Vaccine is Close But Will be Awhile Before The Economy Starts to Feel a Reprieve

By | December 8, 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.


World shares held at record highs on Friday on hopes that the U.S. will get a second stimulus package. A bipartisan $908 billion coronavirus aid plan gained momentum in the U.S. Congress on Thursday as conservative lawmakers expressed their support. MSCI’s world share index ticked up 0.1% toward the previous day’s record high. It is set for a fifth straight week of gains, which have seen it surge 15%. Asian shares hit their own record high overnight. Europe then saw Britain’s FTSE 100 index reach a nine-month high on hoes of a Brexit deal by year’s end. There are still worries about the rising cases of COVID-19, despite the nearness of a vaccine. The next few months would be tough before the virus is conquered.

Wall Street main indexes rose to all-time highs on Friday, as data showing the slowest U.S. jobs growth in six months raised investors’ expectations for a new fiscal relief bill to help revive the coronavirus hit economy. The Labor Department’s employment report showed that nonfarm payrolls increased by 245,000 jobs in November, below expectations of 469,000 jobs and the slowest pace since the recovery started in May. The Dow Jones Industrial Average rose 248.74 points, or 0.83% to 30,218.26. the S&P 500 gained 32.40 points, or 0.88% to 3,699.12 and the Nasdaq Composite added 87.05 points, or 0.7% to 12,464.23.  

The latest spike in COVID infections is clearly evident in the latest releases of economic data. Consumers have begun to pull back from high-contact activities in late-October and early November. This affected restaurants, bars, entertainment venues and in-person shopping. Restaurant closings have picked up. The falloff in business activity will be more apparent in the December-January data, when the latest wave of COVID infections is likely to most heavily affect the economy. Still, the latest reports on manufacturing still poins to some momentum. The ISM manufacturing index fell 1.8 points to a still strong 57.5 in November. The ISM index is a diffusion index and measures the breadth of strength or weakness in the factory sector rather than magnitude. The forward-looking elements suggest that manufacturing should hold up even if the economy loses momentum over the next couple of months. While the new orders series of the ISM manufacturing fell slightly in November, it remains high at 65.1 and backlogs continue to trend higher. Export orders are improving and inventories of just about everything are low.

Most of the recent housing data shows strength. Home sales and single-family construction normally slow during the winter but are likely to slow less this year due to the shift of Americans from the North to the South and West, where weather is less of a factor. Mild fall weather allowed construction to continue longer this year. That said, pending home sales fell 1.1% in October and 2.0% in the prior month. Part of the reason are low inventories. Mortgage applications have moderated, hinting that the run-up in home sales and housing starts may be ready for slower growth, at least through the winter.

Reflecting the downshift in the economy amid the spike in COVID cases, the ISM services index backtracked from 56.6 in October toa still respectable 55.9. Business activity, new orders, backlogs and inventories retreated. Supplier deliveries slowed. Both of the ISM reports showed the difficulties caused by the coronavirus. It is hard to find workers when millions of school-aged children are at home. Factories are forced to work in a constrained environment to combat the virus. Workers have elected to stay at home with their kids and the disease has hurt the labor market. Education is under stress, as well as many service industries. It will take some time before Americans can return to normal. What changes the pandemic has produced in terms of stay-at-home workers and places of employment is hard to ascertain. There will be changes. Still, I do not think the willingness to travel will die. Humans have short historical memories. Like always, some things will change, and others will remain the same.

Nonfarm employment rose by a smaller-then-expected 245,000 jobs in November. The winding down of census jobs weighed on the headline increase. Government payrolls fell by 99,000 jobs. Employment in the blue-collar professions continue to rebound. Manufacturing and construction each added 27,000 jobs. Employment in trucking and warehousing added 145,000 jobs, much of that at courtiers and delivery firms. Part of that increase will come at the expense of brick and mortar retailers, who hired fewer workers for the holiday season. 

The next few months may be tough for some businesses and consumers. The weaker-than-expected labor report boosted chances for a second stimulus package. A vaccine is near but wrestling the disease will take a few months before the economy starts to feel a reprieve. Economic data may come in weaker than expected in December and January. Financial markets are on a wave of joy as the vaccine becomes a near-term thing. 2021 will be a year of changes. Business activity will likely start slow early in the year but rebound as the pandemic fades. Some of the sectors that are currently seeing strength will likely moderate. The service sector is likely to be a winner, as some sectors return to normal. The goods sector and housing may moderate. There will be changes from the pandemic. Combined with technology, many businesses may decide to not have a big office and many workers will stay at home. 

Next week, we get a look at JOLTS data, inflation and small business optimism. 

