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.
The dollar looked poised to finish the best weekly gain of the year and equities headed for the best month this year, as investors weigh the prospects for tax cuts in the world’s largest economy. Trump’s tax plan, which still needs approval from Congress, currently lacks detail, leaving investors guessing which parts of the package will win passage in Congress. The chances of higher interest rates at the end of the year have increased to 65%, driving equities higher and taken money out of gold, which is on track for the worst month this year. The S&P Index, the Nasdaq Composite Index and the Russell 2000 all set records on Friday. Treasuries slumped when word leaked out that Treasury Secretary Steven Mnuchin met with former Fed Governor Kevin Warsh to discuss the role of Fed chair. Financial shares, which would stand to gain on Warsh’s views on deregulation helped spearhead the market’s gains. Other investors said Warsh’s nomination would not bring confidence to the Fed and expect equities to fall if he is announced.
Meantime, data out of Europe underscored the region’s economic progress. German unemployment fell to a record low in September providing encouragement for the European Central Bank as it contemplates reducing asset purchase in coming months. The Stoxx Europe 600 ended the quarter up 1.9%. The MCSI All-Country Index increased 0.1% on Friday for an eleventh straight advance.
Housing data kicked off a relatively light week for economic data. New home sales fell 3.4% to a 560,000 annualized pace in August. The Houston metro area accounts for about 5% of new home sales, providing an indication of the magnitude of the hurricane-related disruptions we will see in economic reports for both August and September. Consumer confidence was only dinged by hurricane effects, falling 0.6 points, according to the conference Board. Durable goods orders were the only bright spot in economic activity this week, rising 1.7%, helped by rising aircraft orders. New orders for core capital goods orders increased 0.9%, a good sign for business investment plans going forward.
The economy expanded a bit faster in the second quarter than previously estimated, rising at a 3.1% annual pace. Economic growth in the second quarter was the strongest since the first quarter of 2015, but followed a 1.2% increase in the first quarter. Momentum likely slowed the third quarter, in part due to the impact of the hurricanes Irma and Harvey, which probably reduced growth by half-a-percent. Rebuilding efforts are expected to boost GDP growth in the final quarter and into 2018. Hurricane Harvey was blamed for the weakness in retail sales, industrial production and weaker home-building in the August reports. Hurricane Irma will have an effect on September data. The economy’s growth rate for Q3 might dip below the trend 2.5% rate because of the hurricanes, but is likely to gain that ground back. The economy remains on solid ground for the near-term, but does face challenges in the long-term as interest rates rise and central banks withdraw stimulus.
Mr. Trump proposed the biggest tax overhaul in three decades including reducing the corporate tax rate to 20% and implementing a new 25% tax rate for pass-through businesses such as partnerships to boost the economy. The plan was short on details on how the tax cuts, which would cost about $1.5 trillion over a decade, would be paid for without raising the budget deficit. That sets up a situation where it would be difficult to pass as it is.
Next week will be relatively heavy for economic data and reports will reflect the disruption of the hurricanes. Construction spending is expected to post a small gain and the ISM manufacturing index will reflect a stronger industrial sector. Vehicle sales may have rebounded following Hurricane Harvey’s impact at the end of August. Employment will come in weak, likely near 100,000, and was also affected by hurricanes. Geopolitical tensions remain on the radar, with tensions growing between the U.S. and North Korea. There could be an economic impact if confidence begins to waver. So far, business and consumer confidence has held up well, despite tensions and brinkmanship emanating out of Washington.
The U.S. Economy:
Consumer confidence edged down in September, but remains solid. The Conference Board’s index of consumer sentiment fell from 120.4 in August to 119.8 in September. The index of current conditions fell from 148.4 to 146.1, while the expectations index rose from 101.7 to 102.2. The recent hurricanes have created some uncertainty and likely helped lower the index. Rebuilding efforts will help offset the decline in economic activity ad help shore up confidence. Economic data in August came in weaker than expected and September’s reports also will show some impact from the storms. Generally, the rebuilding from natural disasters offsets the losses, but that could take several quarters.
The pace of U.S. economic activity slowed in August. The Chicago Fed National Activity index slipped to -0.31 from 0.03 in July. Two out of four broad categories contributed to the decline. The contribution of production-related indicators dropped to -0.36 from 0.03. Employment-related indicators contributed 0.05 to the index, compared to 0.09 the previous month. The 3-month moving average moved down to -0.04, compared to a neutral 0.00 reading the month before. Some of the weakness in consumption can be attributed to Hurricane Harvey, which hit in the last week of August. The flood will be felt for months in the utility sector. The hurricane hurt auto sales in August, although there should be a pick-up in coming months. The hurricanes will have an impact on September sales and production, before rebuilding efforts start to kick in.
Sales of new homes slipped in August, falling 3.4% m/m and was also down 1.2% from a year earlier. Unlike the existing hoe market, the supply of homes does not appear to be a binding restraint. The total of new homes has been increasing steadily over the past year and the I/S ratio is above that for the existing home market. Sales fell to an annual pace of 560,000 in August. With the market starting to slacken, the median new house price also fell to $302,059, down 7.5% in August, but still up 0.5% from a year earlier. Hurricane Harvey had a hand in slowing August sales, but the sales pace likely would have fell anyway. The industry appears to have slowed just as the supply is increasing. The market for existing homes is still tight.
