Will Industrial Output Bounce Back in Coming Months?

By | April 30, 2019

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.


Coffee and Economic Review

Asian stocks rose moderately in quiet holiday trading on Good Friday as some markets were closed. Japan’s benchmark Nikkei 225 edged up 0.6% in early trading and the Shanghai Composite Index also recorded a 0.6% increase. Major U.S stock indexes capped the holiday shortened week with slight gains, although the marginal upward moves were not enough to keep the benchmark 500 index from snapping a streak of three straight weekly gains. The S&P 500 Index rose 0.2% to 2,905.03, while the Dow Jones Industrial Average gained 0.4% to 26,559.54. The question now is the rally that sent the S&P 500 from bear territory in less than four months to the cusp of record territory continue? Valuations are becoming a more pressing concern. While fund flow data and sentiment have suggested that investors have wared up to the rally in equities as it climbed upwards, they have not swarmed in. Some analysts now say a near-term scenario will result in a “melt-up” rather than a “melt-down.” A melt-up is a situation where investors feel they are being left out and participate in a feeding frenzy, that is often followed by a steep pullback.

The latest Federal Reserve Beige Book survey covers the period from March to early-April. The report suggested that economic activity did not change much from the previous report, while a few districts strengthened. Consumer spending was mixed but general retailers and auto dealers reported weak sales. Manufacturing remains solid, although contacts reported that trade uncertainty is a problem. Home sales are robust, with weakness in higher priced homes. Agriculture remains weak, with rainfall and flooding concerning contacts. The near-term outlook has not changed, contacts expect slight to modest growth in coming months.

Job growth continued nationwide as nine districts reported modest to moderate growth and the other three reported slight growth. Gains were strong across industries and most pronounced for highly skilled jobs. Tight labor markets are limiting the rate of hiring. Price pressures have been generally modest since the previous report. Input cost increases were characterized as modest to moderate, with tariffs, freight cost and rising wages as reasons for increases. Some contacts were able to pass the cost increases along to customers. Construction firms have noted some increases in construction material costs, with some firms reporting higher metal costs. The nation’s agricultural sector remains weak and recent floods only made the situation worse. Generally, the economy continues to develop at a modest pace but is encounter some headwinds. Recent data has been more upbeat after a weak January and February. Business will have problems finding workers as labor markets continue to tighten. Still, the economy is heading in the right direction and the near-term outlook looks a little brighter. Trade and the slowing of the global economy are headwinds, but growth should continue at a modest pace over the next few quarters.

Data was active this week and there were some surprises. The trade deficit unexpectedly narrowed in February as exports surged 1.1% and imports rose just 0.2%. Of the roughly $2.3 billion increase in exports, $2.2 billon came from one source, civilian aircraft. Given Boeing’s problems with the 737 Max, we expect that dynamic to wind down in coming months. The surge in exports looks unsustainable, given the slowing of the global economy and trade tensions. Global export volumes are down 1.0% on a year-over-year basis and this is something that rarely occurs outside of a recession. If global trade continues to decline, eventually U.S. exports will be at risk. For the present, the February results suggest trade will be a plus for first quarter GPP growth. However, that will be unlikely to provide much comfort in the second. Another worry for the first quarter was consumer spending, which was weak in January and February, but bounced back nicely in March. Retail sales bounced back, with a 1.6% jump in retail sales. Gas prices and strong vehicle sales played a role, but excluding those sectors, sales still rose a solid 0.9%. Low estimates of consumer spending influenced early weak projections of first quarter GDP growth, but the March data paints a different picture. Real first quarter GDP growth was projected to grow only 0.3% a month ago., now has been revised near to 3.2%,

Business inventories rose 0.3% n February, but the I/S ratio remains at a high level, at 1.39 months. This suggests the need for weaker production. Industrial production fell 0.1% in March. Manufacturing was unchanged in March and that was the third weak month. Excess inventories and weak sales are causing the manufacturing sector to be weak. The question is, will industrial output bounce back in coming months?  There will be little help from housing starts fell 0.3% and permits declined 1.7%. Mortgage rates are down, but they are not yet, helping new construction.

Next week will be a little quieter on the data front. We get a look at new and existing home sales and durable goods orders. The first look at first quarter GDP is also due. The first quarter will be subpar, near 2%, but a lot stronger than many analysts thought possible a month earlier.

Latest Data

The U.S. Economy:

Industrial production declined 0.1% in March, following a 0.1% advance in February and a 0.3% decline in January. Results were mixed across industries. Manufacturing was unchanged, following a 0.3% decline in February and a 0.5% drop in January. For the first quarter, manufacturing fell at an annual rate of 1.1%, the f.2%, up 1.5% from a year decline since the third quarter of 2017. Much of the decline in manufacturing was attributable to a falloff in in autos and parts production, which fell 2.5% in March. Production of nonauto manufacturing moved up from a year earlier. Business equipment production increased 0.4% for March and was up 3.8% from a year earlier. Mining fell 0.8% in March, the second slip in three months. Nevertheless, that sector did exceed its December 2014 cyclical peak. Utilities advanced 0.2% for the month. Industrial production disappointed in March, marking the fourth consecutive month of weak results. Mining led the top-line decline, with the index failing to gain since December, largely attributed to oil price volatility. Utility production increased as cold weather swept through much of the country. Manufacturing is weak despite the advance of the ISM manufacturing index. Manufacturing has been unimpressive and will likely see a bumpy road ahead because of multiple risks, including a slowing global economy and a downshift in U.S. economic growth. Trade remains a threat. Also, the tight labor market makes it hard to find workers. We still expect industrial activity to remain on a positive but modest trend.

