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.
Global stocks were mixed on Friday, capping the last full trading week of the year, with investors still on edge over a Brexit trade deal and the U.S. stimulus package. The EU warned that there were just hours left to strike a deal, undermining British hopes as prospects of trade tariffs in the New Year loomed. The EU-UK talks are likely to go right up to the wire, as neither side wants to be seen, as giving in too much to the other side. MSCI’s broadest index of Asia-Pacific shares outside of japan dropped 0.4% on Friday, while Japan’s Nikkei dipped 0.2%. Oil climbed to a nine-month high before easing in Asia. Brent futures traded at $51.34, up 2.7% for the week. Overall, global equities still remain upbeat among investors as vaccine news suggests that global growth will accelerate as the virus fades.
U.S. stocks ended lower on Friday, pulled down by uncertainty over the stimulus deal, while Tesla shares jumped in heavy trading in anticipation of being included in the S&P 500 in the coming week. All three major indexes hit record highs before retreating. The U.S. Congress risked blowing a midnight deadline to keep the government open, but it does appear a deal will be passed over the weekend that will likely lift stocks in the coming week. For the week, the S&P was up 1.3%, the Dow was up 0.4% and the Nasdaq gained 3.1%. Some analysts say the markets are over-extended considering the economy’s slow progress expected over the next few months. Other see further gains as the virus be largely contained over the course of 2021.
The week marked the first U.S. COVID vaccinations and the imminent rollout of a second vaccine. However, the resurgence of the virus further showed why a second wave of stimulus is needed to ensure the economic recovery. The highest number of people since September filed an initial claim for unemployment last week. A total of 20.6 million people continue to collect some form of unemployment insurance, with 14 million on assistance from a temporary program. It does appear a second stimulus package will be passed that will support spending at a critical time. Retail sales fell a larger than expected 1.1% in November and October was revised to a 0.1% loss. The increase in infections is affecting spending. The year-over-year outlook for holiday spending still looks decent. However, spending is at risk over the next few months.
The increase in spending for goods has benefited manufacturing, which advanced 0.8% in November. The next few months may be rough of the virus slows consumer spending on durables. We still expect production to turn a decent year, although spending will shift to services. Business investment on equipment and a brighter global outlook will pick up the load of lifting industrial output.
The near-term outlook for the economy will depend on the virus. The country is taking a step back, with additional restrictions, rising unemployment benefit claims and slower spending. Since vaccinations will take time to reach the general public, there are downside risks near term. Over, the course of 2021, the economic picture will brighten. The future looks bright, but we may see a few rough months before the sky starts to clear.
Next week, we get a look at the Chicago National Activity index, a real Q3 GDP update, personal income and outlays, durable goods and existing home sales.
The U.S. Economy:
U.S. industrial production increased 0.4% in November, following a revised 0.9% increase in October. Manufacturing output increased 0.8%, following a 1.1% advance in October. The gain was led by a 5.3% increase in auto output. Excluding motor vehicles and parts, manufacturing rose 0.4%. Mining production gained 2.3% after falling 0.7% in October. Warmer-than-normal weather contributed to a 4.3% drop in utility output. Industrial production is making progress but still remain below pre-pandemic levels. After falling 16.5% between February and April, the level of the index is about 5% below its pre=pandemic reading. Manufacturing remains 3.8% below its pre-pandemic peak. Durable goods output rose 1.5% in November. In addition to the auto sector, there were sizable increases for primary metals, computers and electronics, aerospace and miscellaneous transportation equipment. Nondurable manufacturing edged up 0.1%. The outlook for the industrial sector is modestly positive. The introduction of a vaccine is good news but is not likely to have an immediate impact on output as it will take months for the general population to receive the medicine. Downside risks are mainly near-term as COVID infections and restrictions are increasing. Still, the corner is being turned to a return to a pre-pandemic world.
