Third Quarter Slows, Rise in Infections and Stimulus Fades

By | October 18, 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.

Overview

U.S. stocks climbed on Friday and the main indexed were set for weekly gains, after Goldman Sachs capped a strong earnings season for big banks, while a surprise rise in retail sales raised optimism about the economic recovery. The Dow Jones Industrial Average jumped 1.1% in its best weekly performance since June. The S&P 500 climbed 0.75% to notch its best week in two-and-a-half months and the Nasdaq Composite added 0.5%. Despite optimism emanating from an expected decent earnings season for the third quarter, the increase in oil prices is keeping investors uneasy about the future. U.S. crude jumped to $82.23 a barrel and Bret increased to $84.70 on Friday. Bets that rising prices will force central banks to raise interest rates sooner than expected lifted government bond yields. The yield on the two-year Treasury zoomed to a two-year high of 0.3949% and benchmark 10-year Treasury yield rose to 1.5738%. The return of optimism will be tested by this week’s anticipated weaker growth from China and the impact of rising oil prices on consumers going into the winter months.

Last week’s job openings report supported the notion that labor supply shortages remain a problem for the U.S. economy. Total job openings declined modestly in August, but at 10.4 million, they remain roughly 50% higher than their pre-COVID levels. Despite the decline, a few sectors saw job openings increase, such as transportation, warehousing and utilities. The quit rate jumped 0.2% to the highest level on record. Quits increased the most in food service and accommodation, not a surprise considering the upward trend in wages in most industries. A high quits rate is a sign a worker is confident that another better paying job is easy to get. The report is another piece in the puzzle that suggests that the imbalance between labor supply and demand will take time to resolve.

Labor shortages are one type of fuel that fuels the inflation fire. The CPI showed that inflation strengthened again after a brief August slowdown. The CPI rose 0.4% in September after a 0.3% increase in August. Energy prices were a large driver, rising 1.3%, up 24.8% from a year earlier. Food prices jumped 1.2%, the most since April 2020. The rising cost of housing is contributing more to the headline numbers. Owners equivalent rent rose 0.4% and rent of primary residences jumped 0.5%. The inflation push is likely to continue a few more months as oil prices continue to climb. Until the supply shortages ease and inventories are rebuilt, goods prices are unlikely to revert to the level that allowed inflation to be weak over the last two decades. The indexes for food and shelter rose in September and together contributed to more than half of the monthly increase. The index for food rose 0.9% and energy 1.3%. Excluding food and energy, the CPI rose 0.2%, following a 0.1% increase in August. The indexes for food and shelter rose in September and together contributed to more than half of the monthly increase. The index for food rose 0.9% and energy 1.3%. Excluding food and energy, the CPI rose 0.2%, following a 0.1% increase in August.

 It does seem that service inflation is starting to moderate, while energy is the main driver behind goods prices. Producer prices for final demand increased 0.5% on a seasonal adjusted basis in September, following a 0.7% advance in August and a 1.0% increase in July. Nearly 80% of the September PPI index can be traced to a 1.3% increase in final demand goods. The services index moved up 0.2%. Prices for final demand less foods, energy and trade services moved up 0.1% in September, after a 0.3% advance in August. In September, 40% of the advance in goods PPI can be traced to a 2.8% jump in energy prices. Over two-thirds of the increase in services can be traced to margins for fuels and lubricants. September marked the weakest advance in the PPI index since December 2020 and seems to suggest that inflation is moderating and more dependent on energy. At some point, energy prices will flatten and retreat, as they have down many times in the past. For the near term they remain a threat to both inflation control and economic growth.

Despite higher inflation, retail sales showed unexpected strength in September. Retail sales grew 0.7%, despite expectations of a small decline. Sporting goods stores revered a string of declines, rising 37% and apparel sales contributed a 1.1% increase. Some of the increase in sales did come from higher prices. The auto industry surprised on the upside, with a 0.5% advance. Sales excluding autos rose 0.8% and excluding autos and gas were up 0.6%. Spending shifted to goods from services over the course of the pandemic, straining supply chains. Spending is shifting back to services but the resurgence in COVID infections did slow spending in sectors like dining and travel. Economists believe that consumer spending slowed significantly in the third quarter after the robust 12% advance in the second quarter, as a rise in infections and the stimulus benefits faded. Consumer spending is projected to have only increased 2.0% in the third quarter. The consumer still looks solid, but rising prices are a concern, especially energy prices, which have the power to curb overall spending and reduce economic activity

This week, housing takes center stage along with industrial production and the leading economic indicators.

Latest Data

The U.S. Economy:

The NFIB small business optimism index fell 2 points to 99.1 in September, a six-month low, as firms say they are growing frustrated by shortages of supplies and skilled labor that are hampering sales. A record 51% of small business owners reported job openings they could not fill, up one point from August. A net 42% of small business owners reported raising compensation, up one point from August and a 48-year record. A net 30% of owners plan to raise compensation in the next three months, up four points from August and a record high reading. Over 35% of owners report supply chain disruptions had a significant impact on their business. Another 32% report a moderate impact and 21% reported a mild impact. Fifty-three percent of owners reported capital outlays in the next three months, down two points from August and historically a weak reading. The report does not bode well for the economy. Both large and small companies are having trouble finding labor and difficulties in finding needed inputs due to disruptions in the supply chains.