Latest Data

The U.S. Economy:

The ISM manufacturing index slipped from 59.3 in October to 57.5 in November. The details were generally weaker than in October as production, new orders and employment all dropped. The new orders index backtracked to 65.1 from 67.9. of the 18 industries, 15 reported growth in new orders. Production dropped from 63 to 60.8 and 14 industries reported growth in production. The employment index fell from 53.2 to 48.4. The index did dip below the 50 mark, back to contractionary territory but remains well above the 27.5 mark reading in April. The supplier deliveries index increased from 60.5 to 51.7, indicating slower deliveries. Transportation challenges and problems in labor markets are constraining production growth, the ISM said. The inventory index fell from 51.9 to 51.2. Inventories grew for a second time after three months of contraction. Supply chains are still struggling to meet production demand but did slow from October. The price index fell 65.5 to 65.4, indicating raw material costs continue to rise. New export orders were almost unchanged but new import orders fell from 58.1 to 55.1, indicating continued increases in U.S. factory demand but at a slower pace.

The ISM manufacturing index shows industrial activity continuing to recover. Members of the survey committee reported that companies and suppliers continue to operate in reconfigured factories, but absenteeism, short-term shutdowns to sanitize facilities and difficulties in returning and hiring workers are causing strains that will likely limit future production. Labor market difficulties are likely to persist until the coronavirus crisis ends. Reports from respondents are uneven. Primary metals report business is booming. Jet fuel consumption is down and hurting refiners. Furniture and related products report that sales are down 30% year-over-year, but production is going up. From the transportation sector the recent rise in COVID-19 cases are hurting Tier-1 and Tier-2 suppliers. Multiple suppliers mention hiring new people is a problem with the COVID-19 situation. Also, there is a problem with teaching new people to adapt to production line speed. 

Construction spending increased 1.3% in October to an annual rate of $1,438.5 billion. During the first ten months of the year, construction spending was up 4.3% from the same period a year ago. Private residential construction spending increased 2.9% m/m and was up 14.6% from a year earlier. Driving the residential sector has been construction spending on single-family homes, that rose 5.6% in October, up 13.3% from a year earlier. The multi-family sector rose 1.3% in October, up 18.4% year-over-year. Nonresidential construction spending was unchanged in October, down 3.7% year-over-year. Public construction spending rose 1.0% in October, up 3.7% from a year earlier. Low interest rates are powering the single-family market and will be a source of growth in the near-term. The rise in COVID-19 infections may affect activity in the near term. The expected delivery of a vaccine will help the market but may take some time to truly provide a boost. Nonresidential construction spending is being hurt by relatively low oil prices, the onslaught of non-store retailing and the COVID-19 pandemic. A vaccine will help nonresidential investment but at a slower pace.

U.S. auto sales came in at a seasonal adjusted annual rate of 15.55 million annualized units in November. Down from 16.21 million units in October and 17.09 million units a year earlier. The decrease is of some concern as auto sales were encouraging in the August-September period and seemed to be on an upward trend. The increase in COVID-19 infections likely placed downward pressure on demand. Interest rates are still low and are supporting demand. The introduction of a vaccine for the coronavirus will likely result in higher sales. However, it may take time for a vaccine to quell the virus enough to support consumer demand. The auto industry may see a few rough months ahead before better news surfaces. The slower pace of sales is not positive for future industrial output. Still, the November sales pace was nearly double the 8.58 million units marked in April, which was the lowest since December 1970.

The U.S. trade deficit widened more than expected in October and there was a sizable revision to September. The nominal trade deficit widened from $62.08 billion in September to $63.1 billion in October. Nominal exports were up 2.2% in October, compared to a 2.4% gain in September. Nominal imports increased 2.1% in October, after a 3.2% increase in September. Exports of goods increased by $3.7 billion to $126.3 billion in October, with decent increases in capital goods and industrial supplies. Imports of goods increased by $4.3 billion to $207.8 billion in October, with healthy increases of consumer goods, capital goods and industrial supplies. The outlook for trade calls for slow progress the next few months, as COVID-19 infections are increasing. As the vaccine is released, prospects look better but only at a modest pace. The new Biden administration will be more friendly to trade, but tensions with China will remain at high levels.

Factory orders increased $4.9 billion, or 1.0% to $480.8 billion in October. This followed a 1.3% increase in September. Shipments also increased for a sixth consecutive month, rising 1.0%, following a 0.5% rise in September. Durable goods orders increased 1.3% in October, following a 2.1% increase in September. The increase was led by transportation equipment, which rose 1.4%. New orders for nondurable goods increased 0.7% in October. Core capital goods orders increased 0.8%. Factory conditions are not immune to the rise in COVID-19 cases and the pace of recovery will likely be constrained. Auto sales have slowed in the last two months, as infections increase. However, a total shutdown of the country is not likely and the impact to this wave will be less. The vaccine will help manufacturing but we may see a few tough months.