Wholesale inventories increased by 0.2% in February, following a strong 1.2% increase in January. Both wholesale categories contributed to the increase. Durable goods inventories rose by 0.1%, following a 0.8% rise n January. Furniture, lumber and professional equipment posted the largest gains. Durable good’s stockpiles were up 10.6% from a year earlier. Nondurable goods inventories rose by 0.3% in February, following a 1.8% increase in January.  Apparel posted the largest gain of 1.8%. Nondurable goods stockpiles were up 1.4% from last year. Sales rose 0.3% in February and 0.5% in January. The inventory-to-sales ratio held steady at 1.35 months.

The trade deficit unexpectedly narrowed in February, falling to $49.4 billion from January’s $51.1 billion. Total nominal exports rose 1.5%. Goods exports also increased 1.5% for the month, after a 1.4% advance in January. Capital goods exports rose 4.6% and automobiles exports added 4.3% to January’s 9.9% gain. Total imports increased 0.2% in February 2029, after January saw a 2.6% gain. Within the import category, a 2.7% drop in industrial goods was offset by a 2.8% gain in consumer goods. The deficit was smaller than expected and largely driven by an increase in civilian aircraft exports. That category is volatile and will be subject in coming months to Boeing’s problems with the 737 MAX. The strong economy will favor imports in coming months and put upward pressure on the deficit. At the same time, global demand is slowing, with economic growth slowing in Germany, Japan and the U.K. In addition, trade with China is unresolved and tariffs are disruptive to trade flows. There is growing evidence that some suppliers are switching to other nations. Even if a trade deal is reached, it won’t impact the topline deficit figure.

Stockpile growth moderated. Business inventories increased 0.3% in February, following the 0.9% jump in January. Among the three categories, manufacturers and retailers’ stocks rose by 0.3%. Wholesale stocks rose by 0.2% in February. Motor vehicles and parts inventories rose by 0.3% in February, following a 1.1% advance in January. Retailers excluding autos and parts, logged a 0.4% advance during the month. Furniture inventories jumped by 1.1%. Business sales grew by 0.1% in February. The I/ ratio held flat at 1.39 months. In comparison, the I/S/ ratio in February 2018 was 1.36. The cycle low was 1.25 and recession high was 1.49. The I/S ratio for wholesales is elevated compared to previous months, suggesting that it is taking longer to clear store shelves. This suggests some production restraint is needed unless final sales suddenly accelerate, which is unlikely.

The outlook for the U.S. economy has improved. The Conference Board’s index of leading economic indicators rose 0.4% in March, following a 0.1% increase in February and no change in January. Most of the index’s subcomponents were in positive territory and only two registered no change. Initial unemployment claims and consumer expectations for business conditions made the largest contributions to the index in March. Most components made positive contributions to the index. The only exceptions were the average workweek for manufacturing workers and building permits, which were unchanged for the month. On net, financial markets were positive in March. Employment gains were strong in March.

Residential housing still lacks traction. Housing starts fell 0.3% in March to an annual pace of 1.139 million Total start in March were down 14.2% from a year earlier. Starts fell in 3 census regions, but the decline in the Midwest was dramatic, declining 16.6% and down 28.3%. Floods in the Midwest had a large influence on the decline in that region. Single-family starts fell 0.4% to an annual pace of 785,000, while multi-family starts were unchanged for the month at 354,000. Future activity does not look promising in the near-term. Total permits fell 1.7% to an annual rate of 1.269 million units. Analysts hoped the decline in mortgage rates would spark activity in the housing sector. The30-year fixed mortgage rate has dropped from a peak of 4.94% in November to around 4.12%. Fundamentals remain intact, so housing activity should pick up some strength. Wages continue to rise, and interest rates are expected to remain low through 2019. Issues of affordability and land and labor shortages are curbing demand and we are likely to see only a small pickup in demand in 2019, at best.


China’s economy grew at a steady 6.4% pace in the first quarter, defying expectations for a further slowdown. The advance was helped by a jump in industrial production and consumer demand that showed signs of improvement. The upbeat readings, which included faster growth in investment, will add to optimism that China’s economy is starting to stabilize, as Washington and China edge closer to a trade agreement. China’s slowdown ad the trade war are the biggest risks facing the faltering global economy. Industrial production surged 8.5% in March, the fastest growth in four-and-a-half years. Beijing has ramped up fiscal stimulus this year, announcing billions of dollars in additional tax cuts and infrastructure spending. Output of building materials such as steel and machinery showed strong gains. Prices of steel reinforcing bars used in construction hit seven-and-half- year highs. China is still expected to show growth near 6.0% this year, as the government seeks stabilization, not strong growth for the economy.

Important Data Releases This Week

March existing home sales will be released on Monday, April 22 at 10:00 AM EDT. Moderation is the call for sales after February’s 11.8% advance. Sales will come in at 5.300 million, still down 1.8% y/y.

March new home sales will be released on Tuesday, April 23 at 10:00 AM EDT. New home sales have been getting a boost from lower mortgage rates. Still, we expect a retreat to 645, 000 in March, down from February’s 667,000 rate.

March durable goods orders will be released on Thursday, April 25 at 8:30 AM EDT. Weakness in shipments and core capital goods orders were the hallmark of the February durable goods report. We expect a partial rebound in March, up 0.8% and core capital goods orders to rise 0.1%.

Real Q1-2019 GDP (first estimate) will be released on Friday, April 26 at 8:30 AM EDT. Reflecting the improvement in trade and a rise in inventories, we project the first quarter turned in a 2.0% annual increase. Consumer spending is projected to have increased 1.1%.

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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.