Pending home sales declined 2.6% in August, giving back all its gains for the year and falling back to early-2016 level. The index fell to 106.3 in August, down 2.6% from a year earlier. Aside from temporary weather-related disruptions to home buying in the South, pending home sales have been hurt by rising and persistent affordability issues in certain locations. Exceeding tight inventories have put upward pressure on prices, in turn preventing may first time homeowners from buying a home. Greater wage growth will help the affordability issues. Tighter monetary policy and higher interest rates will present greater headwinds to home sales in coming months.
New orders for durable goods increased 1.7% in August, larger than expected. August marked the second increase in orders this summer. Total orders are up 5% higher than a year earlier. Excluding transportation, orders rose 0.2% in August and are up 5.9% y/y. Core capital goods orders rose 0.9% excluding civilian aircraft and shipments rose 0.7%. Autos and parts orders rose 1.5%, but the road ahead for autos is soft. Among manufacturing industries, orders were generally positive. Orders for electrical equipment lost 0.3%, but orders for computer and electronic products increased 0.7%. Orders for primary metals were up 1.7% are up 11.9% from a year earlier. New orders for machinery advanced 11%. Fundamentals for business investment remain solid. Production of core capital goods is trending in the right direction. There are some risks as the lack of action in Washington to pass any legislation related to stimulus and lower taxes for businesses could undermine confidence and affect investment decisions.
Personal income rose 0.2% in August, following a downwardly revised 0.3% advance in July. Meantime, personal spending fell 0.1% in the same month. It was the first decline in since January. There is little doubt that Hurricane Harvey had a hand in the lower spending and income reports. Looking through the hurricanes, spending growth is growing at a pace that modestly exceeds GDP growth. Growth is averaging between2.5% and 3% annual rate. Personal income grew 3.2% in 2016, but that wasn’t as fast as in 2015. The share of income going to the top 5% hit a record high in 2016 of 22.6%. The bottom quintile fell to 3.1%, a record low. The middle quintile took in 14.2% of income, also a record low. Inflation remains weak, with the PCE deflator increasing just 0.2% in August, up 1.4% from a year earlier. The core PCE was up just 1.3% y/y. The weak readings won’t hinder the Fed, which is expected to raise rates one more time this year.
China’s manufacturing activity grew at the fastest pace since 2012 in September, easing worries of a slowdown before a key political meeting next month. The official PMI rose to 52.4 in September. Production, new orders and output prices all improved to the highest level in a year. It marked the 14th consecutive month of expansion and come ahead of the Communist Party Congress in mid-October. Indexes for raw materials including paper, wood processing and furniture and Chemicals were all above 75, indicating large price increases. Output prices rose at a slower pace, indicating lower profit margins further along the supply chain. A separate PMI for steel fell to 53.7 in September, down from 57.2 in August, as that industry faces production restrictions aimed at reducing air pollution in the winter. The Caixin/Markit PMI fell to 51 in September from 51.6 in August, as new export orders growth slipped. The S&P recently downgraded China’s sovereign credit rating, saying the government’s deleveraging drive has progressed slower than expected, leading to higher economic and financial risks.
Important Data Releases This Week
August new home sales will be released on Tuesday, September 26 at 10:00 AM EDT. New home sales fell 9.4% to 571,000 in July and we look for an increase to 590,000 in August. A jump in prices slowed July sales, so a small bounce-back is expected.
August ISM manufacturing index will be released on Monday, October 2 at 10:00 AM EDT. Things are looking up for manufacturing. The ISM manufacturing index increased from 56.3 in July to 58.8 in August and we expect the index to hold on to the bulk of that increase. In August, new orders remained above the 60 mark for the third consecutive monthly increase and production rose from 60.6 to 61. We expect a slight slippage in the index to a still lofty 58.2.
August construction spending will be released on Monday, October 2 at 10:00 AM EDT. Construction spending should resume its positive trend, rising 0.3% in August after falling 0.6% in July. Public spending was weak in July and the multifamily sector held back the residential component. The August report should return to the normal weak but positive trend.
September vehicle sales will be released on Tuesday, October 3 at 12:00 AM EDT. We expect sales to increase from 16.1 million in August to 16.8 million in September. Sales will get a boost in August-September as consumers replace the vehicles lost in the hurricanes. Following the artificial boost, vehicle sales will resume their long-term trend of roughly 16.6 million vehicles.
May factory orders will be released on Wednesday, August 3 at 10:00 AM EDT. We look for factory orders to rise 2.8%. The advance durable goods report showed a strong 6.5% jump. Orders should advance but the nondurable sector won’t show that much strength. Core capital goods orders will be unchanged.
August ISM non-manufacturing index will be released on Wednesday, October 4 at 10:00 AM EDT. Service sentiment has been doing well over the last few months. Confidence is projected increased from 55.3 in August to 56 in September. Consumer spending is holding up and prospects in the service sector are doing well.
August international trade will be released on Thursday, October 5 at 8:30 AM EDT. We project the trade deficit to narrow from $43.7 billion in July to $42.4 billion in August. Already released goods data showed goods exports increasing 0.2% and imports slipped 0.3% during the month. A slightly weaker dollar should help exports going forward.
April employment will be released on Friday, October 6 at 8:30 AM EDT. We look for employment to rise by 100,000, slowed down by the hurricane. The storms will also slow employment growth in September, but rebuilding will add to jobs in coming months.