Supply-chain Bottlenecks Are Still a Problem but Continue to Ease

By | June 28, 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.


Asian shares rose on Friday tracking gains on Wall Street after U.S. President Joe Biden embraced a bipartisan Senate infrastructure deal. Investors have been looking for an infrastructure agreement to extend the recovery in the world’s largest economy after massive stimulus helped the U.S. economy to grow at a 6.4% annualized rate in the first quarter. In morning trade, MSCI’s broadest index of Asian-Pacific shares outside Japan climbed 0.58%. Asian stocks rebounded after falling earlier in the week amid concerns of earlier-than-expected policy tightening by the Federal Reserve, after it signaled higher rates in 2023 last week. Securing bipartisan agreement on the deal required Biden to sacrifice some of his original ambitions on schools, climate change mitigation and support for parents and caregivers, as well as tax increases on the rich and corporations. Some of those issues are likely to surface via the Congressional budget process. Oil prices climbed to a three-year high, supported by drawbacks in U.S. inventories and accelerating German economic activity. U.S West Texas Intermediate rose 0.29% to $73,51 and Brent crude climbed 0.28% to $75.77.

Wall Street notched broad gains on Friday, with the S&P 500 index closing at a record high and global shares also finished at an all-time high. The Dow Jones Industrial Average rose 0.71% to end at 34,438,58, while the S&P gained 0.34% and the Nasdaq Composite dropped 0.06% after holding near the previous session’s record high. MSCI’s gauge of stocks across the globe closed at a record high of 721.91. The latest U.S. personal consumption expenditures (PCE) data showed a measure of underlying inflation rising less than expected in May. Core PCE rose 3.4% year-over-year, above the Fed’s 2% flexible target. The data seemed to affirm that inflation will remain in the Fed’s transitory camp. There are different opinions concerning inflation. Bank of America top strategist Michael Hartnett said that U.S. inflation could remain elevated for two to four years and only a market crash would prevent central banks from tightening in the next six months.

Housing data headlined last week’s light economic reports. Sales of both new and existing homes fell in May. May’s drop in new home sales was accompanied by downward revisions to sales for each of the prior three months. Even with the pullback, sales are still strong, with existing homes falling to a 5.8 million annualized pace and new homes moderating to a 769,000-unit pace. Home prices did not moderate, with the median price of an existing single-family home surging a record 24.4% over the past year and the median new home spiking 18.1%. While buyer traffic has eased, as explained in last week’s report by the National Association of Home Builders, we do not think demand has cooled substantially. We do think that affordability is starting to catch up with consumers. Another factor affecting the housing market is low inventories for sale, which remains near an all-time low. Many homes are selling in less than two weeks, or lower.

Supply chain bottlenecks and higher prices are likely starting to temper demand. Overall, consumer spending was flat in May and after factoring in prices, real spending fell 0.4% in May. Most of the declines were in big-ticket items like motor vehicles and household appliances. Inventories for both are exceptionally lean amid parts shortages, especially microchips. Real spending on durable goods tumbled 4.3% in May, while spending on nondurables fell 0.5%. We are starting to see spending shift to services, as the economy re-opens. Spending on services, which normally account for 60% of all spending, rose 0.4% in May and we are likely to see a strong of strong advances.

While supply chain bottlenecks and price spikes might shave a few percentage points off Q2 growth, the quarter will come in extraordinarily strong. The second quarter could come in near a double-digit pace. Moreover, there is plenty of fuel to support growth in the second half of the year. Wages and salaries rose 0.8% in May, following gains of 1% the previous two months. The savings rate fell to 12.4%, but that is double the pre-pandemic rate.

There are some changes in the wind. Supply-chain bottlenecks are still a problem, but there are signs they are starting to ease. The backlog of ships waiting to get in port continues to decline, but shipping volumes are up. Rising production will make a difference and manufacturing will continue to rise as inventories are extremely low. The housing sector, which was on the leading edge of the economic rebound is providing a glimpse of what other industries will see in coming months. Lumber prices have tumbled in the past month and are likely to decline further as more sawmills come online. Home construction has eased the last few months, as the price spike caused some delays in home construction. As lumber prices ease more, there could be a return to the market of those projects that were delayed.