Retail sales fell a larger than expected 1.1% in November, after falling a revised 0.1% in October. Sales grew 1.7% in September. Sales remained an impressive 4.1% above their year ago level and 3.6% above February. Sales fell across a broad spectrum of segments, including apparel, restaurants, electronics and appliance stores and gasoline stations. Among the few segments posting healthy growth were grocery stores and building supply shops. Growth in the non-store sales weakened following Prime Day in October. Total sales year-to-date were up 5.2% from a year ago. Excluding autos and gas, retail sales slid 0.8% in November. The report suggests that sales are being impacted by the increased levels of COVID infections and the restrictions imposed by many states to curtail the virus. It was the biggest decline since the start of the pandemic. The release of a vaccine is good news, but it will take time to reach the general population. In the meantime, a weakened stimulus package will help but progress against the virus will determine sales activity in coming months, which may turn out to be tough.
Business inventories increased solidly in October, suggesting an inventory build could help production in coming months. Business inventories rose 0.7% in October after a 0.8% increase in September. Retail inventories rose 0.9% in October, following a 1.6% advance in September. Motor vehicle inventories increased 1.0% for the month. Retail inventories, excluding the auto sector, increased 0.8% for the month. Wholesale inventories jumped 1.1% in October. Manufacturing inventories rose 0.2%. Business sales increased 0.9% in October. The inventory-to-sales ratio fell to 1.31, down from 1.32 in September. The rise in inventories is good for production and the low I/S ratio suggests greater need for future output. However, the fall in retail sales is worrisome. If demand falls, production will have to be adjusted. At the present moment, inventories and I/S ratios are low, but if sales falter, production will slow.
Housing starts expanded in November, rising 1.2% to a seasonal adjusted annual pace of 1.547 million units, up 12.8% from a year earlier. Single-family starts grew 0.4% to 1.186 million units, the highest level since April 2007. Multi-unit starts rose to 352,000. Building permits increased by 6.2% to 1.639 million, up 8.5% from a year earlier. Single-family permits rose 1.3% to 1.143 million units. Multi-family permits rose to 441,000 in November. Starts increased in all four census regions, led by a 12.9% rise in the Northeast. The housing industry is being fed by record low interest rates and a movement towards more living space. Future activity looks promising but the rise in COVID infections may slow activity. Mortgage applications have moderated recently, suggesting a few cooler months may be following. For 2021, this sector of the economy looks promising, but may slow its expansion from the red-hot pace of 2020.
The euro-zone’s economy exceeded expectations this month, although it contracted slightly, as a second wave of coronavirus infections and renewed lockdowns has had less of an economic impact earlier in the year. HIS Markit’s composite PMI increased to 49.9 in December from November’s 45.3, just shy of the 50-mark separating growth from contraction. The manufacturing PMI jumped to 55.5 from 53.8, its highest since May 2018. The output index rose to 56.6 from 55.3. Backlogs rose to 56.2 from 54.3, the highest in nearly three years. The positive news on the introduction of vaccines has fueled optimism. The composite-future output index jumped to 63.8 from 60.4. Although the future looks brighter, the short-term outlook is clouded with risks.
Important Data Releases This Week
The November Chicago Fed National Activity Index will be released on Monday, December 21 at 8:30 AM. The index has returned to normal swings after the sharp decreases and increases earlier in the year. The index has been flattening as COVID infections have increased and restrictions are slowing activity. The index stood at 0.83 in October and should track near 0.85 for November.
The November existing home sales report will be released on Tuesday, December 22 at 10:00 AM. Home sales were on a hot streak in October, hitting a 6.85-million-unit pace. A mild step back is projected for November at 6.78 million.
The November durable report will be released on Wednesday, December 23 at 8:30 AM. Durable goods orders continue to surprise on the upside amid a factory sector that has remained on track despite the increase in COVID infections. We look for a 0.8% rise for November, a bit smaller than the 1.3% rise recorded for October.
The November personal income and outlays report will be released on Wednesday, December 23 at 8:30 AM. November seems to be the month when the rise in COVID infections began to slow the economy. Incomes has slowed hurt by the ending of the first stimulus package. Spending has held up, especially on consumer durables. We project incomes to fall 0.2% for November and spending to rise 0.1%.
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