When Infection Rate Falls and Consumer Spending will Bounce Back

By | September 13, 2021

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

Wall Street ended sharply lower on Friday as investor optimism faded after a strong inflation report, while Apple Inc. tumbled following an unfavorable court ruing related to its App store. Producer prices rose solidly in August, leading to the biggest annual gain in 11 years and indicating that high inflation is likely to persist as the pandemic pressures supply chains. Sentiment also took a hit from Cleveland Federal Reserve Bank President Loretta Mester’s comments that she would like the central bank to begin tapering purchases this year despite the weak jobs report. The Dow Jones Industrial Average fell 0.78% to close at 34,607.72 points, while the S&P 500 lost 0.77% to 4,458.58 and the Nasdaq Composite dropped 0.87% to 15,115.49. Apple’s shares dropped 3.3% after a judge struck down a core part of its App Store rules, benefiting app makers. It’s drop contributed more than any other stocks to the Nasdaq and S&P 500’s declines.

Last week was slow for economic data and suggested the same themes that have hampered the re-opening boom of the economy have persisted. Data from the Job Opening and Labor Turnover Survey (JOLTS) for July indicated that the labor market is tighter than other measurements, such as headline unemployment indicate. Job openings hit a new record high of 10.9 million, pushing the number of unemployed workers per job opening down to 0.78 from 0.93 in June. The quits rate was unchanged at 2.7%, above the peak of the pre-COVID cycle. This suggests that workers still feel the labor market is favorable enough they can quit their job and find new employment. However, the JOLTS report was for July, which is somewhat dated, given the evolution of the pandemic over the past two months. Initial jobless claims continue to trend down and despite slowing activity in COVID-affected sectors, employers are still holding on to their staff and layoffs continue to trend down toward their pre-pandemic level.

The PPI for final demand increased 0.7% in August, following a 1.0% advance in July. The fact that the measure slowed is good news, but inflationary pressures remain elevated. The final demand index was up 8.3% from a year earlier, the highest annual readding since August 2014. Prices for final demand less foods, energy and trade services oved up 0.3%, after a 0.9% jump in July. Final demand services PPI moved up 0.7% and two-third of the increase can be traced to final demand trade services, which rose 1.5%, a measure that tracks changes between wholesalers and retailer’s margins. Over 30% of the increase in final demand services can be traced to the index for health, beauty and optical goods retailing. Final demand goods PPI moved up 1.0%, after rising 0.6% in July. Foods were a big contributor. Prices of industrial chemicals, motor vehicles, meats and steel mill products moved up. On the other hand, the price of steel scrap decreased 3.7%. The good news is that inflation seems to be moderating. The bad news is that inflation remains elevated. Price pressures traced to supply chain problems remain intact and that inflationary pressure will remain a problem for over the next few quarters, although fading next year.

Data last week revealed thar consumer borrowing slowed in July after two record increases. Slower credit card spending jibes with other measures that suggest consumer spending slowed in July. The pandemic likely caused a slowdown in service spending, especially bars and restaurants. The number of new COVID cases did fall for the first time since early summer, but Labor Day have been a factor. We do think the infection rate will fall and consumer spending will bounce back. Price pressures do seem to persist and price pressures are watering down the impact of increased spending.

Next week will be busy on the economic front, with the CPI, industrial production and retail sales reports will be released.

Latest Data

The U.S. Economy:

The July JOLTS data underscored the challenges that employers are having facing filling positions. Job openings pushed higher in July reaching a new record for the series of 10.9 million, up 6.9%. This represented an addition of 749,000Hiring eased slightly to 6.67 million from 6.83 million up 4.5%. Thus, the gap between hires and new openings has widened. Separations increased to 5.79 million from 5.61 million. Over the past 12 months that ended in July, new hires have totaled 72.6 million and separations totaled 85.6 million, implying a net employment gain of over 7 million over the year. This comes on the latest payroll report that showed that nonfarm payrolls increased by only 235,000 in August, the smallest gain since January. The JOLTS report shows the ongoing surge in employment but that the tight labor market has put the largest strain on full economic liftoff post-pandemic. Meantime, the Federal Reserve’s Beige Book found that economic growth “downshifted slightly in August as a resurgence of COVID infections took a toll on dining, travel and tourism, Nevertheless, business activity is still being hit by inflation, worker shortages and supply bottlenecks.

Producer prices increased in August by slightly more than forecast as persistent supply chain disruptions squeeze production costs higher. The PPI for final demand increased 0.7% in August and was up 8.3% from a year earlier, a fresh series high. Excluding food and energy, the core index advanced 0.6% and was up 6.7% from August last year. Median forecasts called for a 0.6% increase for the month. The PPI for goods increased 1% after a 0.6% gain the previous month, while the cost of services rose 0.7%. A 1.5% increase in trade services, which measure changes in margins received by wholesalers and retailers, accounted for two-thirds of the broad increase in services. Food prices rose 2.9%Transportation and warehousing prices shot up 2.8%. Supply chain bottlenecks have persisted longer and more intensely than most analysts predicted at the beginning of the year. Widespread labor shortages have also boosted price pressures. The latest wave of COVID-19 infections, driven by the Delta variant, have disrupted production at factories in Southeast Asia, a key raw materials supplier for manufacturing in the United States. Although surveys by the Institute for Supply Management this month showed measures of prices paid by manufacturers fell significantly in August, they remain elevated. Factories and service suppliers are still struggling to secure labor and raw materials and face logistic delays.

U.S. wholesale accumulation slowed in July, lagging sales, and is now taking wholesalers the shortest time in seven years to clear selves. Wholesale inventories rose 0.6% in July, following a 1.2% advance in June. Wholesale inventories were up 11.5% from a year earlier. Business inventories were deleted in the first half of the year, but shortages and persistent supply chain bottlenecks because of the COVID pandemic and recent ports congestion in China are frustrating efforts to replenish stocks. Still, inventory rebuilding is expected to support economic growth in the second half of the year. Sales at wholesalers increased 2.0% in July, after accelerating 2.3% in June. At July’s sales pace, it would take wholesalers 1.20 months to clear shelves, the fewest since July 2014, from 1.22 in June.

Important Data Releases This Week

The August CPI report will be released on Tuesday, September 14 at 8:30 AM. The CPI report for July showed some signs of moderation. The headline and core index softened and the used car index leveled off. However, there was a bog gain for food and core goods, excluding autos suggested that inflation will not quietly go away. We project the headline index for August to advance 0.45 and the core index 0.2% for August. Until workers go back to work and the supply chain problem straightens out, higher inflation will linger.

The August industrial report will be released on Wednesday, September 15 at 9:15 AM. Last month showed a glimpse of what industrial production would be without supply shortages. Total IP advanced 1.3% in July and manufacturing advanced 0.9%. Manufacturing was boosted by a large 11.2% jump in auto-sector production. We look for a sifter 0.4% advance for total IP in August. The August retail sales report will be released on Thursday, September 16 at 8:30 AM. Rising COVID cases, fading fiscal support and ongoing supply chain issues are expected to dampen August retail sales. Last month’s 1.1% drop would have been worse except for service spending on food and drinking establishments. Vehicle sales are weak because of supply shortages and that will not change soon. Meantime, spending will continue to drift toward services and away from goods. Higher prices are not a help. We project August retail sales to fall 0.8%.

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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.