This week will be heavier on economic data. We get a look at the ISM manufacturing index, construction spending, trade balance, factory orders and the important payroll report.

Latest Data

The U.S. Economy:

The Chicago Fed National Activity Index was 0.29 in May, up from a revised -0.09 in April. The increase in the index suggests activity strengthened in May from April but fell short of that in March, which was impacted by consumers receiving their stimulus checks. Of the four categories that make up the index, three were positive. The production-related indicators contributed 0.29 to the CFNAI in May, up from -0.05 in April. Industrial production increased 0.8% in May, after posting a 0.1% increase in April. The personal consumption and housing category of the CFNAI contributed -0.18 in May, down from -0.04 in April. The contribution of the sales, orders and inventories category to the CFNAI increased to 0.02 in May from -0.06 in April. The contribution of the employment, unemployment and hours category contributed 0.016 in May from 0.06 in April. The CFNAI’s three-month moving average rose to 0.81 in May from 0.17 in April. Fifty-five of the 85 indicators made positive contributions to the CFNAI in May, while 27 deteriorated and one was unchanged. Overall, the index points to a modestly improving economy.

Existing home sales fell 0.9% in May to 5.8 million annualized units. This marked the fourth month of consecutive declines and dropped back to near their July 2020 level. Single-family sales declined 0.9% and the condo/co-op sales were basically flat. The string of declines came after sharp gains last fall and through the winter as Americans sought more living space during the pandemic. Sales were up nearly 45% from last May. The drop in sales suggest that the housing market is cooling even as hiring is steady and the pandemic is fading. Pricing and limited inventory are factors in the recent slowdown. The median existing house price accelerated a record 23.6% from a year earlier to an all-time high of 350,300 in May. There were 1.23 million previously owned homes on the market in May, down 20.6% from a year ago. The inventory-to-sales ratio was 2.5 months in May, down from 4.6 months a year ago. Prices have increased so quickly, roughly half of all homes sold were purchased for more than their asking price, according to Redfin. Just before the pandemic, just one-quarter of sales were above the asking price.

U.S.  durable goods were up 2.3% in May, according to the advance report. Orders for April were revised upward to a 0.8% decline. The bulk of the May durable goods orders were on the softer side as most of the increase was in the volatile transportation sector. Transportation orders rose 7.6%. Excluding transportation, orders rose 0.3%. Unfilled order rose 0.8% and inventories were up 0.7%. The key core capital goods orders and shipments fell 0.1% and rose 0.6%, respectively. All told, it was just a single month, but the report suggests business investment may be cooling a bit.

Wholesale trade inventories jumped 1.1% in May, following an upwardly revised 1% increase in April. Both durable and nondurable inventories grew 1.1% from April and were up 5% and 12.2% from a year earlier. Retail inventories contracted 0.8% in May. However, as in April, the topline number was weighted down by a steep decline in motor vehicles and parts, which fell 5.3%. Nonauto inventories grew 0.9%.

Trade could be a larger drag on second quarter GDP than previously expected. The advance nominal goods deficit widened more than expected in May, coming in at $88.1 billion, compared with April’s $85,7 billion. Nominal goods exports slipped 0.3%, with another sizable decline in automotive exports. Capital goods exports dropped 1.3%, while industrial supplies were down 0.9%. Consumer goods exports jumped 5.6%. Nominal goods imports advanced 0.8%. The bulk of the gain was in foods, feeds and beverages, along with industrial supplies. Capital goods imports fell along with automotive vehicles.

New home sales cooled in May for a second month in a row as homebuilders contend with high construction costs, labor supply issues and a backlog of homes under construction. New home sales fell 5.9% to 769,000 annualized units. Furthermore, April’s sales numbers were downwardly revised to 817,000 from the original 863,000. May’s declines were concentrated in the South, whereas sales either grew or were flat in other regions. Month’s supply increased to 5.1 from 4.6 in April. The report suggest that housing is losing some of its luster, although demand should stay at high levels.

