The Economy has Ticked Up as Businesses are Reopening

By | June 3, 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 rose on Friday and oil prices jumped more than 3%, taking the sting out of a week that saw sentiment hit on deteriorating U.S.-Chinese relations which added to worries about how fast economies would recover from the coronavirus. European stocks opened broadly higher, with stock markets in London tracking overnight gains in the U.S. and Asian markets. Data showed China’s industrial output increased 3.9% from a year earlier, the first expansion of the year. U.S. President Donald Trump statements on Thursday signaled further deterioration of relations with China, saying he has no interest in speaking to President Xi Jinping right now and suggesting he might cut relations with China. U.S. Federal Reserve Chief Jerome Powell brushed off the notion that the Fed could push rates below zero.

Stocks recovered from steep losses early Friday to close high, despite data showing U.S. retail sales plunged more than expected and news the Trump administration will block shipments of semiconductors to China’s Huawei Technologies, raising fears of renewed trade tensions. However, sentiment increased as the House of Representatives was set to vote on another $3 trillion coronavirus package that could be the opening round of another round of fiscal stimulus. The Dow Jones Industrial Average increased 61 points, or less than 0.3% to close at 23,685.42, while the S&P added 11.20 points, or 0.4% to end the session at 2,863.70. For the week, the Dow was down 2.7%, while the S&P lost 2.3%.

The abrupt shutdown of the U.S. economy and virtually and all developed economies across the globe has reduced aggregate demand quickly. The fall was quicker than the supply side could adjust and one of the major inputs that lost significant value was oil. Almost every other commodity lost value except food and toilet items. The fall in demand was evident in the inflation reports. The consumer price index fell 0.8% and the PPI fell 1.3%. This raises the specter of deflation, but we do not think that this will take hold. The global economy has seen sharp commodity price declines in the past but they evened out in a few months. 

Retail sales fell 16.4% in April, following a 8.3% drop in March. Spending was off in early every category except non-store retailers. One item of resistance was sales at building supply stores, which did fall 3.5%, but remained sturdy despite the freefall in final demand and may be a support for the residential side. 

While aggregate demand fell sharply, the supply side also fell sharply. Industrial production fell 11.2% in April and manufacturing fell 13.7%. Most major manufacturing operations such as auto assembly plants were completely shut down. Notable exceptions were food products and paper products plants, which continued to work. Oil and gas drilling fell 28%, the largest decline on record dating back to 1972. 

April was an awful month for the economy. However, data over the last couple of weeks suggest the economy has ticked up as businesses are reopening. Oil and gas demand increased the last couple of weeks. There has been an uptick in seated diners in parts of Texas, Georgia and Florida. There are more people traveling. New mortgage applications have picked up in the last two weeks. Truck traffic, as measured by FTR has not seen much of an increase but is bouncing along at the bottom. Activity is still depressed but it does seem most indicators agree that economy has bottomed out. Next week, we get a look at housing starts, existing home sales and leading economic indicators.

Latest Data

The U.S. Economy:

Disinflationary pressures intensified as a good portion of the U.S. economy shut down and global oil prices tanked. Consumer prices fell 0.8% in April, the largest decline since 2008. The CPI for energy dropped 10.1%, with gasoline prices plunging 20.6%. Excluding food ad energy, the core CPI fell 0.4%. declines in apparel, transportation services and used car prices contributed to the drop in core CPI. On a year-over-year basis, the headline CPI was up 0.4% and the core was up 1.4%.  Food prices rose 1.5% in April, after a 0.3% rise in March. Inflation is likely to be weak, at least until a vaccine for COVID-19 is found. 

The advance estimate showed the goods deficit widened from $59.9 billion in February to $64.2 billion in March. Goods exports dropped 6.7% and the decline was broad based. There was a sizable decline in automotive exports. Nominal imports were down 2.4%. Declines in imports of autos and consumer goods more than offset increases in food and beverage imports. COVID-19 impacted trade in March and April will be worse. 

U.S. consumer confidence posted its largest monthly decline on record, according to the Conference Board. The index fell from 118.8 in March to 86.9 in April. Consumers’ assessments of current conditions tanked, coming in at 76.4 in April, down from 166.7 in March. Expectations did increase from 86.8 I March to 93.8. It remains lower than before COVID-19, but the gap is not large. The rise in the index does suggest that consumers think the economy will bounce back rather quickly .Not till the labor market improved, state re-openings accelerate more meaningfully and the number of COVID-19 cases fall more significantly, will consumer confidence mount a sustained comeback.

The NAR pending hoe index plunged 21.8% in April to 69, an all-time low. April’s decline added to the steep losses in March. All census regions had double-digit losses in potential home sales but the Northeast West recorded the steepest losses because of their outsize exposure to the pandemic. National pending home sales were down 33.8% from a year ago. The rapid deterioration in the labor market will keep sales depressed for some time. The good news is that mortgage rates are at an all-time low. Mortgage applications have been increasing the last few weeks but remain below the onset of the OVI-19 virus. It will likely be 2022 before the market returns to previous levels unless a vaccine is found.

