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.
Global shares rallied on Friday, with Japan’s Nikkei hitting a three-decade peak, while U.S. Treasuries extended their biggest sell-off in months as investors looked beyond rising COVID-19 cases and political unrest in the United States to focus on an economic recovery later in the year. The MSCI world equity index, which tracks equities in almost 50 countries rose 0.4% on Friday, extending its push into record territory. In Asia, South Korea’s Kospi led the way, charging 4% higher, the best showing in nearly seven months, while the Nikkei added 2.3%, hitting its highest level since August 1990. In the U.S. government officials have begun weighing removing President Trump from office after Trump supporters stormed the U.S. Capital building.
Wall Street scaled new highs on Friday as hopes from more stimulus from Washington were shaken by a senator’s comments but were later bolstered after U.S. President elect Joe Biden said his economic package would be in the trillions of dollars. The Dow Jones Industrial Average rose 56.84 points, or 0.18% to 31,097.97. The S&P 500 gained 20.89 points, or 0.55% to 3,824.68 and the Nasdaq Composite added 134.50 points, or 1.03% to 13,201.98. For the week, the S&P rose 1.83%, the Dow added 1.61% and the Nasdaq gained 2.43%. Positive vaccine data and expectations of a bigger fiscal package and infrastructure spending have pushed stocks upwards. Market participants looked past a report that congressional Democrats plan to introduce articles of impeachment against U.S. President Donald Trump, after a violent crowd of his supporters stormed the U.S. Capital on Wednesday.
The manufacturers sector is showing a great deal of resilience, with the ISM manufacturing index exceeded expectations and factory orders remaining strong. The ISM jumped 3.2 percentage points in December to 60.7, the highest reading in two-and-a-half years. Part of the increase came from slower supplier deliveries, suffering from lockdowns, operating restrictions and hiring difficulties caused by the COVID pandemic. New orders, production and employment all made solid gains. It seems the manufacturing sector will hold up even if consumer spending slows this winter because of the pandemic.
On the negative side, payrolls fell by 140,000, following a 336,000 gain in November. Most of the drop was in the hospitality/leisure sector, which lost 498,000 jobs. Renewed infections and additional restrictions are causing economic activity to slow in recent weeks. Government payrolls fell by 45,000 and private education saw a 62,500 people job loss. The losses in employment validate the call for more fiscal help and will help the Biden administration to hopefully pass more stimulus in the early days of his administration. Nonfarm employment remains 9.8 million below its February 2020 level.
Next week, we get a look at the NFIB small business optimism index, JOLTS data, CPI and PPI, retail sales, industrial production and business inventories.
The U.S. Economy:
Construction spending rose 0.9% in November, following a revised 1.6% gain in October. Residential investment stayed on course, rising 2.7% in November, while nonresidential construction spending dropped 0.8% for the month. Public construction spending rose 0.2%, driven by a 0.3% rise in educational investment and a 1.8% rise in highway construction. From a year earlier, total construction spending was up 3.8% and private construction was up 4.1%. Residential investment was up 16.1% from a year earlier. Nonresidential construction spending was down 9.5%. Public construction was up 3.1% from a year earlier. The same pattern will likely prevail through most of 2021. Single-family construction will remain strong and the multi-family sector will likely stay flat. Nonresidential construction was facing headwinds from the weakness in store retailing and weakness in lodging will take a while to turnaround. As the world starts to recover from the pandemic, the extraordinary rates of stimulus will start to unwind and inflation will pick up modestly. Interest rates will start to climb in late-2021, or early 2022. This will slow housing back to a normal trend. Nonresidential construction has a steeper hill to climb back to pre-pandemic levels.
The ISM manufacturing index increased from 57.5 in November to 60.7 in December. Details were generally better than in November, as new orders, production and employment all rose. The new orders index increased by 2.8 percentage points to 67.9, the seventh consecutive month of expansion and the sixth consecutive month above the 60 mark. 13 out of 18 industries reported growth in new orders. The production index rose by four percentage points to 64.8 in December. 13 out of 18 industries reported growth in output. Employment rose by 3.1 percentage points to 51.1. 8 industries reported growth in employment in December. The supplier deliveries index rose by 6.9 percentage points to 67.6 in December, indicating slower deliveries. Supply chains are having difficulties with COVID-19 related problems , including labor force problems and transportation. The inventory index rose by 0.4 of a percentage points to 51.6. Eight industries reported higher inventories in December. The price index rose by 12.2 percentage points to 77.6, the highest reading since May 2018. All 18 industries reported higher prices in December. Backlogs rose by 2.2 percentage points to 59.1, with 12 industries reporting an increase in backlogs. New export orders fell by 0.3 of a percentage point to 57.5. Nine industries reported an increase in new export orders. The import index fell by 0.5 of a percentage point to 54.6. 12 industries reported an; increase in imports.