Nominal personal income declined 2% in May, following a 13.1% reduction in April. The large decline in April was the result of the massive drop in government payments included in the American Rescue Plan. May’s drop followed the same dynamics, although on a smaller scale. Compensation to employees grew 0.7% in May, following a 0.9% growth in both March and April. Real personal spending fell 0.4% in May after rising an upwardly revised 0.3% in April and 4.4% in March. Service spending continued its rebound, rising 0.4% in May. Goods spending fell 2%. Durable goods spending fell 4.3% and nondurable goods spending fell 0.5%. Spending will likely continue to be decent as wages are rising and the savings rate is high. The savings rate fell to 12.4% in May from 14.5% in April, still a at a high level. The PCE deflator rose 0.4% in May.  Goods prices were up 0.7% in May, while services were unchanged. Excluding food and energy, the PCE deflator was up 0.5%. Base effects juiced year-over-year growth over the past few months. The PCE deflator was up 3.9% on a year ago basis in May, compared with 3.6% in April. The core deflator was up 3.4% on a year ago basis. The Federal Reserve believes that temporary factors are behind much of the big push in inflation and some of the rise is transitory.


 Euro-zone business sentiment growth accelerated at its fastest pace in 15 years in June as the easing of lockdown measures unleashed pent-up demand and drove a boom in services but has also led to a pickup in inflationary forces. The HIS Markit Flash Composite Purchasing Manager’s index rose to 59.2 in June from 57.1 in May, it highest reading since June 2006. The flash services index bounced to 58 from 55.2, the highest reading since January 2018. Suggesting that momentum would continue, the new business index climbed to near a 140-year high of 57.7 from 56.6. The manufacturing index held steady at 63.1. However, the high level of manufacturing has led to an increase in inflation. The price input index rose to 88.0 from 87.1, the highest level since the series began in June 1997. The European Central Bank is likely to look through those inflationary pressures and will keep monetary policy loose to offer support to the economy.

Important Data Releases This Week

The June ISM manufacturing report will be released on Thursday, July 1 at 10:00 AM.  The May ISM manufacturing index beat expectations and rose to a level of 61.2. The supplier deliveries index reached the highest level since 1974, reflecting the supply-chain constraints many producers are feeling. Prices fell in My but remained elevated. In addition, finding qualified workers is difficult. The hiring index fell by over four points, more than any other sub-index. New orders increased solidly during May. The supply chain and labor problems will be around for a while, although we do expect some easing. The index should step back to 61.1 for June.

The May construction spending report will be released on Thursday, July 1 at 10:00 AM. Construction spending edged up 0.2% in April, with residential constriction again taking the lead. The nonresidential sector is still facing difficulties that occurred during the pandemic. Longer lead times and shortages of materials, as well as labor shortages are still constraining the industry. Still, demand is strong in the residential side, and we think the nonresidential sector will start to awake. Construction spending should climb 0.5% for May.

U.S. June vehicle sales will be released on Thursday, July 1 at a varying time. Sales in May were decent at 17.0 million units but down from the stimulus-fueled two previous months. Supply constraints are slowing production and low inventories are limiting sales. Demand will likely inch up to 17.2 million for June.

The May trade deficit report will be released on Friday, July 2 at 8:30 AM. The advance goods trade deficit widened to $88.1 billion in May, up from $85.7 billion in April. Goods exports slipped 0.3%, mainly on weakness in the auto sector. Imports advanced 0.8%. Trade volumes are increasing as the global economy is rebounding from the pandemic. However, supply-chain constraints are a global problem. There are delays at ports from supply chain and labor problems. Still, trade is on a rebound. The deficit will increase from $68.98 billion in April to $71 billion for May.

The May factory orders report will be released on Friday, July 2 at 10:00 AM.  Factory orders fell 0.6% in April as supply constraints slowed production, especially in the auto industry. We expect a meaningful advance of 2.4% for factory orders for May.

The June employment report will be released on Friday, July 2 at 8:30 AM. Labor scarcities continue to hold back hiring. Employers added 559,000 net new jobs in May, yet for a second month, the total came in below expectations. We see the labor problem starting to ease as some of the pandemic limitations are relaxing. For one, vaccinations have greatly reduced health concerns and the pace of retirements have slowed. Childcare is still a problem and none of the 26 states that planned on cutting benefits ended before the survey week. We look for payrolls to expand by 725,000 for June.

FTR is the leader in economic analysis and forecasting for the commercial freight and transportation equipment markets. For more information: Click here

Category: Monday Morning Coffee Tags:

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.