Part of the Recovery in Manufacturing Has Come from Consumer Spending on Goods

By | January 19, 2021

Welcome 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

Global shares stumbled on Friday as hopes of a fiscal boost provided a $1.9 trillion U.S. stimulus plan were smothered by the prospect of stricter lockdowns in France and Germany and a resurgence of COVID-19 cases in China. European stocks followed Asian markets lower, with the pan-European STOXX-600 down 0.4% and London’s FTSE 100 0.6% weaker, with the latter hurt by data showing Britain’s economy shrank in November for the first time since the initial COVID-19 lockdown last spring as social-distancing rules tightened. The MSCI world equity index, which tracks shares in 49 countries, was 0.2% lower on Friday. Stocks rose after the president-elect Joe Biden outlined a proposal that included $415 billion aimed at the COVID-19 response, some 1$1 trillion in direct relief to households and roughly $440 billion for small businesses and communities hurt by the pandemic. Biden’s comments came after Federal Reserve Chairman Jerome Powell struck a dovish tone in comments at a virtual symposium with Princeton University. Powell sad the U.S. central bank is not raising interest rates anytime soon and rejected suggestions the Fed might start reducing its bond purchases in the near term.

Wall Street’s main indexes finished lower on Friday, weighed down by big U.S. banks after their earnings reports, while energy fell sharply due to a regulatory probe into Exxon Mobile Corp.  The S&P index lost ground as shares of large banks tumbled although they posted better-than-expected earnings. The bank sector had rallied sharply in recent days. Wall Street had hit recent highs lately on hopes of a hefty stimulus package. Meantime, data showed a further decline in U.S. retail sales in December, the latest sign the economy lost considerable speed at the end of 2020. The Dow Jones Industrial Average fell 177.26 points, or 0.57% to 30,814.26. The S&P lost 0.72% to 3,768.25 and the Nasdaq lost 0.87% to 12,998.50.  Earnings for the S&P 500 companies are expected to decline 9.5% in the fourth quarter from a year earlier but gain 16.4% in the first quarter, according to Refinitiv. For the week, the S&P fell around 1.5% and the Dow lost 0.91%.

Retail sales fell 0.7% in December, the third straight monthly decline. Sales were still up 2.9% for the year. Surging COVID-19 cases have led to diminished consumer sentiment and a pullback in consumer spending. On the other hand, the pace of vaccine distribution looks likely to speed up and we do expect consumer spending to improve as vaccines become more widely distributed. Inflation has picked up in December, but most of the increase can be traced to energy. The CPI increased 0.4% in December and the PPI 0.3%. Inflation is still likely to remain below the Fed’s target for several months. There has been talk of a possible increase in monetary conditions later this year. This comes in the light of the fiscal stimulus and uplift that can be expected as the pandemic fades. Fed Chair Powell commented that “now is not the time to talk about exit,” and that the Fed would “let the world know” before that process begins. Small business sentiment fell sharply, dropping 5.5 points in December to 95.6. Firms reported weakening outlooks for business conditions and sales. Other consumer surveys have declined recently but not as much and some of the surveys took place when it appeared that the president might not sign a second stimulus package or a federal budget.

The good news from the week came from the factory sector, where industrial production increased 1.6% in December and manufacturing advanced 0.9%. Part of the recovery in manufacturing has come from consumer spending on goods. However, with consumer spending faltering, there is likely to be moderation in the factory sector in coming months.

Next week, we get a look at housing starts and existing home sales.

Latest Data

The U.S. Economy:

The NFIB small business optimism index came in at 95.9 in December, down 5.5 percentage points from November. The reading stands below the historical 47-year average of 98 points since May. The small business optimism index came in at 95.9 in December, 5.5 points less than in November. The decline was largely drive by a 24 point drop in expectations for better business condition over the next six months, which fell to a negative 16 percent. The percent of owners thinking it is a good time to expand fell 4 points to 8%. Earnings trends over the las three months declined 7 points to a negative 4%. Two-thirds of the decline in the total index can be attributed to the decline in the economic outlook and sales expectations components in December. The renewed COVID infections and restrictions are affecting consumer confidence. The index did not catch the passing of the budget act, or the Georgia elections that boosted the probability of greater stimulus, which will help small businesses. That does reflect the slowing of the economy, reflected in the employment numbers. The course of the economy in 2021 will track the numbers of vaccinations. That trend will restore the economy. The question is that of the speed of the recovery.

