The U.S. Labor Market is the Firewall for the Economy

By | March 9, 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.


Coffee and Economic Review Global stocks tumbled on Friday as disruptions to business from the spreading coronavirus epidemic worsened, stoking fears of a prolonged economic slowdown. European shares opened sharply lower, with travel stocks bearing the brunt. The pan-European 600 index was down 2.4% by 0856 GMT. The MSC’s All-Country World Index, which tracks shares across 47 countries was down 0.72%. After marking their worst weekly performance since the 2008 financial crisis, global stocks recovered 1.7%, as sentiment recovered from policymakers to combat the economic fallout of the virus. The U.S. Federal Reserve made an emergency interest rate cut of 50 basis points this week. The Bank of Canada and the Reserve Bank of Australia also cut rates, with investors expecting other central banks to soon follow suit. Travel restrictions and factory closings aimed at curbing the spread of the virus are expected to add pressure to global growth.

Since its record closing high on Feb. 19, the benchmark has lost more than 12%, wiping out $3.43 trillion from its market capitalization. Even so, for the week the S&P. along with the Dow Jones Industrial Average and the Nasdaq posted a modest gain as stocks lost ground late in the session. Comments from Federal Reserve officials about the possibility of using other tools in addition to interest rate cuts to blunt the economic impact of the coronavirus helped stocks ease declines. Yields on long-dates U.S. Treasuries fell to record lows as investors fled to bonds. Data showing strong employment growth was ignored. Shares of cruise operators Carnival Corp. and Caribbean Cruises Ltd. slid after reports that the administration of Donald Trump was considering ways to discourage travelers from taking cruises.

The Federal Open Market Committee lowered the target fed funds rate by 50 basis points to 1% to 1.25% because of the heightened risks COVID-19 poses for the U.S. economy. The move took place two weeks before the scheduled meeting of the Committee and surprised many analysts. The intra-meeting move is rare and has elements of risk, as it appears the central bank might be pushing the panic button. The initial moves in the equity markets were unfavorable. This was the ninth intra-meeting rate change since 1994. Emergency rate cuts usually don’t provide much lift to the equity markets. Considering the meltdown in the equity markets the week preceding, the move was needed. However, the timing is debatable. Based on past experience, when the Fed cuts rates intra-meeting they do it again at the regular meeting. The March meeting is in a couple of weeks. If the rate cut prompts Congress to follow through with some fiscal action, the end results could be some strong quarters down the road.

It was a tumultuous week for the global economy, as concerns spread about the economic and human impact from the spread of COVID-19. Some of the first economic data out of China since the outbreak began signaled a sizable slowdown in that nation’s economy. Purchasing manager indices plunged to record lows and Chinese auto sales were down 80% year-over-year. Chinese oversea shipments fell 17.2% in January-February from a year earlier, the steepest fall since February 2019. Imports sank 4% from a year earlier, better than market expectations of a 15% drop. Factory activity contracted at the fastest pace ever in February, even worse than during the global financial crisis, with a large slump in new orders. Economists are waiting on data on retail sales and industrial production to further ascertain economic consequences.

In the U.S. economic data was mostly decent. The week started off with the ISM manufacturing index by remaining in expansionary territory by a hair. The manufacturing sector had started to stabilize following the de-escalation of trade tensions at the beginning of the year. Now all bets are off, as February’s report already showed some signs of supply disruptions from the coronavirus. Delivery times rose to an all-time high and imports fell to a 10-year low and purchasing managers in several industries noted trouble in sourcing parts. Prices paid dropped 7.4 points, suggesting demand is pulling back. Lingering issues with Boeing’s 737 MAX also weighed on this month’s report. One respondent in the transportation offered the grim comment, “layoffs are here.”

As for the non-manufacturing side of the economy, February’s ISM non-manufacturing index jumped 1.8 points to 57.3. This report was at odds with the Markit Services PMI, which turned sharply into contraction territory. The two indexes are not identical. Some of the likely strength may have come from mining and construction. Goods producing industries are not included in the Markit index. Still, the service sector needs to be closely watched. Companies and consumers are already starting to curtail travel on top of the shipping delays that are hurting the transportation industry.

The impact of the virus has not hit the labor market yet. The strong pace of job growth continued in February job creation continued in February with employers adding 273,000. Revisions in December and January brought the three-month average to a robust 243,000. While the labor market appears strong now, we will have to wait for March data to assess the impact of the coronavirus. The U.S. labor market is the firewall for the economy and if COVID-19 leads to layoffs, a recession is almost certain.
Next week, we get a look at the NFIB small business optimism index. Consumer and producer inflation, and imported prices. All eyes will be watching the development of the coronavirus and what actions are taken by global governments to contain the virus.

