growth and a decline in home sales. Factory production rose 8.7% in April from a year earlier, down from 8.8% in March, according to the National Bureau of Statistics. It was the slowest since 2009, excluding January-February data that was distorted by the shifting timing of the Lunar New Year holiday. In a separate report, fixed asset investment increased 17.3% in the first four months of the year, the slowest for the period since 2001. Retail sales advanced 11.9% in April from a year earlier, the same gain as in March and below expectations. The weak economic news is testing policymakers’ reluctance to step up monetary stimulus. The figures signal increasing risks that China will miss the year’s expansion goal of 7.5%. The government in April rolled out tax breaks and sped up spending on infrastructure and social housing to speed up growth.

The euro-zone recovery failed to gather momentum last quarter, as France stalled and economies from Italy to the Netherlands shrank. Growth came in at 0.2%, half what most economists forecast. While Germany doubled its expansion to 0.8%, that wasn’t enough to offset weakness across the region, including a 0.7% drop in Portugal. The Dutch economy contracted 1.4% in the first quarter, the steepest contraction in the euro-area. France stagnated and Italy shrank 0.1%. The euro-zone has still seen four quarters of positive growth. The report raises the probability that the ECB will act to stimulate the economy at the next meeting in June.

Japan’s economy grew at the fastest pace since 2011 in the first quarter, as companies stepped up investment and consumers spent ahead of the first tax increase in 17 years. GDP grew at annualized pace of 5.9%. Consumer spending rose 2.1%, the fastest pace since before the 1997 tax increase. Capital expenditures rose 4.9%, the most since the 8.2% jump following the Tohoku earthquake and nuclear disaster. Public investment fell 2.4%. The government does plan increased investment in the second and third quarters to offset what will certainly be a much weaker quarter following the tax increase. Economists expect a 3.3% decline in the second quarter and a 2% rise in Q3. Recent April data has been weak. Beer shipments fell 21% in April from a year earlier, the largest fall since 2005, after a 17% rise in March.

Data to Watch This Week: May 19-23, 2014

This week will be relatively light for economic data.

The minutes of the Federal Reserve Open Market Committee for April will be released on Wednesday at 2:00 PM EST. The update on Fed thinking could signal timing for normal monetary policy.

The Conference Board’s Leading Indicators for April will be released on Thursday at 10:00 AM EST. Look for more positive news.

Existing Home Sales for April will be released on Thursday at 10:00 AM EST. Look for an upturn after three months of declines.

New Home Sales for April will be released on Friday at 10:00 AM EST. New home sales should improve as the housing market is emerging from the harsh winter.

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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.