The Economy Got a Boost From Re-Opening and the iscal Stimulus

By | November 2, 2020

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

World stocks slipped further on Friday and safe havens got a fill up as jitters over rising global COVID-19 infections and the coming U.S. elections weighed on sentiment. A strong central bank-fueled bounce back from the initial pandemic slide earlier in the year has faltered this week with concerns about an even worse second wave in infections, particularly in Europe, taking the froth off markets. World stocks were down 0.3% earlier in Friday trading, tracking weakness in Asia and the turmoil on Wall Street earlier in the week. MCSI’s broadest index of Asia-Pacific shares outside of Japan, was down 1.2% on track to break four straight weeks of gains. 

U.S. stocks extended losses on Friday, with investors waving off strong quarterly reports from technology companies to focus on the uncertain outlook amid a surge of COVID-19 cases in Europe and in the U.S. On the last trading day of the month, investors also faced the prospects of the coming U.S. elections and the timing of any further fiscal aid for businesses and consumers from Congress. The Dow Jones Industrial Average closed 157.51 points, or 0.6% at 26,501.60, while the S&P lost 40.51 points, or 1.1% to close at 3,269.96. The Nasdaq slumped 274 points, or 2.5% to finish at 10,911.59. All three indexes closed well off much stepper midday losses, but the week still marked the worst week for the S&P 500 and the Nasdaq since March. Nervousness over the elections continues to hang over the market. 

Initial claims for unemployment insurance benefits decreased by 40,000 to 751,000 in the week ending October 24. California started to process claims, a factor that has been distorting numbers the last couple of weeks. New filings for Pandemic Unemployment Assistance continue to bounce around as they increased from 344,905 to 359,667 in the week ending October 24. Meantime, continuing claims for unemployment insurance benefits continue to signal improvement, falling from 8.465 million to 7.756 million in the week ending October 17. The labor market continues to show improvement but remain very high. The forecast calls for employment growth to moderate in the fourth quarter. A sustained recovery will not commence until a vaccine is found. Risks to employment growth are high as new infections increase.

The U.S. economy bounced back in the third quarter after actions to contain COVID-19 in the second quarter to fall significantly. Real GDP rose 33.1% at an annualized rate, by far the biggest increase on record. Still, the economy remains 3.5% below its peak in the fourth quarter of 2019. The economy got a boost from re-opening and the fiscal stimulus. Real consumer spending soared in the third quarter, rising 40.7%, adding 25.3 percentage points to GDP growth. Real spending on durable goods is 11.9% above its level in the final three months of 2019. However, real spending on services is still 8% below the fourth quarter level.  Business investment was also strong, rising 70.1% at an annualized rate, adding 3.3 percentage points to growth. Residential investment increased 59.3%, adding 2.1 percentage points to GDP growth. Housing, boosted by low interest rates, is leading the recovery. Net exports shaved 3.1 percentage points off growth. He economy’s future will depend on the virus and the political outcome next week. A vaccine is expected sometime soon. However, it will take time to corner the virus and refloat the economy.

Next week, we get a look at the ISM manufacturing and services indexes, construction spending, factory orders and employment data.

Latest Data

The U.S. Economy:

The Chicago Fed National Activity Index showed continued moderation after unprecedented swings earlier in the year. The index fell to 0.27 in September after a upwardly revised August reading of 1.11. Three out of the four categories made positive contributions, but three out of four retreated from their August peak. The three-month moving average came in at 1.33, down from 3,22 in August. Production-related indicators contributed -0.24 to the index in September, down from August’s 0.31 reading. Industrial production fell 0.6% in September, after a 0.4% increase in August. The sales, orders and inventories contributed 0.07 in September, down from 0.1 in August. Employment-related indicators added 0.35, down from 0.71 in August. The personal consumption contributed 0.09, up from a neutral reading I August. The index shows a fourth month of increasing economic activity but the rebound is slowing quickly and the economy is still far from its pan-demic peak. 

