U.S. Businesses are Seeing a Severe Blow By the Suppressed Fall-off in Domestic and Global Demand

By | April 27, 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

Global stocks fell on Friday, spurred by delays on an agreement on details of the European Union’s stimulus package and doubts about progress in the development of drugs to treat COVID-19. MSCI’s All Country World Index, which tracks stocks across 49 countries, was down 0,5% on Friday, while it’s broadest index of Asia Pacific shares outside of Japan fell 0.9%. European stocks opened 1.4% down, with London’s FTSE 100 shedding 1.3% as data showed UK retail sales crashed in March. European Union leaders agreed on Thursday to build a trillion euros emergency fund to help recover from the coronavirus pandemic but left divisive details until the summer, disappointing investors.

Global equity indexes struggled on Friday as some U.S. states began opening businesses despite the approval of health experts. On Wall Street, stocks got afternoon lift from big-market techs Microsoft and Apple, which rose as much as 1.3% and 2.6%, respectively. The Dow Jones Industrial Average rose 260.01 points to 23,775.27, despite Boeing falling more than 5% on a report the plane-maker was planning to cut the 787 Dreamliner output by about half. The S&P added 38.94 points, or 1.4% to close at 2,836.74. For the week, the Dow fell 1.9% and the S&P 500 declined 1.3%.

Oil prices went negative for the first time in history last week as the evaporation of demand collided with a supply glut. In the past five weeks, 26.5 million people have filed for unemployment insurance, more than one out of seven workers. The flow of workers into the unemployment lines has slowed over the past three weeks, not surprising but the challenge will be the speed back to employment when businesses start to reopen. Congress passed its fourth major relief package, an additional $310 billion for the PPP. The Fed continues to do what it can, with its balance sheets rising an astounding $2.4 trillion in just about two months.

Capital spending plans clearly took a hit in March, with durable goods orders falling 14.4%. The weakness was centered in transportation but core capital goods orders, which fared surprisingly well in March, will fall markedly in the coming months. U.S. businesses are seeing a severe blow by the suppressed fall-off in domestic and global demand. In this environment of broken supply chains and depressed oil prices and tighter financial conditions, capital spending will take a big sharp decline in the coming months. As states start to reopen, the speed of the rebound will be clearly measured by the fall in unemployment. Under the loan forgiveness standards, the PPP is designed to put people back to work. Watching employment numbers will be a clear lens to the speed and strength of the rebound, or evidence the economy is still struggling.

Next week, we get a look at advance trade in goods, ending home sales, personal income and outlays, inflation, the ISM manufacturing index, construction spending and motor vehicle sales. 

Latest Data

The U.S. Economy:

The pace of economic activity plummeted in March as the effects of COVID-19 and the subsequent lockdowns throughout the country took hold. The Chicago Fed National Activity index fell to -4.19, the lowest reading sine the financial crisis and the third lowest on record, with the series going back to March 1967. Production and employment-related indicators contributed most of the decline, but all four categories made negative contributions and three out of four fell from their February levels. The three-month moving average fell to -1.47. Negative values indicate a slowing pace of activity and readings below -0.7 have been historically associated with recessions. Production-related indicators contributed -2.72 to the index, down From February’s 0.06 reading. The sales, orders and inventories contributed -0.05, compared to February’s -0.06 reading, the only positive contribution of the month. Employment-related indicators contributed -1.23, compared to 0.07 in February. Personal consumption contributed -0.19, down from -0.02 the preceding month. We do expect improvement in the index as the economy reopens. How quickly we improve is the key question going forward.

Existing home sales declined 8.5% in March, falling back to their lowest level since April 2019, but were still up 0.8% from their year-ago level. Sales of existing single-family homes totaled 4.74 million units at a seasonally adjusted annual rate, down from 5.16 million units in February, but up 1.3% from a year earlier. Sales of condo/co-op homes came in at a 530,000 annual-rate, down from 600,000 in February and down 3.6% from a year earlier. The market loosened because of an increase in listings but remains tight. Homes listed for sale totaled 1.5 million, up 2.7% from February but down 10.2% from a year earlier. The inventory-to-sales ratio for March came in at 3.4 months, up 0.4% from February, but down 0.4 months from a year earlier. Although mortgage rates are low, sales will come under considerable stress because of the jump in unemployment. It may take years to get the unemployment rate back to the low single-digits. Sales may not recover to pre-COVID-19 levels before 2022.