U.S. consumer prices increased solidly in September, largely driven by food and energy products. The consumer price index rose 0.4% in September after climbing 0.3% in August. The CPI was up 5.4% on a year-ago basis, following a 5.3% increase in August. The indexes for food and shelter rose in September and together contributed to more than half of the monthly increase. The index for food rose 0.9% and energy 1.3%. Excluding food and energy, the CPI rose 0.2%, following a 0.1% increase in August. August was the smallest increase in six months. The core index was up 4.0% in the last 12 months. The energy index rose 24.8% from a year earlier and food is up 4.6%. The fact that the core rate is cooling is good news for the Federal Reserve, although high energy prices and rising wages are a fuel for inflation. The September report will not likely change the Fed’s schedule in starting to reduce its bond buying program in November, or December. Inflation should start to moderate early next year. If not, the central bank may have to tighten monetary policy earlier than currently projected, which is though to be late in 2022.

Producer prices for final demand increased 0.5% on a seasonal adjusted basis in September, following a 0.7% advance in August and a 1.0% increase in July. On an unadjusted basis. The final demand index was up 8.6% in September from a year earlier, the highest reading since the 12-month data was first calculated in 2010. Nearly 80% of the September PPI index can be traced to a 1.3% increase in final demand goods. The services index moved up 0.2%. Prices for final demand less foods, energy and trade services moved up 0.1% in September, after a 0.3% advance in August. The core index was up 5.9% in the last 12-months. In September, 40% of the advance in goods PPI can be traced to a 2.8% jump in energy prices. Over two-thirds of the increase in services can be traced to margins for fuels and lubricants. September marked the weakest advance in the PPI index since December 2020 and seems to suggest that inflation is moderating and more dependent on energy. Although there is still pressure on the Fed to contain price increases, the report does suggest that some of the inflationary push is moderating and may be transitory in nature.

Retail sales increased a better than expected 0.7% in September, up 13.9% from a year earlier. In addition, sales for August were revised upward to 0.9% instead of the 0.7% previously reported. Some of the increase in sales did come from higher prices. The auto industry surprised on the upside, with a 0.5% advance. Sales excluding autos rose 0.8% and excluding autos and gas were up 0.6%. Growth was led by a 3.7% advance in sporting goods stores, general merchandise stores and food and beverage sales. Building material stores saw a 0.1% advance. Losers were electronic and appliance stores and health and beauty stores. Spending shifted to goods from services over the course of the pandemic, straining supply chains. Spending is shifting back to services but the resurgence in COVID infections did slow spending in sectors like dining and travel. Economists believe that consumer spending slowed significantly in the third quarter after the robust 12% advance in the second quarter, as a rise in infections and the stimulus benefits faded. Consumer spending is projected to have only increased 2.0% in the third quarter. Pricing is an issue, with sales at gasoline stations up 38.2% from a year earlier. Still, the American consumer spears to be rock solid, which bodes well for future spending.

Business inventories rose 0.6% in August and were up 7.4% from August 2020. Retail inventories increased 0.1% in August, following a 0.4% gain in July. Retail inventories excluding autos, rose 0.6% in August. Wholesale inventories advanced 1.2% in August and manufacturing stocks rose 0.6%. Business sales dipped 0.1% in August after increasing 0.5% in July. The inventory-to-sales ratio rose to 1.26 months in August, up from 1.25 in July. The I/S ratio was 1.35 in August 2020. Business inventories were depleted in the first half of the year, but shortages and supply chain bottlenecks, plus congestion at Chinese and U.S. ports are making it difficult to rebuild stocks.

Important Data Releases This Week

The September industrial production report will be released on Monday, October 18 at 9:15 AM. In August, industrial production continued to push ahead despite disruptions from Hurricane Oda and supply chain disruptions. Total IP rose 0.4% in August. Manufacturing expanded despite a sharp drop in oil and gas production that closed many petroleum products plants. We expect the linger effects of the hurricane to still have effects in September, slowing total IP to a 0.2% increase. That said, most manufacturing facilities are seeing strong demand, restrained by supply shortages and lack of labor. The retail sales report shows that consumer demand is still quite strong.

The September housing starts report will be released on Tuesday, October 19 at 8:30 AM. During August, housing starts rose 3.9% to a robust 1.615 million units. All the increase came from the multifamily sector. Single-family starts slipped for a second straight month but remain at a high level of activity. Lumber prices have retreated significantly this summer and builders think, they can sell all the houses they can build. We think starts will come in at a 1.610 million level.

The September existing home sales report will be released at 10:00 AM. Existing home sales have moderated in recent months from the frenzy of much of 2020 and early 2021. The slowdown is in part due to the low inventory levels. We think sales will remain solid for September.  and prices should moderate over the next couple of years. We look for a jump to roughly 6.0 million for September.

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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.