U.S. producer prices increased 0.3% in December, largely driven by a 5.5% increase in energy prices. Food prices slipped 0.1%, the first decline since August. Excluding food and energy, the PPI increased The PPI for final demand increased 0.3% in December, following a 0.1% increase in November and 0.3% in October. The final demand index moved up 0.8% in 2020, after increasing 1.4% in 2019. Goods prices rose 1.1% in December. Services slipped 0.1% in December. Prices for final demand less foods, energy and trade services rose 0.4% in December, the eighth consecutive advance. In 2020, the index for final demand less foods, energy and trade services moved up 1.1%, following a 1.5% increase in 2019. Meantime, the consumer price index rose 0.4% in December. Energy prices rose 4% and food prices were up 0.4%. Gasoline prices were up 4% in December. Excluding food and energy, the core index rose 0.1% in December, following a 0.2% rise in November. For 2020, the total index was up 1.4%, slightly larger than the 1.2% advance in 2019. The core index was up 1.6% for 2020. Largely because the December rise in inflation was powered by energy, the Fed will not see it as a near-term threat. As the pandemic fades and the economy accelerates, some inflation will surface, but it will be a lengthy period before the Fed starts to move.

Retail sales fell 0.7% in December after falling 1.4% in November and 0.1% in October. Sales remained 2.9% above December 2019. Total sales for 2020 were up 0.6% from 2019. The December decline in sales came, despite motor vehicle and parts sales advancing 1.9%, up 10.1% above December 2019’s total. Sales excluding motor vehicles fell 1.4% in December. There was a 0.6% decline in furniture and related items and a sharp 4.9% decline in sales at electronic and appliance stores. Food and beverage sales fell 1.4%. Non-store retailers saw a s-harp 5.8% drop in a sector that has been strong. The outlook for the consumer is mixed. COVID-19 infections are rising and restrictions are hurting businesses, especially the restaurant and bar businesses. On the other hand, stimulus checks are in the mail and there are good prospects for additional funding. Spending will depend on the progress against the virus. Vaccinations are off to a slow start but there is a possibility the rate could improve rapidly in coming months. The stimulus package will help spending on goods near-term. As the pandemic fades, spending will shift more towards the service sector.

Industrial production increased 1.6% in December, following a 0.5% rise in November. Manufacturing advanced 0.9%. Utility output jumped 6.2% in December, while mining rose 1.6%. Motor vehicle and parts declined 1.6%. Excluding the auto sector, manufacturing advanced 1.1%. Consumer goods output advanced 1.6% and business equipment production rose 0.6%. Construction material output rose 1.9% in December and nonindustrial supplies was up 1.8%. For the fourth quarter, total IP rose 8.4% and the manufacturing sector was up 11.2%. Still, total IP remained 3.6% lower than in December 2019 and 3.3% below its pre-pandemic February reading. The stimulus package will be a support. The recent restrictions to slow the spread of the virus is mainly hitting the service sector, but the recent weakness in consumer spending likely means some moderation in the factory sector. Industrial output will shift to its long-term trend of modest advances.

Business inventories increased 0.5% in November. Among the categories, manufacturing inventories and retail inventories added 0.7%, while wholesale stocks were unchanged. Business sales decreased by 0.1%. The inventory-to-sales ratio was unchanged at 1.32 but down from the 1.39 reading a year earlier. Inventories are relatively low and are a support for production. The recent weakness in consumer spending is a potential headwind for production, although the stimulus checks will help sales.

Important Data Releases This Week

The December housing starts report will be released on Thursday, January 21 at 8:30 AM.  Housing starts are expected to rise slightly in December, climbing 0.9% to 1.562 million. Usually, December is a slow month for housing starts but the weather was warmer than usual this season. Employment rose solidly in residential housing in December, boosting the probability, it was a decent month.

The December existing home sales report will be released on Friday, January 22 at 10:00 AM. Sales of existing homes are expected to fall 1.6% in December to a still strong 6.58 million annual pace. Mortgage applications leveled off some time ago and pending sales, which reflect purchase contracts for existing homes have fallen in recent months. Supply rather than demand seems to be a constraining factor.

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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.