Strong Economic Activity Will Emerge in Q2 and Q3

By | April 10, 2017

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.


Coffee and Economic Review

The U.S. missile attack on Syria jolted financial markets, but volatility settled down as a Pentagon spokesman alluded to a one-time affair. The strikes likely caused “considerable damage” between the U.S. and Russia, a Kremlin spokesman said. The Shanghai Composite index climbed 0.2% on Friday, giving it a 2% gain for a holiday shortened week. U.S. stocks ended a volatile session on Friday lower, while the dollar advanced with Treasury yields, as investors looked past the U.S. military strike on Syria and weaker than forecast jobs data. The S&P fell 0.1% on Friday to 2,355.58. The Fed Bank of New York bolstered speculation that the central bank won’t slow interest rate increases while it trims its balance sheet. In all, financial markets showed resilience in the face of weaker hiring and geopolitical tensions. Volatility came down over the course of Friday after the missile strike after highs reached overnight.

The labor market gave a jolt when payroll employment came in at only 98,000 in March. Weather was a factor as goods producing industries rose by only 28,000 in March, after a 96,000 gain in February. Employment averaged 178,000 in the first quarter, more than the 100,000 needed to keep up with the growth working age population. Non-seasonal employment growth rose by 1.01 million in February, the second most February since the expansion and above its 832,000 average. This suggests that hiring was pulled forward from March, one reason for the weak payrolls. The unemployment rate fell to 4.5% in March from 4.7% in February and the participation rate was stuck at 63%. The Fed will likely look beyond the weak payrolls but will notice the low unemployment rate. Minutes from the March FMOC showed broad agreement that the economy was at, or near full-employment. Some members thought that a significant overshooting of full employment poised significant risks for inflation. This suggests another rate increase in June.

Vehicle sales fell 5.5% to 16.6 million units. Weather depressed sales and these sales will be made up in coming months, but the vehicle cycle is in a late-stage expansion stage. The nominal trade deficit narrowed by $4.6 billion to $43.6 billion in February. Net exports appear neutral for growth in the first quarter.

The first quarter is coming in weak, but part of the softness is seasonal in nature. The ISM non-manufacturing index fell from 57.6 in February to 55.2 in March, as some of the shine from survey-based data since the election is backtracking. There has been a sizable gap between the hard and soft data in recent weeks, but that gap is starting to narrow. The soft data is being boosted by improved sentiment and the rise in the stock market. Sentiment has been boosted by promises by the Trump administration, including less regulation, corporate reform, personal tax cuts and increased infrastructure spending. These promised lifted sentiment but that has not translated into increased economic activity. Hard data has been positive but much weaker than the survey data alludes to. Moody’s GDP tracking measure shows the first quarter growing at a 0.9% annual rate. The ISM surveys are consistent with a 3.3% GDP growth rate and the NFIB predicts growth of 4.8%. The underlying strength of the economy still lies north of 2%. If the first quarter comes in soft as expected, stronger economic activity will emerge in Q2 and Q3. Still, the underlying fundamentals still come short of 3%, unless there is some fiscal stimulus and even that will be a relatively short term impact of just a couple of quarters.

The attention shifts from the labor markets to inflation this week. We look for inflation to be restrained with the CPI falling 0.1%, but the core rising on trend at 0.2%. Unless core inflation takes a step back, the Fed will keep on moving.  Retail sales are likely to be weak, as auto sales came in soft. Real consumer spending is tracking near 1% in the first quarter and March retail sales won’t be a help. Business inventories will provide further light on the inventory build in the first quarter, which has been coming in light.

