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.
The S&P ended Friday on a lower track after data showed weaker than expected employment growth. Investors still expect the Federal Reserve to begin tapering asset purchases this year. Wall Street’s three main indexes were mixed for much of the session before losing ground toward the end of the day. The Dow Jones Industrial Average fell 0.03% to end at 34,746.25, while the S&P 500 lost 0.09% to 4,391.35. The Nasdaq Composite lost 0.51% to 14,579.54. For the week, the S&P rose 0.8%, the Dow was up 1.2% and the Nasdaq gained 0.1%. The Labor Department nonfarm payrolls report showed that the U.S. economy created the fewest jobs in nine months, as hiring dropped at schools and some businesses were short workers. Third quarter earnings start this week and investors will be worried about surging energy prices, which could drive up inflation, erode profit margins and pressure consumer spending. Oil prices have surged more than 25% since late August, with Brent topping $80 a barrel and hitting three-year highs. Natural gas prices in Europe have sky-rocketed, causing alarm among political leaders. Fears of slowing economic growth and higher inflation will likely lead to volatility in financial markets in coming weeks.
September’s disappointing employment report took center stage last week in economic news. Nonfarm employment grew by just 194,000 jobs, as employers continue to have trouble finding workers they need. He data was not quite as weak as it first appears. Data for the preceding two months was revised upwards by a combined 169,000 jobs. The weakness in September came from a 123,00 jobs loss in government payrolls, all of which were state and local education, which lost 161,000 jobs. Private payrolls added 317,000 jobs in September, following 332,000 gain the month before. Payrolls for the preceding two months were revised up by a combined 169,000. The household employment data did not show anywhere the weakens of the establishment survey, where employment grew by 526,000 in September, after a 509,000 increase in August. The stronger employment data in the household survey is one of the reasons the unemployment rate fell by 0.4 of a percentage point to 4.8%. The establishment survey is considered to be more reliable over time, it does seem to miss new jobs being created and a reason why employment growth is widely revised upwards in the early stages of a recovery.
No matter how you look at the numbers, there is no way of avoiding the fact that there are widespread labor shortages. Manufacturers added 26,000 jobs and would have added more if automotive plants were idled due to semiconductor shortages. Motor vehicle manufacturers cut 6,100 workers in September. Demand is clearly not a problem. Oil and gas extraction is back, with the addition of 1,100 jobs in September and support activities for mining added 3,700. The expansion of domestic oil extraction may be the medicine needed for rising oil prices.
Earlier in the week, the ISM services index rose to 61.9 in September from 61.7 the month before. While the index is down from summer highs, it does show that the increase in COVID infections has not meaningfully slowed economic activity. Although there has been some moderation in high frequency data, large crowds in in-person events, such as football games, and music festivals, suggest consumers are not pulling back. The survey showed that demand is strong and supply still an issue. As in the manufacturing, supply constraints seem to be the biggest block to growth. Supply issues were also evident in the August trade report. The trade deficit widened to $73.3 billion in August. COVID outbreaks in Asia closed some ports, while capacity restraints are still hurting domestic port activity. The lack of labor is slowing the movement of goods in ports. Despite these headwinds, both exports and imports rose for the month. There are still log-jams, but greater volumes of goods are flowing both ways.
This week, inflation takes center stage and retail sales and business inventories will give us further insights.
The U.S. Economy:
U.S new vehicles sales fell to a seasonal adjusted annual rate of 12.2 million units in September, down 25.2% from September 2020. Both sales of passenger cars and light trucks declined during the month. The sales of SUVs and light trucks decreased 4.5% from August and by 23,8% from a year earlier. Sales of passenger cars fell 12.6% from August and were down 30.1% from a year earlier. U.S. vehicles sales tumbled in September as chip shortages and other parts-supply disruptions cut into the selection on dealer lots and raised prices to record levels. This sending consumers to the sidelines to wait out a shortage that has hobbled the industry since late last year. The average price of a new vehicle hit a record $42,892 last month, breaking the old record of $41,528 set in August. General Motors expressed some optimism the shortage is improving, saying that a steady flow of vehicles will continue in the fourth quarter, as they pan to re-start production of key cross-over and car plants, leading to a more stable operating environment through the fall. Other auto executives say they anticipate better access to chips early next year. September’s weakness also was influenced by the fact that Labor Day sales were counted in August. Near term sales will be determined by production, determined by the supply chains.
