Road for Consumers Look Brighter

By | September 20, 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

U.S. stocks ended sharply lower on Friday ending a week buffeted by corporate tax hike worries, the Delta variant and possible shifts in the Federal Reserve’s timeline for tapering asset purchases. All three major indexes lost ground on Friday and saw losses for the week, with the S&P index suffering the biggest two-week drop since February. The Dow Jones Industrial Average fell 166.44 points, or 0.48% to 34,584.88, the S&P 500 lost 40.76 points, or 0.91%, at 4,432.99 and the Nasdaq Composite dropped 137.96 points, or 0.91% to 15,043.97. The market is struggling with prospects for tighter fiscal policy with tax increases and tighter monetary policy due to Fed tapering. Leading Democrats are seeking to raise the top tax rates on corporations to 26.5% from the current 21%. Inflation is likely to be a major issue this week, when the Federal Open Market Committee holds its two-day monetary policy meeting.

Economic data last week suggests that the Federal Reserve’s thinking that some of the recent inflationary push may be “transitory” in nature may be true. The CPI for August increased 0.3%, down from the 0.5% advance in July. In the last 12 months, the index was still up 5.3%, an elevated level. Much of the August increase in consumer prices came from energy, up 2.0% and food, up 0.4%. Excluding food and energy, the core index rose just 0.1%, the smallest increase February 2021. Some of the slowdown in inflation can be traced to the recent increase in COVID infections, as airfares and lodging away from home declined. It’s too early to suggest the August slowdown in inflation is really a trend, or just a temporary speed bump.

The industrial side is looking solid although a hurricane did slow output during August. Industrial production increased 0.4% in August after moving up 0.8% in July. Last month’s shutdowns related to Hurricane Ida held down the gain in industrial production by an estimated 0.3%. Although the hurricane forced plant closures for petrochemicals, plastic resins and petroleum refining, overall manufacturing output rose 0.2%. Despite an estimated 0.2 percentage point loss by Hurricane Ida, manufacturing output increased 0.2% and was up 1.0% above its pre-pandemic level. Supply chain bottlenecks are slowing the industrial side. Inventories are low, as suggested from the inventory report for July. Business inventories increased in July, rising 0.5% after increasing 0.9% in June. Motor vehicle inventories climbed 0.2% in July and 0.3% in June. Auto producers have had a hard time increasing inventories because of a shortage of semiconductors. Excluding auto inventories, business inventories increased 0.5% in July. Business sales rose 0.5% in July, after a 1.6% advance in June. At July’s sales pace, it would take 1.25 months for businesses to clear shelves, unchanged from June. At some point when the supply chain problems diminish, an inventory build will provide fresh fuel to the industrial sector.

Worries about the consumer were quieted when the latest retail sales report was released. Retail sales surprised on the upside in August, rising 0.7%, up 15.1% from a year earlier. There was a large downward revision to July’s number, where sales fell 1.8%, instead of the -1.1% original estimation. Total sales excluding motor vehicles and parts were up 1.8% in August and 0.8% excluding the auto sector and gasoline. Motor vehicle and parts sales fell 3.6% for the month. Most sectors saw decent advances in sales activity for the month. The increased COVID infections did have an impact on the leisure/hospitality sector. Food and drinking establishments sales were unchanged. Many economists downgraded their third quarter GDP projections in the wake of the previous month’s sales report and the weak employment report. Now the road for the consumer looks a little brighter and the outlook for the economy appears more solid.

Next week will be focused on housing, with housing starts, existing and new home sales and leading economic indicators. The Fed FMOC meeting will also draw a lot of attention.

Latest Data

The U.S. Economy:

The CPI report shows a slightly different picture of inflation, one that falls more in the line of the Fed’s thinking that inflationary pressures will start to cool in coming months. The CPI for August increased 0.3%, down from the 0.5% advance in July. In the last 12 months, the index was up 5.3%. Much of the August increase in consumer prices came from energy, up 2.0% and food, up 0.4%. Excluding food and energy, the core index rose just 0.1%, the smallest increase February 2021. The energy index rose 25% over the past 12 months and the food index 3.7%. The index for airline fares, used cars and light trucks and motor vehicle insurance all declined for the month. The index for lodging away from home declined 2.9%. While index decline for airfares and lodging away from home is likely related to COVID-fears from the consumer, the index for food away from home increased by 0.4%, suggesting a mixed picture from the COVID-impact on inflation for August. The slowdown in inflation represents both an impact from increased COVID infections in August that started to retreat in early September and possibly a shift to a slower pace of increase as the economy slows and greater production starts to align demand with production. August could be the start to slower inflation, but it is still early to determine that.