New home sales fell 3.5% in September to 959,000 annualized units. Sales in August were revised down to 994,000 annualized units. Sales fell in the Northeast, Midwest and South in September, but rose modestly in the West. New homes listed for sale crept higher in September, rising from 282,000 to 284,000. Inventory is still a problem as the month’s supply still remains below four, but up from a record low. The median new home price was up 3.5% from a year earlier. The slower September pace is not really a concern as housing is still leading the recovery.

U.S. durable goods orders came in better than expected in September, rising 1.9%. Transportation was a big support, as motor vehicles and parts were up 1.9%. The volatile defense aircraft and parts orders dropped 46.1%. Excluding transportation, new orders rose 0.8%. The key nondefense capital goods orders excluding aircraft rose 1%, following a 2.1% rise in August. Some parts of business investment are rising faster than others. U.S. durable goods orders have increased for five consecutive months. Fundamentals are becoming more supportive for equipment spending as corporate profits have been positive since the economy re-opened. Oil prices have not moved much, hovering around the $40 a barrel level. The recent rise in infections is still a clear downside risk. 

Consumer confidence remains at a low level as millions remain without work and coronavirus infections rage. The Conference Board’s confidence index dipped from a revised 101.3 in September to 100.9. The index of current conditions rose from 98.9 to 104.6, well below the 170 level before the crisis. Expectations fell from 102.9 to 98.4 in October. Consumer confidence is moving upward on trend remains on a slight upward trend. Confidence remains above cyclical lows, but at or near recession levels. The increase in infections and reversals of re-openings have mostly stopped the upward trend. A second stimulus plan and a vaccine would certainly lift confidence but that may take many months. 

The trade deficit narrowed from $83.1 billion in August to $79.4 billion in September in the advance release of goods trade. Nominal goods exports increased 2.7%, led by double-digit gains in foods, feeds and beverages. Capital goods exports along with automobiles posted decent gains in September. Nominal imports slipped 0.2%. Weakness was concentrated in consumer goods, industrial supplies and other goods. Exports of goods remain down 9.9% on a year-ago basis in September, while imports declined 2.5%. The report suggests that the pickup in imports in recent months is starting to slow and that the global economy is starting to gain enough strength to raise export levels, despite the strong dollar.

Wholesale inventories inched down 0.1% in September, following a 0.3% increase in August. Wholesale stockpiles are 4.5% below year-ago levels. Durable goods inventories contracted 0.1%, while nondurable goods were flat from August. Retail inventories grew 1.6% in September, following a 0.5% advance in August. Motor vehicle and parts dealers saw stocks grow 3.2%. Exports picked up in September, but the increase in coronavirus infections threatens to slow economic activity and slow trade. 

Pending home sales dropped 2.2% to 130 in September, snapping its four-month winning streak. However, the September number was the second highest ever. Homebuyers continue to brave open houses despite the ongoing fears over the virus in order to capitalize on record low financing costs. Potential home sales cooled in all regions except the Northeast, which registered a small gain. Pending home sales remain up 20.5% on a year ago basis. The upward trend in sales remains intact. Inventories remain tight, with the inventory-to-sales ratio declining to 1.39 million units in September, a fresh all-time low. The lack of inventory has pushed prices higher. Sales are likely to remain robust through 2020 and into 2021, but the increase in infections may slow activity.

Personal income surprised to the upside in September, increasing 0.9%, following a 2.5% decline in August. Solid growth in compensation of employees offset a small decline in government transfer payments. However, in total, due to the expiration of federal income support, nominal personal income declined from the second quarter to the third. Real consumer spending continued its rebound in September. Real spending grew 1.2%, after rising 0.7% in August. Goods spending once again led growth, up 2.2% after dipping in August. Service spending lagged, rising 0.8% and remains much weaker by pre-pandemic standards. The savings rate fell to a still remarkable 14.3% from 14.8% in August. Consumer spending continues to make slow progress towards its pre-pandemic level. Real spending fell almost a fifth in March and April and has recovered about two-thirds of its decline in May and June and has been inching up over the last three months. The pace is slow because consumer fundamentals remain awful outside of fading government support. The future will depend on the virus and political developments that could favor another stimulus program. 