The outlook for manufacturing looks favorable but there are headwinds. Cases of COVID-19 infections are increasing and there are renewed restrictions. These are being played out against the introduction of the vaccines. Numbers of people that are receiving the medicine are increasing but at a slower pace than hoped. The stimulus package will help support spending on goods and political events appear to favor more stimulus, although the current timing is unknown. Some of the major global ISM manufacturer numbers did back down slightly in December, reflecting the additional restrictions. However, they did remain positive, meaning the global manufacturing recovery will continue. The ISM reported problems with increasing production because of labor force hiring and returning problems, linked to the pandemic. Despite that, the attitude is mostly positive. This suggests that downside risks are near term and as the pandemic fades, problems in output will fade.
U.S. net exports are going to be a drag on fourth quarter GDP growth, as the shift in consumer spending on goods and away from services is affecting trade. The nominal trade deficit widened from $63.1 billion in October to $68.1 billion in November. Nominal imports rose 2.9% in November, following a 2.1% gain in October. Nominal exports increased 1.2% in November, following a 2.2% rise in October. Some of the import gain will end up as inventories as businesses are restocking. The real goods deficit also noticeably widened in November, coming at $96.5 billion, compared with $89.9 billion in October. Imports have been supported by the general recovery that has been supported by goods spending by both consumers and businesses. The pandemic has supported spending by businesses to support at-home-working and consumers who are staying at home and use at-home deliveries. Exports are slow off the block as the global economy is only slowly regaining strength. The dollar is now trading near three-year lows, which will favor some export activity. Spending on goods will start to moderate and move towards services as more vaccinations are accomplished. Trade will resume normal trends as the pandemic fades, but 2021 will be a year of transition.
The ISM non-manufacturing index increased from 55.9 in November to 57.2 in December, the highest since September. The business activity index increased 1.4 percentage points to 59.4, with 11 industries reporting an increase in business for the month. The new orders index 1.3 percentage points to 58.5, with 10 industries reporting an increase in orders. The employment index fell 3.3 percentage points to 48.2, with four industries reporting an increase in employment. Supplier deliveries increased by 5.8 percentage points to 62.8. 17 industries reported slower deliveries in December. Inventories rose by 8.9 percentage points to 58.2. 11 industries reported an increase in inventories. Prices rose by 1.3 percentage points to 56.1. 12 service industries reported an increase in prices. Backlogs fell by 2 percentage points to 48.7.
The service report suggests that survey data is holding up despite rising infections and additional restrictions. The December report is somewhat misleading as supplier deliveries and inventories provided most of the lift. Other details were mixed and employment fell below 50. Respondents noted that business activity is weakening in states that re-imposed restrictions. Labor is a problem. COVID-19 continues to impact operations. Transportation and warehousing are seeing increased business, but supplier deliveries are slowing. Entertainment, recreation, accommodation and food services continue to struggle.
U.S. vehicle sales jumped back above the 16 million seasonally adjusted annualized units in December. Sales rose to 16.3 million in December, up from 15.9 million in November, but down from 16.7 million a year earlier. Total deliveries came to 14.5 million for the year, the lowest since 2012. Seasonally adjusted annualized sales of light trucks and SUVs increased by 5.8% from November and were 1.7% higher than a year earlier. Car sales fell 1.4% from November and are down 16.8% from a year earlier. Sales are likely to track near the 16 million pace for the next few months, aided by the stimulus checks. Sales will likely track near 17 million later in the year as the pandemic starts to fade. Anticipating greater economic activity on a global scale as 2021 passes, oil prices are starting to rise to slightly above $50 a barrel. A sustained rise much above that level is not expected. This will help sustain light truck sales.