Latest Data

The U.S. Economy:

Construction spending increased 0.8% in February, reaching a decade high on the strength of residential spending. Total private construction spending also rose 0.8%.  Private residential spending rose 1.8% in February. Nonresidential construction spending fell 0.3% for the month.  Of the largest components of nonresidential spending, investment in manufacturing spending fell 3.4% m/m and multi-unit retail spending fell 5.4%. Public construction increased 0.6% m/m remained down 8% y/y. Spending on highways and street construction rose 1.3%, but remained down 5.3% y/y, while spending on educational structures increased 0.7% from January, but was down 12.3% from a year earlier.  Residential construction continues to accelerate and has room to grow. The nonresidential sector continues to limp along. Public construction remains weak. Federal government spending fell 2.8% in February, along with a sharp decline in January.

The ISM manufacturing index fell from 57.7 in February to 57.2 in March, still remaining at an elevated level. Details were mixed. The production index slipped from 62.9 to 57.6. New orders fell from 65.1 to 64.5, still at an elevated level.  All 18 industries reported growth in new orders led by wood products, printing, electrical equipment and appliances. The inventory index fell 2.5 points to 49. The difference between new orders and inventories widened from 13.6 to 15.5, pointing to increases in future production. Backlogs rose from 57 to 57.5. The employment index rose from 54.2 to 58.9. New export orders rose from 55 to 59. Imports fell from 54 to 53.5. The prices paid index increased 2.5 points to 70.  No products fell in price. There seems to be a noted difference between the “hard” and “soft” data in recent months. The “hard data” index correlates strongly with actual data on employment, industrial production, new orders, inventories and supplier deliveries. The bulk of the improvement in recent months has been in the sentiment component. The rise of the stock market, expectations about the Trump administration policies on taxes and regulations and anticipation concerning future fiscal stimulus have boosted the sentiment component. Actual data, although positive, is notably weaker than the ‘sentiment data.” The fluctuations in sentiment do not correspond statistically with real advances in manufacturing output. On the same note, a slide in the sentiment component does not necessarily correspond with a drop in manufacturing.

New vehicle sales fell from an annual pace of 17.6 million units in February to 16.6 million in March. Fewer incentives may have been a contributing factor, but weather also played a part in the March weakness. Warmer than normal weather in February may have been a factor in pulling some units forward from the March sales pace and a winter storm in the Northeast may have affected sales. The first quarter is now on the books, with sales averaging 17.3 million, down from 18.1 million in the first quarter. Light truck sales fell from 11 million annualized to 10.3 million in March. Car sales fell from 6.5 million to 6.3 million. Fundamentals still favor decent vehicle sales, despite a reduced pent-up demand. Employment and wage growth are positive and a pick-up in construction is favoring light truck sales. Sales should track near 17 million over the next few quarters.

The trade deficit narrowed from $48.2 billion in January to $43.6 billion in February. Total nominal exports rose 0.2% in February, the third consecutive monthly increase. The February increase followed a 06% rise in January. Goods exports increased by a modest 0.3% in February. Imports dropped 1.8%, washing away much of January’s 2.3% gain. The early Lunar New Year has distorted trade figures in the first two months of the year by pulling forward imports into January. The trade balance has been on a weak footing early in the year and will be a drag on growth in the first quarter. Goods exports have made progress over the course of the past year, but imports shot up as the strong dollar boosted purchases of imported oil. The strong dollar will place pressure on exports, but will favor imports over the next few years. The gains in exports are an encouraging sign that global economic activity is picking up. Downside risks are probable of the Trump administration follows through with adverse trade policies. So far, there is more bark than bite, but trade is still uncertain under the new administration.

The ISM non-manufacturing index fell from 57.6 in February to 55.2 in March, as some of the shine from survey-based data since the election is backtracking. The composite index is still above the 2016 average of 54.9.  Details were generally weaker than in February. New orders dropped back to below 60 but remain elevated.  Business activity fell from 63.6 to 58.9. The employment index fell from 55.2 to 51.6. Trade details improved as new export orders rose from 57 to 62.5 and imports increased from 51 to 56.5.