Even though the economy has bounced back, there is still slack in the economy and it is weighing on inflation. The PCE deflator increased 0.2% in September, leaving it up 1.4% on a year ago basis. The core PCE also increased 0.2%, putting it up 1.5% y/y. Inflation is still running below the FED’S TARGET AND THE Federal Reserve is not raising interest rates anytime soon. The federal Open Market Committee still believes that risks are tilted towards deflation. Inflation will likely pick up a little in the second half. The Fed is not likely to move until 2022 or 2023.

International:

China’s economic recovery accelerated in the third quarter, although the weaker than expected headline growth suggested persistent risks for one of the few drivers of global demand. China’s real GDP grew 4.9% in the third quarter, slower than the expected 5.2% forecast by economists, but faster than the 3.2% increase in the second quarter. On a quarter-on-quarter basis, GDP grow 2.7% in the third quarter, the National Bureau of Statistics said, compared with expectations of a 3.2% rise and a 11.5% increase in the previous quarter. Retail sales grew 3.3% in September from a year earlier, speeding up from a modest 0.5% increase in August and the fastest growth since December 2019. Industrial output grew 69% after a 5.6% rise in August, showing the factory sector is gaining momentum. Fixed-asset investment rose 0.8% in the first nine months from a year earlier, returning to year-to-date growth for the first time this year. The International Monetary Fund has projected an expansion of 1.9% for China for 2020, which is close to the central bank’s expectations of 2%. That will make China the only major economy to report growth in 2020, although at the slowest annual pace since 1976, the final year of Mao Zedong’s Cultural Revolution. 

China’s factory activity expanded at a slightly slower pace in October, suggesting a continuing economic recovery as the country emerges from the pandemic shock. The official manufacturing PMI fell to 51.4 in October from 51.5 in September. New orders remained steady at 52.8, while new export orders rose to 51, improving from 50.8 the month before. China’s vast industrial sector is steadily returning to levels before the pandemic shut down large portions of the economy. The pandemic is still controlled in China, but it is still a growing threat to large parts of the globe. 

Important Data Releases This Week

The October ISM manufacturing Index report will be released on Monday, November 2 at 10:00 AM. The manufacturing sector has been supported from the shift from goods from services since the pandemic began. The manufacturing index has been fueled by a solid expansion in new orders. October will likely be strong as inventories are below pre-pandemic levels even as consumer goods spending has recovered and capital goods spending has been decent. The index should rise from 55.4 to 55.7.

The September new home sales report will be released on Monday, November 2 at 10:00 AM. Construction activity has been supported the robust single-family sector. Nonresidential construction remains weak and the public side has been slightly positive. We look for a 0.2% advance in construction spending for October.

The September factory orders report will be released on Tuesday, November 3 at 10:00 AM. Already released durable goods orders increased 1.9% in September and thee important core capital goods orders rose 1.0%. The factory sector will remain positive but starting to trend back to a slower trend. Orders will increase 1.0% for September.

The September international trade report will be issued on Wednesday, November 4 at 8:30 AM. The goods trade deficit narrowed in September, as imports slipped back and exports picked up. We expect the total deficit to slip from $67.1 billion to $65.2 billion for September.

 The October ISM services report will be issued on Wednesday, November 4 at 10:00 AM. Service sector activity was strong in September, with the ISM surprising on the upside. Firms reported a strong rise in new orders. We look for another decent report, with the index slipping from 57.8 to 57.5. 

The October employment report will be issued on Friday, November 6 at 8:30 AM. Job growth has slowed since early summer when restrictions were lifted. Last month’s gain pf 661,000 was held back by less education employment as some schools moved online. Census jobs ended. We expect payrolls to fall back to 600,000 for October.

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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.