Factory orders rose 1% in November, following a 1.3% rise in October. Factory shipments increased 0.7% in November, following a 1.2% advance in October. Unfilled orders, down eight of the last nine months, decreased 0.1% in November. Inventories increased, up three out of the last four months, increased 0.7% in November. The inventories-to-shipments ratio was 2.41 in November, unchanged from October. Transportation equipment, up six out of the last seven months, rose 2.1% in November. Durable goods orders rose 1.0% and nondurable goods orders rose 1.1%. Orders for transportation equipment jumped 2.1%, mainly due to motor vehicles and parts (1.8%). Orders for machinery increased 1% and electrical equipment and appliances went up 0.7%. Excluding transportation, orders rose 0.8%. Capital investment is doing well, driven by the recovery in business investment and consumer spending on goods. The stay-at-home workplace has boosted the need for business equipment. Oil prices have been steady the last few months and are edging up. The vaccine will slowly improve business conditions. Stimulus efforts are a plus. There are near-term risks as infections rise, but that should fade as the year progresses.
Payroll employment declined for the first time in the recovery as winter weather and the pandemic suppressed economic activity. Employment fell by 140,000, more than expected, mainly because of a loss of nearly 500,000 in leisure and hospitality, with employment at bars and restaurants tumbling by 372,000, accounting for three-quarters of the drop. Government employment fell for a fourth month, with losses spread across federal, state and local governments. Retail employment rose by 121,000. Factories added 38,000 jobs and construction added 51,000 jobs. There were gains in professional business services and transportation and warehousing, healthcare and wholesale trade. Because of the loss of lower paying jobs, average hourly earnings surged 0.8% after a 0.3% gain in November. The unemployment rate was unchanged at 6.7% in December, that was in part of people misclassifying themselves as being “employed but absent from work.” Without that misclassification, the jobless rate would be about 7.3%. Although the vaccine and the stimulus efforts will help employment, it will take time to seriously lower unemployment. Still, 2021 will be a year of recovery.
Manufacturers across Europe ended 2020 on a high while Asian factory activity expanded modestly thanks to robust demand in regional giant China, but the prospect of tougher coronavirus restrictions ha clouded the outlook for the recovery. The final euro zone PMI for manufacturing rose to 55.2 in December from November’s 53.8. December was the highest reading since May 2018. An index measuring output, which feeds into the composite PMI rose to 56.3 from 55.3. Manufacturing activity expanded in Japan, South Korea and Taiwan, indicating that manufacturers in Asia continue to bounce back from the pandemic. The Chinese Caixin/Markit PMI fell in December to 53.0. The lowest level in three months, but stayed above the 50 mark. The reading was lower than November’s 54.9 reading. Elsewhere, output stabilized in Japan for the first time in two years and India ended 2020 on a stronger note as more manufacturers boosted production to meet rising demand.
Important Data Releases This Week
The December NFIB small business optimism Index will be released on Tuesday, January 12 at 6:00 AM. The index has flattened lately as COVID infections have increased and restrictions are being imposed. We look for small movements in the index until the pandemic fades.
The December CPI report will be released on Wednesday, January 13 at 8:30 AM. Prices continue to recover with the CPI projected to advance 0.2%. Oil prices are advancing, but a sustained lift in inflation is not likely until demand picks up measurably and that will wait until vaccinations become more widespread.
The December retail sales report will be released on Friday, January 15 at 8:30 AM. Retail sales will close out the year better than it started but sales are slipping at the end of the year. Sales slipped 1.1% in November, but we see no change in December. Additional stimulus will help boost spending in the new year. Spending will likely shift to services as the pandemic fades.
The December PPI report will be released on Friday, January 15 at 8:30 AM. Prices are advancing but at a subdued level as demand in many sectors remains loose. The PPI could see bigger advances later in the year as the pandemic starts to fade.
The December industrial production report will be released on Friday, January 15 at 9:15 AM. Industrial production remains off its pre-virus peak but has recovered more than half its losses. The bulk of the recovery has been in manufacturing, which continues to benefit from the shift to goods spending. Manufacturing likely held up in December. We look for a 0.3% advance in total output.
The November business inventories report will be released on Friday, January 15 at 10:00 AM. Inventories remain low and we are looking for a 0.7% advance for November.
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