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.
Wall Street scaled new highs on Friday, with the S&P closing up for a seventh straight day, after jobs data showed robust hiring but still persistent weakness in the labor market that will keep the Federal Reserve from raising interest rates anytime soon. The Dow Jones Industrial Average rose 152.82 points, or 0.44% to 34,786.35, the S&P 500 gained 32.4 points to 4,352.34 and the Nasdaq Composite added 116.95 points, or 0.81% to 14,639.33. For the week, the S&P gained 1.7%. the Dow rose 1.0% and the Nasdaq gained 1.9%. The Labor Department reported that nonfarm payrolls increased by 850,000 jobs last month but remains 6.8 million below its peak in February 2020. The better-than-expected jobs total was a tentative sign that the labor shortage that is overhanging the U.S. economy is starting to ease but was not enough to force the Fed to raise rates. Focus will shift in the upcoming week towards second quarter earnings and progress on Joe Biden’s infrastructure bill that could help the equity market keep on the momentum.
It was a full week for economic data. The ISM manufacturing index fell 0.6 of a percentage point to 60.6 in June. The index still reflects strong manufacturing and economic growth. New orders fell 1 percentage point to 66 in June. The production index increased 2.3 percentage points to 60.8. The price index increased by 4.1 percentage points to 92.1, the highest level since July 1979. The manufacturing sector continues to struggle to meet increasing levels of demand. There are record long lead times for raw materials and shortages of critical basis materials. The sharp rise in prices are hurting all industries, as well as difficulties in transporting products. Pricing is an issue but with stronger production, some relief may be in sight. Several industrial commodity futures have retreated. This suggests that some relief in pricing may be coming. The factory orders report mirrored the ISM survey. Factory orders surged 1.7% in May after slipping 0.1% in April. Orders were up 17.2% on a year-over-year basis. Core capital goods orders edged up 0.1% in May following a 0.1% decline for April. Factories are struggling to keep up due to strong demand and fractured supply chains. Companies are struggling to keep up with strong demand. Still, production is increasing and employment is growing. The supply chain and labor problems are expected to slowly ease in coming months.
U.S. new vehicle sales fell sharply in June, falling to a seasonal adjusted annualized rate of 15.4 million. It was the lowest rate in nearly a year. Supply constraints due to a global semiconductor were a large factor in June’s falloff in sales, where inventories are low. With strong employment growth and rising wages, vehicle sales should still turn in some decent numbers for the remainder of the year. Total nonfarm payroll employment rose by 850,000 in June. The unemployment rate was little changed at 5.9% and number of unemployed people was little changed at 9.5 million. Average hourly earnings rose by 10 cents to $30.40 an hour. Wages are rising and companies need labor, all good signs for the American economy. This week will be light on economic data. We get a look at the ISM services index, Jolts data, FMOC minutes and wholesale inventories.
The U.S. Economy:
Construction spending fell 0.3% in May to $1.5 billion. In the first five months of the year, construction spending was up 4.6% from the same time period last year. Private construction also fell 0.3% in May. Residential construction spending increased 0.2%, while nonresidential construction spending fell 1.1% in May. Residential construction spending was up 28.2% from a year earlier, while nonresidential construction spending was down 7.1% y/y. In the nonresidential sector, office construction fell 2.9% in May, down 23.3% from a year earlier. Amusement and recreation construction spending decreased 0.1% in May but was off 7.5% from a year ago. Public construction slipped 0.2% in May, down 8.7% from a year earlier. Highway and street construction spending increased 1.4% in May but was down 4.2% from a year earlier. Residential construction continues to make modest advances. The nonresidential side continues to be weak. The public side is losing ground but may see some gains if the infrastructure bill passes through Congress.
The ISM manufacturing index fell 0.6 of a percentage point to 60.6 in June. The index still reflects strong manufacturing and economic growth. All six of the biggest manufacturing industries increased in June. New orders fell 1 percentage point to 66 in June, still a strong reading. 15 out of 18 industries reported higher orders in June. The production index increased 2.3 percentage points to 60.8 with 14 industries reported stronger production. Lack of labor and shortages of raw materials are still constraining production. The employment index fell 1 percentage point to 49.9, ending a six-month series of gains. The supplier delivery index fell 3.7 percentage points to 75.1 still indicating slower deliveries. For perspective, the record of the series was 75.6 in April 1979 and the June reading has been exceeded only three times. Inventories increased 0.3 percentage point to 51.1, with 8 industries reporting higher inventories. The price index increased by 4.1 percentage points to 92.1, the highest level since July 1979. All 18 industries reported higher prices. Backlogs fell 6.1 percentage points to 64.5. 12 industries reported higher backlogs in June. New export orders increased 0.8 percentage point to 56.2 and imports rose 7 percentage points to 61.