Latest Data

The U.S. Economy:

The February ISM manufacturing survey came in weaker, but that was widely expected given the impact the coronavirus has had on global manufacturing, especially China. The index fell from 50.9 in January to 50.1 in February. The new orders index fell from 52 to 49.8. Of the 18 industries, 16 reported growth in new orders. According to the ISM, a reading of 51.7 over time is consistent with an increase in the Fed’s industrial production data. The production index dropped from 54.3 in January to 46.9. 12 industries reported growth in output, compared to seven in January. The employment index rose from 46.6 in January to 46.9. Only three industries reported growth in employment in February. The supplier deliveries index increased from 52.9 to 57.3. Thirteen out of 18 industries reported slower deliveries in February. The inventories index came in at 46.5 in February, down from 48.8 in January. The ISM is now seasonally adjusted inventory data. The prices paid index dropped from 53.3 to 45.9. New export orders fell from 53.3to 51.2. New import orders dropped from 51.3 to 42.6. Respondents noted the combined effects of the Lunar New Year and the coronavirus.

The ISM manufacturing index came in weaker than expected but most of the decrease was attributed to new orders. The coronavirus will affect U.S. manufacturing. The global economy will suffer a hit of almost a percent in the first quarter and slow to 2.4% for the year. The hit to the U.S. economy will come via reduced U.S. exports to China, less spending by Chinese tourists and a drop in production caused by supply chain disruptions. The coronavirus is spreading beyond China, so downside risks are high. Moody’s expect first quarter growth will be reduced by 0.4%. There is a silver lining because as the virus is contained, global production will rebound.

Construction spending rose 1.8% in January. Private residential construction spending continued its string of increases, rising 2.1% from December. Spending on new single-family homes increased 2.1% in January and was up 9.6% above a year earlier. Spending on multifamily homes was flat in January, but 8,3% below a year earlier. Private nonresidential construction spending increased 0.8% m/m and was up 0.5% year-over-year. Of the largest components of private nonresidential construction spending, manufacturing structure spending increased 1.4% m/m and was up 5.0% y/y. Public construction spending rose 2.6% above December and was up a stunning 12.6% from a year earlier. Residential construction spending is being fueled by low mortgage rates and healthy job creation. Public construction continues to surprise on the upside.

The ISM non-manufacturing index continues to preform well. The composite index for non-manufacturing increased from 55.5 in January to 57.8 in February. The business activity index slipped from 60.9 in January to 57.8 in February. Thirteen industries reported an increase in business activity in February. The new orders index rose 6.9 percentage points to 63.1 in February. Sixteen industries reported an increase in new orders in February. The employment index rose 2.5 percentage points to 55.6. The supplier deliveries index increased from 51.7 to 52.4, but this increase indicates slower deliveries. The inventory index jumped from 46.5 to 53.9, indicating inventories are increasing. The index shows strength in services. However, there were comments from respondents concerning the outbreak of the COVID-19 virus.

U.S. auto sales increased in February, rising to an annualized pace of 17.1 million from 17 million in January. Car sales ticked up 0.3% to 4.5 million. Sales of light trucks were flat at 12.6 million. February vehicle sales were up 2.1% from February 2019. Car sales were down 8.5% from a year earlier. Light truck sales were up 6.5% from a year earlier. Car and light truck sales have been trending down since peaking in mid-2015. However, sales remain at a healthy level thanks to strong consumer fundamentals. The spread of the COVID-19 virus is a downside risk but is expected to be temporary. We do expect sales to end 2020 at slightly below 17 million.

Factory orders fell 0.5% in January, following a 1.9% advance in December. Durable goods orders slipped 0.2% and have fallen two out of the last three months. Nondurable goods orders dropped 0.8%, the first decline since December. Core capital goods orders advanced 1.1% in January, following a 0.8% decline in December. Looking through the volatility in the core capital goods sector, orders have been little changed since November. Total factory shipments fell 0.5% in January, reversing the December gain. The supply chain issues from China will spill over to the U.S., bit they will be smaller. The U.S. imports semiconductors, machinery and other intermediate goods from China, mainly by air. Travel restrictions will have a more immediate but smaller impact on supply chain than the West Coast strike of 2015. The port strike took time to affect the U.S. economy and the effects of the coronavirus in China will slowly affect U.S. manufacturing.