Payrolls only increased by a paltry 98,000 in March, following a revised addition of219,000 in February. The weak March figures likely were impacted by a storm in the Northeast, warm weather early in the year that pulled jobs forward from March and a late-Easter. Gains in the first quarter averaged 178,000, slightly higher than the fourth quarter average of 170,000. Goods producers added 28,000 in March, down from 96,000 in February. This was primarily due to 6,000 jobs added in construction, following the addition of 59,000 in February, which likely saw some pull-forward effect. Mining added 11,000, reflecting the improvement in drilling activity and manufacturers added 11,000.  Service industries added 61,000, less than half the February pace. The unemployment rate declined to 4.5%, a post-recession low as the participation rate was unchanged at 63%. The average workweek was unchanged at 34.3 hours and hourly earnings rose 0.2%, bringing the year-over-year gain to 2.7%. The March figures were disappointing but special circumstances did have a play in the numbers. Manufacturing seems to be improving, but retail, leisure/hospitality and healthcare were disappointing. The household sample showed gains of 400,000 for the last two months, a much different picture than the payroll data.  Employment should remain solid in 2017, with average gains near 150,000. Expectations from infrastructure investment and tax reform have been tamped down.


Factories across Europe and much of Asia posted another month of solid growth, rounding out a solid quarter for manufacturers, even though exporters fear a rise in U.S. protectionism could snuff out a global trade recovery. China’s purchasing manager’s index climbed to the highest level in almost five years, rising to 51.8 in March from 51.6 in February. China has strong domestic demand to support its growth targets. However, measures to cool its overheated property sector and tighter monetary policy are likely to curb investment and industrial activity in coming quarters. Japanese factory activity expanded at a solid clip in March, but the pace slowed from the previous month as growth in new export orders and output slowed. India’s manufacturing sector grew at the fastest pace in five months as output and new orders accelerated. The report suggests that the world’s fastest growing major economy has largely recovered from Prime Minister Narendra Modi’s decision to ban high-value currency notes, which caused major disruptions to the largely cash-based economy.  In the euro-zone, the HIS Markit’s purchasing manager’s index rose to its highest level in nearly six years of 56.2. However, British manufacturing lost momentum as export orders grew more slowly and rising inflation cut into demand. The Sterling’s tumble following June’s vote to leave the European Union helped British manufacturers to enjoy the fastest growth in three year during the final quarter of 2016, but the sector’s PMI suggested growth is slowing in the first three months of the year.

Important Data Releases This Week

March NFIB small business survey will be released on Tuesday, April 11 at 6:00 AM EDT. We expect the survey to decline from the 105.3 reading in February to 102.8 in March. The survey had increased from 98.4 in November to 105.3 in February under the assumption that the new administration’s policies would result in less regulation, taxation and increased government spending. Realization that there is a high probability that any actions will take longer than expected, or be watered down will sap some of the confidence exhibited by small businesses. The index still remains in elevated territory. The problem with finding qualified workers is still a big problem with small businesses.

March PPI index will be released on Thursday, April 13 at 8:30 AM EDT. We look for index to remain unchanged in March following the 0.3% rise in February. Energy prices fell in March, but the core index will remain on trend. Inflation slowed in March but the Fed will keep on track in raising rates.

March CPI index will be released on Friday, April 14 at 8:30 AM EDT. We look for index to fall 0.1% in March following the 0.1% rise in February. Energy prices fell in March, but the core index will remain on trend. Inflation remains gradual.

March retail sales will be released on Friday, April 14 at 8:30 AM EDT. We look for retail sales to drop 0.3% in March, in part due to soft auto sales and the storm effect that hit the Northeast. Retail sales increased 0.1% in February and 0.6% in January. The consumer is still in a confident mode and sales will pick up, but the auto sector won’t provide much of a lift.

February business inventories will be released on Friday, April 14 at 10:00 AM EDT. We project that business inventories rose 0.3% in February and the I/S ratio will rise slightly. Inventories have been coming in light, but sales slowed in the first quarter. The I/S ratio has been gradually falling and the slight increase will be temporary.

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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.