Rise in Material Costs Coming as Labor Shortages

By | May 17, 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.


Global equities rebounded on Friday, building on a lead from Wall Street snapping up shares that would benefit most from an economic recovery. The rally interrupted a three-day rout for stocks globally, as market jitters over accelerating U.S. inflation were calmed by Federal Reserve officials reiterating that price pressures from the reopening of the economy would prove transitory. Japan’s Nikkei jumped 1.3% on Friday, while MCSI’s broadest index of Asian-Pacific shares outside of Japan gained 0.6%. Benchmark 10-year Treasury yields, which spiked 7 basis points following Wednesday’s CPI release in the biggest daily rise in two months, fell by four basis points overnight and were little changed at 1.6642%.

All three major U.S. indexes built on Thursday’s gain at the conclusion of a whipsaw week of buying and selling as signs of economic revival clashed with mounting inflation fears. Economic data showed retail sales stalling and consumer sentiment dipping as prices remain on an upward trajectory that suggested that while demand might be taking a break, inflation is not. The Dow Jones Industrial Average rose 365.02 points, or 1.07% to 34,386.47, the S&P gained 60.01 points, or 1.46% to 4,172.51 and the Nasdaq Composite added 278.15 points, or 2.12% to 13,403.13. First quarter earnings is nearing its final curtain, with 87% of the S&P companies betting consensus estimates, according to Refintiv. The indexes were on course for one of the worst weeks since late-February due to concerns of surging prices, despite assurances from the Federal Reserve that the near-term spikes will be temporary.

Last week’s data showed that the strong economic growth could even be stronger if supply could meet with the surge in demand. The imbalance comes at a cost: inflation. The Consumer Price Index jumped 0.8% in April and is up 4.2% from a year earlier. Excluding food and energy, prices soared 0.9%, the biggest increase since 1981. In the last three months, core CPI is rising at a 5.6% annualized pace, indicating prices have picked up significantly in the past few months. Booming demand is giving pricing power to businesses, allowing them to pass on the additional costs. This is evident in the auto sector, where shortages of semiconductors have resulted in pullbacks in production. There was a 10% jump in used car and truck prices in one month alone that accounted for more than one-third of April’s CPI increase.

There does not seem to be much let-up in price pressures in sight. The PPI rose 0.6% and is up 6.2% year-over-year. Inflation expectations are also rising, with the University of Michigan’s measures of both short and long-term inflation expectations rising to the highest levels since the spring of 2011. The rise in material costs are also coming as labor shortages are making businesses raise wages to find workers. Job openings from the JOLTS data bounced to a high of 8.1 million in March and the NFIB reported the percent of businesses with at least one position that is difficult to fill rose to the highest in the series nearly 50-year history. There are some small hints that demand for goods outside of the auto sector, are becoming more balanced. Total retail sales were flat, after a revised 10.7% surge in March. Spending jumped in the auto sector and in food and drinking establishments, but fell broadly in other sectors. Excluding food services, spending is up an impressive 21% above the pre-COVID levels. Production of consumer goods rose 0.3% in April but is flat with the start of the pandemic. The Fed noted that plants that were impacted by the severe weather in February returned to normal in April, suggesting that higher production may help alleviate some of the supply problem.

This week will be focused on housing, with starts and existing home sales and the leading economic indicators being released.

Latest Data

The U.S. Economy:

The NFIB Small Business Optimism Index rose from 98.2 in March to 99.8 in April, the third consecutive monthly rise. Optimism has been trending up since the beginning of the year. The net percent of respondents planning to hire slipped by one point to 21% in April. Of those hiring, the number of respondents that have at least one position that they are unable to fill remained at a record level for a third month. Fifty-seven percent of respondents reported capital outlays in the last six months, down 2 points from March but up 10 points from last year’s low. Expectations about the economy dropped from -8% to -15%, well below levels before the presidential election. A net 3% of owners reported higher sales in the past three months, up 9 points from March. The net percent raising selling prices increased 10 points to a net 36%, the highest reading since 1981. The report shows a slow upward trend in confidence, but a tight labor market and rising prices are a concern.