The ISM services index fell to a still elevated 55.9 in November, down from 56.6 in October. The business activity index declined from 61.2 to 58. 14 industries reported an increase in business activity in November. New orders fell from 58.8 to 57.2, with 13 industries reporting growth in new orders. The employment index increased from 50.1 to 51.5. Statements from respondents included difficulties with finding qualified workers and troubles with people being quarantined ad having to overstaff due to high turnover rates. The supplier delivery index increased from 56.2 to 57, meaning slower deliveries. Inventories slipped from 53.1 to 49.3. Respondents reported firms preparing for more COVID-19 infections and restaurant sales flat from the previous month. The prices paid index increased from 63.9 to 66.1. Fifteen industries reported higher prices in November. New export orders fell from 53.7 to50.4 and imports increased from 52.8 to 55. Six industries reported an increase in new export orders and nine industries reported an increase in imports. 

The ISM services index tracked lower in November but was the sixth consecutive month of expansion. 14 industries reported growth in November. Respondents reported that requirements for dealing with COVID-19 are becoming more difficult. The rise in infections as made it difficult for education. Health care reported difficulties in securing PPE. Business activity is inconsistent. Remote working is affecting a lot of businesses. There is difficulty in obtaining equipment sch as I-Pads. Printers and PCs for stores. Some businesses reported a 30 to six day waiting period for some high-tech items. A vacine is near, but it will take time to distribute the medicine and infections are spiking. Likely, there will be a few rough months before the tide starts to turn. 

Payroll employment increased by a weaker than expected 245,000 in November, although the unemployment rate did fall to 6.7%. The improvement was caused by labor force departures. Weakness across industries was broad-based, with only transportation and warehousing getting a large boost thanks to holiday hiring. Government payrolls fell as expected as census hiring stopped. The good news of fewer new layoffs was offset by the continued increase in long-term unemployment. The weak report could spur Congress to finally pass a new stimulus bill. Private-payrolls increased by 344,000 in November. However, there were losses in retail and beverage establishments. With COVID-19 cases rising and policies being put in place to try and control the disease, hiring is slowing. Employment in the leisure and hospitality sector rose by 31,000 in November, after increasing by close to 300,000 the month before. Wages increased by a better-than-expected 0.3% in November. December is likely to be challenging. The difference between the establishment’s survey is telling different stories. The establishment’s report showed payrolls increased by 245,000, but the household survey reported employment reported a loss of 74,000. The two reports usually move in tandem but there is a marked difference now. A vaccine would help ease employment problems and a second stimulus check could provide some help. At 245K a month, it will be 3.3 years before we get back all the jobs lost early this year. 


China’s factory activity expanded at the fastest pace in more than three years in November, while the service sector hit a multi-year high, as the country’s economic recovery from the coronavirus pandemic picked up. China’s official manufacturing PMI rose to 52.1 in November, up from 51.4 in October. It was the highest PMI reading since September 2017. The rise in the November PMI, with broad improvements across the sub-components suggest the recovery momentum in the industrial sector has become more certain. The robust PMI points to solid fourth quarter growth, which is expected to quicken to 5.7%, up from 4.95 in the third quarter, an impressive turnaround from the deep contraction earlier this year. The index showed that new export orders stood at 51.5 in November, up from 51 in October. The services PMI rose to 56.4, the fastest pace since June 2012 and up from 56.2 in October. The labor market still faces difficulties, as employment in the service sector fell in November.

Important Data Releases This Week

The November NFIB small business optimism Index report will be released on Tuesday, December 7 at 6:00 AM. The pandemic has been hard on small businesses. Some businesses in the service sector like leisure and hospitality and travel have been hard hit but are only recovering slowly. The rise in coronavirus infections and the reestablishment of some restrictions has hurt small businesses. The topline index was unchanged last month. Only four of the ten components improved last month, the other six declined. The uncertainty index rose six points to 98, but that is normal in an election month. The biggest near-term headwind will be the rise in COVID infections. Longer term, a vaccine will improve prospects. The virus will likely cause the index back track from 104.0 to 102.

The November CPI report will be released on Thursday, December 10 at 10:00 AM. The CPI was unchanged during October and up 1.2% in the past 12 months. Price pressures continue to be modest, as overall demand for goods and services remain below pre-pandemic levels. Food prices rose 0.2% in the last report and energy rose only 0.1%. Looking forward, inflationary forces should move modestly forward as the economy gains strength, after the pandemic starts to fade. 

The November PPI report will be released on Friday, December 11 at 8:30 AM. The PPI rose 0.3% in the last report. The increase in industrial activity has resulted in some price increases for some industrial commodities. However, global demand s still weak, although recovering. This means the chances of a breakout of inflation for some time. The PPI is projected to rise 0.2% for November.

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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.