New home sales fell 15.4% in March to a 627,000 seasonal adjusted annual rate. The sharpest contractions were in the Northeast and the West, both containing epicenters for the COVID-19 outbreak in March. The number of new homes listed for sales increased in March, but with sales plunging, the inventory-to-sales ratio jumped from 5.2 to 6.4.The median price of a new home slipped from $330,100 to $321,400.Home sales for both new and existing homes will be a deep freeze until the lockdowns are lifted. As bad as March was, April is likely to be worse. Consumer fundamentals have sharply deteriorated, suggesting the road back for housing will be long.

The advance durable goods orders dropped 14.4% in March, snapping three consecutive monthly gains. The details were surprising. Motor vehicles and parts were down 18.4%, while nondefense aircraft plunged 295.7%. Orders of defense aircraft rose 63.7%. Excluding transportation, orders only fell 0.2%. Nondefense core capital goods orders were up 0.1%. Transportation orders fell 41% in March. Orders for computers and electronics slipped 0.2%. Total shipments declined 4.5% in March, following a 0.8% rise in February. The fact that core orders didn’t tank in March suggests that business investment held up, at least until the second week of March. Business investment is likely to be weak the remainder of the year and that will hurt productivity. New business formations have plunged in the last few weeks and will not help near term hiring. Orders for durable goods will not be good in April but should start to turn upwards as the economy reopens.

International:

European new car sales fell by 51.8% in March due to lockdowns imposed in the wake of the COVID-19 pandemic. Sales fell to 853,077 in the European Union, Britain and the European Free Trade Associations countries, according to the European Auto Industry Association (ACEA). Sales fell in all EU markets, hit particularly weak in Italy, where registrations fell 85.4%. Registrations fell by 37.7% in Germany, 72.2% in France and 69.3% in Spain. The decline came, as a majority of car dealerships in Europe were closed in the second half of March as a measure to control the virus.

Global economic activity ground to a halt in March, as government-imposed lockdowns due to the coronavirus pandemic. Services took a particularly heavy toll, recent surveys revealed. The outbreak, which has infected more than 2.6 million people and killed more than 180,000 globally, has also crippled manufacturing, shutting down factories and upended supply chains. In the eurozone, the HIS Flash Composite Purchasing Manager’s Index (PMI) fell to 13.5 for April, the lowest reading since the survey began in 1998. The index fell sharply in March and fell further in April. HIS Markit said the reading was consistent with the economy contracting 7.5% this quarter. Britain’s PMI fell to 12.9, suggesting that country will see a 13.1% contraction this quarter, the biggest quarterly drop since World War II. Japan’s services PMI fell to 22.8, the lowest reading since the series started in September 2007. The manufacturing PMI fell to43.7, the lowest since April 2007.  Australia’s services PMI fell to a record low of 19.6. The manufacturing PMI fell to 45.6 in April from 49.7 in March.

Important Data Releases This Week

The March advance trade in goods will be released on Monday, April 27 at 8:30 AM. The February deficit came in at $59.9 billion. A marked decrease in both imports and exports is expected for March.

March pending home sales will be released Wednesday, April 29 at 10:00 AM. Pending home sales advanced 2.4% in February but are likely to fall sharply in April.

March income and outlays will be released on Thursday, April 30 at 8:30 AM.  Personal income advanced 0.6% in February and spending rose 0.2%. We project income to fall 1.5% in March and spending to contract 5.0%.

The March PCE deflator will be released on Thursday, April 30 at 8:30 AM.  The core PCE deflator advanced 0.2% in February but will be unchanged in March.

The ISM manufacturing index will be released on Friday, May 1, at 10:00 AM. The manufacturing index fell only slightly in March to 49.1, lifted by a ump in suppler deliveries. New orders fell to 42.2, the fastest rate since 209. We expect the index to fall to fall to 36.9 for April, in line with the regional Fed surveys.

The March construction spending report will be released on Friday, May 1, at 10:00 AM. Construction spending contracted 1.3% in February but will fall 5% in April.

April motor vehicle sales will be released on Friday, May 1, at 4:30 PM. Auto sales fell at an annual rate of 11.4 million in March and will likely fall to 8 million in April.

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Category: Monday Morning Coffee

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.