Industrial production increased 0.4% in August after moving up 0.8% in July. Last month’s shutdowns related to Hurricane Ida held down the gain in industrial production by an estimated 0.3%. Although the hurricane forced plant closures for petrochemicals, plastic resins and petroleum refining, overall manufacturing output rose 0.2%. Mining fell 0.6%, reflecting hurricane disruptions to oil and gas production in the Gulf of Mexico. Utility production increased 3.3% reflecting warm temperatures boosted demand for air conditioning. At 101.6% of its 2017 average, total industrial production in August was 5.9% above its year earlier level and 0.3% above its pre-pandemic level. Almost all major market groups posted increases in August. Despite an estimated 0.2 percentage point loss by Hurricane Ida, manufacturing output increased 0.2% and was up 1.0% above its pre-pandemic level. Durable goods output edged up with a large gain in furniture and related products. The largest loss was seen by electrical equipment, appliances and components. The output of nondurable goods edged up, with gains for food and beverage and tobacco products. Chemical output saw a large loss.

Retail sales surprised on the upside in August, rising 0.7%, up 15.1% from a year earlier. There was a large downward revision to July’s number, where sales fell 1.8%, instead of the -1.1% original estimation. Total sales over the last three months were up 16.3% from the same time period a year earlier. Total sales excluding motor vehicles and parts were up 1.8% in August and 0.8% excluding the auto sector and gasoline. Motor vehicle and parts sales fell 3.6% for the month. Furniture and home furnishing store sales increased 3.7%. Building material stores saw a 0.9% advance. Food and beverage sales increased 1.8%. Sporting good sales saw a 2.7% decline. Food and drinking establishments sales were unchanged. COVID infections have kept sales at restaurants and bars flat and congestion at ports is hurting electronic product sales. Semiconductor shortages are hurting auto sales. However, U.S. consumption is not slowing nearly as much as it appeared a month ago. The report suggests that the economy may come stronger in the third quarter than analysts projected a month ago when COVID infections and the loss of fiscal stimulus appeared to slow spending.

Business inventories increased in July, rising 0.5% after increasing 0.9% in June. Inventories were up 7.2% from a year earlier. Retail inventories increased 0.4% in July, following a 0.5% rise in June. Motor vehicle inventories climbed 0.2% in July and 0.3% in June. Auto producers have had a hard time increasing inventories because of a shortage of semiconductors. Excluding auto inventories, business inventories increased 0.5% in July. Wholesale inventories increased 0.6% in July and manufacturers added 0.5%. Business sales rose 0.5% in July, after a 1.6% advance in June. At July’s sales pace, it would take 1.25 months for businesses to clear shelves, unchanged form June. Business inventories were depleted in the first half of the year, but shortages aid persistent supply chain bottlenecks because of the COVID virus and recent ports congestion in China are frustrating efforts to replenish stocks.

International:

China’s factory and retail sales faltered in August with output and sales growth hitting one-year lows as fresh COVID outbreaks and supply disruptions threaten the nation’s impressive economic recovery. Industrial production rose 5.3% from a year ago in August, down from an increase of 6.4% in July and the weakest reading since July 2020. Consumer spending also took a hit by rising only 2.5%, the slowest reading since August 2020. The world’s second biggest economy has made an impressive rebound from last year’s COVID-led slump, but momentum has slowed in the last few months due to supply chain bottlenecks, semiconductor shortages, curbs on high-polluting industries and a crackdown on property investment. Meantime, a new outbreak in Fujian is posing further downside risks in Q3. Production cuts in August hit aluminum and steel output and fuel export curbs hit China’s crude oil output. Xi’s crackdown on education, gaming and a host of other industries is hurting investor confidence and investment.

Important Data Releases This Week

The August housing starts report will be released on Tuesday, September 21 at 8:30 AM. Housing has slowed recently but is still moving at a historically decent rate. Total starts came in at 1.53 million in July. Permits came in at 1.63 million suggesting that demand is still decent, but a lack of labor and affordability issues are impacting the market. We think the market will modestly rebound in a few months, but a flat trend is likely in the near term. Fall usually brings slower demand and more inventory, which should help stabilize prices. Starts should track near 1.5 million for August.

The August existing home sales report will be released on Wednesday, September 22 at 8:30 AM. Last month showed existing home sales increasing by 2% to a 5.99 million annualized rate, well above market forecasts. Inventories increased during the month, rising 7.3% from June and the unsold inventory ratio hit 2.6 months. Prices are high, with the median price up 17.8% from July 2020. With greater inventory, sales will improve this month to 6.0 million. If more inventories appear on the market, the price will decline modestly, supporting greater sales.

The August new home sales report will be released on Thursday, September 23 at 8:30 AM. New home sales jumped 1% to a seasonal adjusted annual pace of 708,000 in July. It was the first increase in four months. There were 367 thousand new homes for sale on the market in July, up from 348,000 in June. Still the numbers are significantly lower than the 972,000 in in July 2020. Higher building costs are weighing on affordability issues. Sales will track near 700K for August.

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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.