The nominal trade deficit widened more than expected in August, rising from $70.3 billion to $73.25 billion. Nominal exports were up 0.5%, after rising 1.2% in July. Exports were lifted by industrial supplies and materials. Nominal imports increased 1.4%, after declining 0.1% previously. Imports were led by consumer goods and industrial supplies and materials. The trade deficit should narrow in the next few quarters, as consumer spending shifts away from goods to services. However, there is a big backlog of foreign-made consumer goods waiting to get into the U.S. supply chains and at foreign ports waiting to go to the U.S. Both imports and exports of autos are weak because of the shortage of semiconductors. Trade volumes are rising as the global economy heals, but COVID outbreaks in Asia and other places are still hampering the recover.
The ISM services index increased 0.2 of a percentage point, to a still elevated 61.9%. The business activity index increased 2.2 percentage points to 62.3, with 17 industries reporting growth. The new orders index increased 0.3 of a percentage point to 63.5, with 17 industries reporting growth. The employment index fell 0.7 of a percentage point to 53, with 14 industries reporting higher employment. The supplier deliveries index fell 0.8 percentage points to 68.8, with 17 industries reporting slower deliveries. Comments from respondents stressed that there are shortages of multiple products due to port backlog and shortages of long-haul truck drivers. There are reports of suppliers being unable to staff their warehouses because of COVID infections, creating more backlogs and longer lead times. Also, container deliveries are slow and not expected to improve for the next 12 to 18 months. Problems with finding labor are widespread. Still, most industries are reporting growth along with challenges of supply. Payroll employment disappointed again, rising by just 194,000, well short of expectations. Payrolls were revised upward for the previous two months by a combined 169,000. Private education fell by 169,000. The weakness came from government education payrolls. In September, local government education fell by 144,000 and 17,000 in state government education. Overall government payrolls fell by 123,000 last month. Seasonal hiring in education has not been as strong as before the pandemic and many schools did not open because of COVID fears, adding some distortions to the seasonal adjustments. Private payrolls increased by 317,000. Employment in the leisure/hospitality sector increased by 74,000 jobs but hiring at restaurants and bars was little changed from the month before. Professional and business services rose by 60,000 jobs. Retailers added 56,000, while manufacturing added 26,000. The labor force participation rate was little changed at 61.6%. The unemployment rate fell by 0.4 of a percentage point to 4.8%. This suggests COVID fears are keeping potential workers on the sidelines. Average wages increased by 06%. During the survey week, new daily COVID cases were up tenfold from early July. Cases have declined since then and 76.2% of people over 12 have been vaccinated. That fact, plus the end of extended benefits for the unemployed at the end of September, suggest more people may join the labor force. The latest figures show a labor force in flux but also show an economy slowing down from its breakout pace from the pandemic and starting to adjust to a more trend growth.
Important Data Releases This Week
The September consumer price index report will be released on Wednesday, October 13 at 8:30 AM. In August, inflation seemed to cool from summer highs. While some sectors like used car prices and travel services saw outright declines, other items, such as food, energy, housing and other goods picked up the slack. Food and energy likely picked up in September. We look for the index to climb 0.3% in September.
The September producer price index report will be released on Thursday, October 14 at 8:30 AM. Prices of inputs continue to climb, leading to greater finished product prices. The auto industry is a poster child for supply log-jams. Prices of inputs, such as semiconductors, when they can get them, keep going up, as well as the price of steel and plastic resins. The result is record high prices for new vehicles, when the consumer can get them. We look for the PPI to increase 0.6% for September.
The September retail sales report will be released on Friday, October 15 at 8:30 AM. During August, retail sales surprised on the upside, rising 0.7%. We expect sales to decline 0.3% in September, mainly on lower auto sales. Excluding the auto sector, we expect sales to increase 0.4%. The consumer is still in good shape and jobs are increasing. Although, spending is shifting to services, it is still decent all around.
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