The nominal trade deficit narrowed in January to $45.3 billion from $48.9 billion in December. Nominal exports slipped 0.4%, while imports dropped 1.6%. The goods deficit narrowed from $69.7 billion to $67 billion. Goods exports slipped, but imports dropped more noticeably, falling 2%. Net exports provided a big boost to fourth quarter GDP growth, but that Is unlikely to recur in the first quarter. Motor vehicle and parts imports will likely bounce back after tumbling in the fourth quarter, affected by the UAW strike. Also, COVID-19 will weigh on travel, which is counted as a service export in the National Income and Products account. Net exports will be a wild card in the first quarter. Travel restrictions will reduce foreign travel to the U.S., which is counted as a service export. Also, the supply chain disruptions will reduce imports. Timing is important. If March imports plunge because of low Chinese production in February. U.S. GDP growth will rise sharply, since the boost from the fall in imports is not offset in production, consumption, or inventories until April. The impact of COVI-19 will be more visible in February and March on trade. There were significant supply chain disruptions.

Payroll employment surprised on the upside in February. 273,000 jobs were added in February, following an upwardly revised addition of 273,00 in January. December’s jobs were also revised upward to 184,00. A mild winter boosted construction and leisure/hospitality. Healthcare also grew at a solid pace. Construction grew by 42,000, following a boost of 49,000 in January. Leisure/hospitality grew by 51,00, following an addition of 38,000 in January. Manufacturing rebounded after a weak January and healthcare added 56,500 jobs. Government payrolls increased by 45,00, although federal payrolls including Census grew by less than 10,00. However, trade, transportation and warehousing contracted as did temp help. Hourly earnings grew by 9 cents or 3% year-over-year. A mix of lower paying jobs has pulled down income gains in recent months. The unemployment rate fell to 3.5%. The labor force participation rate remained at its cyclical high of 63.4%. The labor market continues to shine. Some of the boost is weather-related. We do think the effects of OVID-19 will slow payroll growth in coming months. The transportation industries will see a hit by the virus and so will leisure/hospitality. How much of a hit and the full impact of the virus is unknown. With all the stimulus, there could be a strong rebound once the virus is contained.


The Eurozone Composite PMI grew at its fastest rate in six months in February, with the index coming in at 51.6, compared to 51.3 in January. The services PMI came in at 528 in February, up from 52.5 in January. Manufacturing remains weak, but did rise to 49.1 in February, up from 47.9 in January and was a 12-month high. The composite index was the third consecutive month of expansion. Growth was centered in services, where business grew at the fastest rate in the last six months. The manufacturing sector is still in decline although the rate of contraction is the mildest over the past eight months. The overall rate of expansion still very mild, largely due to subdued new business growth. Growth in manufacturing is likely to be affected by the coronavirus, which is expected to slow production.

Efforts to contain the recent outbreak of the coronavirus in mainland China weighed heavily on the manufacturing sector in February. China’s official manufacturing PMI plunged to a record low 35.7 from 50 in January. The Caixin manufacturing PMI fell from 51.1 to 40.3. Production new work and staffing all fell at the quickest rate since the survey began 16 years ago. Firms extended their usual Lunar New Year shutdown to help stem the spread of the virus. Supply chains were also hit heavily, with average delivery times increasing at the fastest rate on record. Production fell sharply in February as many firms were operating well below capacity, or shutdown due to restrictions put n place. The rate of contraction was the quickest on record. The total amount of new work received by Chinese manufacturers also declined at the steepest rate since the survey began in early-2004. The drop in sales was the first seen since June 2019. The level of new export orders fell at one of the fastest rates in the series history.

The fall in Chinese manufacturing was devasting in February. However, firms anticipate a recovery in production over the next year on expectations that production will be ramped up once coronavirus-related restrictions are lifted. Notably, the degree of positive sentiment was the strongest seen in five years. China’s economy is gradually returning to work, with activity likely running at 60-70% of activity in the last week of February, according to a Bloomberg Economics report, up from 50% in mid-February. The economy should see a significant rebound when the epidemic is gradually contained and companies accelerate the resumption of business amid more proactive fiscal and monetary policies. The gauge for future output expectations hit a five-year high. This was due to more-productive macroeconomic policies and government for small and mid-sized companies.

Important Data Releases This Week

The NFIB small business optimism report will be released on Monday, March 10 at 6:00 AM. Government measures to contain the index will take precedence over economic data in the near term. In January, the index rose 1.5 points, boosted by the Phase 1 trade deal. With the virus spreading beyond China, we expect the index to have backtracked a little. The previous reading was 104.3 and we expect February to report a 102.7 reading.

The February consumer price index report will be released on Wednesday, March 11 at 8:30 AM. Consumer inflation will likely be unchanged in February amid a unseasonably decline in gasoline prices. The core index is still alive and projected to rise 0.2%.

The February producer price index report will be released on Thursday, March 12 at 8:30 AM. Producer inflation was stronger than expected in January, rising 0.5%. We expect inflation will likely fall 0.1% in February.

The February import prices report will be released on Friday, March 13 at 8:30 AM. Import prices gained 0.2% in January on higher energy costs. That trend will reverse in February.

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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.