U.S. durable goods orders plunged 17.2% in April, the second consecutive loss. March’s result was revised down sharply. The decline was led by the volatile transportation sector. Motor vehicles and parts orders were down 52.8%, while defense aircraft fell 32.7%. Excluding transportation, new orders slipped 7.4%, the third monthly decrease. Core capital goods orders fell 5.8% in April ad 1.1% in March. Orders for electronics and computers slipped o 0.3%. Orders for primary metals fell 13.8%, the second monthly decline in excess of 4%. Total shipments fell 17.7% in April and 5.5% in March. Excluding transportation, shipments fell 6.3%, the third consecutive monthly decline. COVID-19 will have implications for the economy and manufacturing for years. Declines in business investment this year will hurt labor productivity. New business formations crashed in April, a source of a lot of hiring and productivity growth.

International:

China’s factory output rose for the first time this year as the world’s second largest economy is slowly emerging from the coronavirus lockdown. Consumption from a year earlier. on remains weak and there has been increased joblessness. Industrial production increased 3.9% in April, following a 1.1% decline in March. After months of lockdowns, China is reopening its economy as the outbreak of the disease becomes under control. The production of oil, coal, metals and electricity all increased as plants restarted operations in April. However, consumer spending fell 7.5% in April and extended the fall in the first quarter as shops and restaurants were closed. Fixed-asset investment fell 10.3% in the January-to-April and 16.1% in then January-March period. Although Chinese exports perked up in April driven by a surge in medical equipment, there are worries about the international sector as many of China’s overseas markets, such as the U.S and Europe are mired in recession.

The German economy plunged into recession after suffering its steepest quarterly contraction since the 2009 financial crisis. The economy contracted by 2.2% in the first quarter and analysts expect a 10% contraction in then second quarter. Germany is fairing better than some of its neighbors. France’s economy fell 5.8 and Italy 4.7% in the first quarter. This was partly due to a decision to allow 16 states in Germany to allow construction sites and factories to remain open. There was also an unprecedented rescue package that allowed employers to switch to shorter working hours to avoid massive layoffs.  

Important Data Releases This Week

World stocks rose on Friday and oil prices jumped more than 3%, taking the sting out of a week that saw sentiment hit on deteriorating U.S.-Chinese relations which added to worries about how fast economies would recover from the coronavirus. European stocks opened broadly higher, with stock markets in London tracking overnight gains in the U.S. and Asian markets. Data showed China’s industrial output increased 3.9% from a year earlier, the first expansion of the year. U.S. President Donald Trump statements on Thursday signaled further deterioration of relations with China, saying he has no interest in speaking to President Xi Jinping right now and suggesting he might cut relations with China. U.S. Federal Reserve Chief Jerome Powell brushed off the notion that the Fed could push rates below zero.

Stocks recovered from steep losses early Friday to close high, despite data showing U.S. retail sales plunged more than expected and news the Trump administration will block shipments of semiconductors to China’s Huawei Technologies, raising fears of renewed trade tensions. However, sentiment increased as the House of Representatives was set to vote on another $3 trillion coronavirus package that could be the opening round of another round of fiscal stimulus. The Dow Jones Industrial Average increased 61 points, or less than 0.3% to close at 23,685.42, while the S&P added 11.20 points, or 0.4% to end the session at 2,863.70. For the week, the Dow was down 2.7%, while the S&P lost 2.3%.

The abrupt shutdown of the U.S. economy and virtually and all developed economies across the globe has reduced aggregate demand quickly. The fall was quicker than the supply side could adjust and one of the major inputs that lost significant value was oil. Almost every other commodity lost value except food and toilet items. The fall in demand was evident in the inflation reports. The consumer price index fell 0.8% and the PPI fell 1.3%. This raises the specter of deflation, but we do not think that this will take hold. The global economy has seen sharp commodity price declines in the past but they evened out in a few months. 

Retail sales fell 16.4% in April, following a 8.3% drop in March. Spending was off in early every category except non-store retailers. One item of resistance was sales at building supply stores, which did fall 3.5%, but remained sturdy despite the freefall in final demand and may be a support for the residential side. 

While aggregate demand fell sharply, the supply side also fell sharply. Industrial production fell 11.2% in April and manufacturing fell 13.7%. Most major manufacturing operations such as auto assembly plants were completely shut down. Notable exceptions were food products and paper products plants, which continued to work. Oil and gas drilling fell 28%, the largest decline on record dating back to 1972. 

April was an awful month for the economy. However, data over the last couple of weeks suggest the economy has ticked up as businesses are reopening. Oil and gas demand increased the last couple of weeks. There has been an uptick in seated diners in parts of Texas, Georgia and Florida. There are more people traveling. New mortgage applications have picked up in the last two weeks. Truck traffic, as measured by FTR has not seen much of an increase but is bouncing along at the bottom. Activity is still depressed but it does seem most indicators agree that economy has bottomed out. Next week, we get a look at housing starts, existing home sales and leading economic indicators.

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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.