The manufacturing sector continues to struggle to meet increasing levels of demand. There are record long lead times for raw materials and shortages of critical basis materials. The sharp rise in prices are hurting all industries, as well as difficulties in transporting products. Optimism remains high, with 16 positive comments from the survey for one cautious comment. Comments from industry executives say that electronic components are by far the biggest challenge to finding inputs. Some industries report production levels at 100%. Oil prices continue to rise. Some customers are placing orders in the fourth quarter and into 2022, with strong confidence of their markets. Although prices continue to rise, a number of commodity prices have fallen recently, and this should take some pressure off of price. The near-term outlook for manufacturing remains very positive.
Total nonfarm payroll employment rose by 850,000 in June. The unemployment rate was little changed at 5.9% and number of unemployed people was little changed at 9.5 million. Leisure and hospitality jobs increased by 343,000 in June. About half the increase was in food services and drinking places (+194,000). Employment in leisure and hospitality is still down by 2.2 million, or 12.9% from its level in February 2020. Employment rose by 155,000 in local government education and 39,000 in private education. Professional and business services rose by 72,000 but is still down by 633,000 from February 2020. Manufacturing changed little by adding 15,000. Retail trade added 67,000 jobs in June. Average hourly earnings rose by 10 cents to $30.40 an hour. The labor participation rate was unchanged at 61.6%. The gain in employment was good news, although one-month is not a trend. COVID-19 disrupted the lives of millions of workers and the recovery will take some time. Still, the levels of vaccinations in the U.S. are positive. Wages are rising and companies need labor, all good signs for the American economy. Decent employment growth can be expected although some volatility can be expected in the summer months.
U.S. new vehicle sales took a pounding in June, falling to a seasonal adjusted annualized rate of 15.4 million, down 9.8% m/m. It was the lowest rate in nearly a year. They did remain 18% above the pandemic-affected sales pace of June 2020. Sales of both cars and light trucks fell in June. Seasonal adjusted annualized unit sales of light trucks fell 9.6% m/m and were 4.3% below June 2019. Passenger car sales fell 10.6% from May. Car sales were up 23.2% y/y but were down 27% below June 2019. Supply constraints due to a global semiconductor were a large factor in June’s falloff in sales, where inventories are low. Consumers also benefitted from the stimulus checks earlier in the year and the fading effects also affected sales for June. With rising wages and strong employment growth, sales should turn in some decent numbers for the remainder of the year. However, the low numbers of inventories in models the consumer wants to buy because of supply constraints is a cloud to overcome.
The nominal trade deficit widened in May to $71.2 billion, up from April’s $68.9 million. Nominal exports increased 0.6% in May after rising 1% in April. Imports rose 1.3% in May, reversing most of the 1.4% decline in April. The goods deficit widened from $98.8 billion in April to $101.8 billion. The trade deficit should narrow over the next year as U.S. consumer spending shifts from goods to services and the fiscal stimulus fades. Global growth continues to increase, but the rise is uneven as the COVID virus is still affecting many countries and the rise of variants is causing renewed problems in other nations. New orders for manufactured goods rebounded sharply in May, while business spending on equipment remained solid, despite bottle necks in the supply chain. Factory orders surged 1.7% in May after slipping 0.1% in April. Orders were up 17.2% on a year-over-year basis. Shipments increased 0.7% following a 0.2% increase in April. Unfilled orders rose 0.8% following a 0.4% increase in April. The unfilled orders-to-shipments ratio was 6.95, up from 6.88 in April. Inventories rose 0.9% following a 0.5% increase for April. The inventories-to-shipments ratio was 1.49, unchanged form April. June’s orders were boosted by a 7.7% surge in transportation orders. Orders for electrical equipment, appliances and components rose 1.3%. Core capital goods orders edged up 0.1% in May following a 0.1% decline for April. Factories are struggling to keep up due to strong demand and fractured supply chains.
Important Data Releases This Week
The June ISM services report will be released on Tuesday, July 6 at 10:00 AM. The May ISM services index beat expectations and rose to a level of 64, another all-time high. Like, the manufacturing sector, the service sector have to contend with labor shortages, supply chain constraints and delivery problems. These problems will linger although we do see some easing in coming months. The index should come in at 63.9 for June.
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