The CPI rose 0.8% in April, following a 0.6% rise in March. Over the last 12 months, the headline CPI was up 4.2%, the highest increase since a 4.9% increase in September 2008. The CPI for energy slipped 0.1% and food prices rose 0.4%. The index for used cars and trucks rose 10% in April, the largest one-month increase since the series began in 1953. The core CPI rose 0.9%, the largest monthly increase since April 1982. Nearly all core index components increased in April. The core index was up 3.0% in the last 12 months, higher than the 1.6% reading in March. The energy index rose 25.1% in the last 12 months. everal factors are feeding inflation, such as the impact of the stimulus checks, the supply chain problems and rebound from the pandemic and are short-term in nature. The Fed views much of this to be temporary and inflation will subside as time progresses. However, if wages start to increase at a faster than expected rate, the result may be a more sustained wave of inflation that will force the Fed to act.

With the economy reopening and supply chain disruptions, U.S. inflationary pressures have intensified. The producer price index for final demand rose 0.6% in April. The goods index also rose 0.6% after rising in excess of 1% in each of the prior months. The services index rose 0.6% in April and 0.7% in March. The core index increased 0.7% in April and 0.6% in March. The final demand index was up 6.2% in the last 12 months, while the index excluding food, energy and trade services was up 4.6%. Despite the jump in inflation, the Fed is still likely to be cautious and view, at least part of the increase in inflation as temporary. The year-ago reading are overstated as the economy was largely shut down a year earlier and some of the inflationary pressures can be attributed to the reopening of the economy.

Retail sales held on to their March gains in April. Sales were essentially unchanged after soaring a revised 10.7% in March and falling 2.9% in February. Gains were led by soaring auto sales. Sales excluding auto sales, sales fell 0.8%. The auto sector saw sales increase 2.9% in April. There were a decent 1.2% gain for electronic and appliance stores and a 3.0% increase in sales at food and drinking businesses. Clothing stores saw a 4.9% decline and general merchandise stores saw a 4.9% drop for April. Almost every sector saw strong increases for March and some falloff in sales was expected for April. Year-over-year sales surged to a meaningless 51.2%, as sales were at a pandemic lockdown low in April last year. The report was good news following the strong March gain. Retail sales were revised up for March and puts consumer spending on a stronger path heading into the second quarter. Future spending looks promising as Household have accumulated an estimated $2.3 trillion in excess savings during the pandemic that should underpin spending this year. Spending on goods is likely to slow in coming months but be more than offset by spending on services. There are concerns that labor and raw material shortages and low inventories, which are hampering production at factories, could slow sales in coming months. Inventories are low and consumers may not want to wait for their favorite consumer item.

Industrial production increased 0.7% in April, following a revised 2.4% increase in March and a 3.5% decline in February. Manufacturing rose 0.4% in April, following a 3.1% jump in March. Utilities increased 2.6% and mining advanced 0.7%. The index for manufacturing moved up 0.4% despite a drop in motor vehicle assemblies that principally resulted from shortages of semiconductors. An important contributor to the gain in factory output was the return to operation of plants that were damaged by February’s severe weather in the south-central region of the country and had remained offline in March. The weather-induced drop in February and the rebound in March are now estimated to have been larger than reported last month. Among other market groups, chemical materials and energy products posted strong gains of 6.7% and 3.8%, respectively. Excluding the motor vehicle sector, factory output posted strong gains of 0.7%. The outlook for the factory sector remains robust in the near term, although semiconductors will slow output in the transportation sector. Inventories are low, a further boost to factory activity.

Business inventories increased 0.3% in March. Among the categories, manufacturing inventories grew by 0.7%, while retail fall 1.4%. Inventories were up virtually unchanged from a year earlier. Sales increased 5.7% in March, up 18.5% from a year earlier. The total business inventory-to-sales ratio was 1.23, down from 1.46 a year earlier. The level of inventories is low and will be supportive of production over the remainder of the year. It will be difficult to build inventories in the near term as demand is outrunning production and there are widespread input shortages.

Important Data Releases This Week

The April housing starts report will be released on Tuesday, May 18 at 8:30 AM. The March report showed housing starts rebounding from the weather-impacted February total. March starts jumped over 19% to a 1.74 million, the fastest pace in more than a decade. Sustaining that pace will be a challenge in April and prices of materials are sky-rocketing, which could cool the market some in coming months. We project starts to come in at 1.70 million for April.

The leading economic indicators report will be released on Thursday, May 20 at 10:00 AM. The Leading Economic Index (LEI) jumped 1.3% in March, a gain consistent with a wide array of other economic data. April data was decent, although retail sales was flat. Consumer expectations did rise quire sharply during the month, suggesting another 1.3% rise in the LEI is projected for April.

The existing home sales report will be released on Friday, May 21 at 10:00 AM. Existing home sales slipped in March to a still strong 6.01 million unit pace. We expect a small rise to a 6.08 million pace.

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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.