Monday Morning Coffee: US Economy Being Hit by Crosscurrents


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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. 


U.S financial markets settled down this week and reports from Europe and China, while not very reassuring, were less dire than many expected a week earlier. In the U.S., housing data was mixed. Existing home sales exceeded expectations, but home sales had significant downward revisions. Inflation remains weak, but the CPI was barely positive. The fact that there is some inflation, rather than deflation, is important to the Fed right now. The Fed recognizes that the current low oil prices, which are a prime cause of low inflation, are likely temporary in nature. The strong economy and labor markets suggest the Fed will wind down its QE program on schedule. The Fed will be cautious about removing stimulus, in light of the turbulence in financial markets and the general weak global economy.

The coming week brings the first look at third quarter GDP. We look for real GDP growth to track close to 3%. Investment details will be important to the current quarter. We look for a small gain for residential and a much stronger, nearly double digit gain in real capital spending. The durable goods report probably saw a small decline based on the transportation sector. The capital goods sector will show some strength. The Conference Board’s report on consumer confidence should show a gain after the big 7.5 point drop in September. Confidence reports will show if the Ebola outbreak and volatility in equity markets are hurting confidence. There will be a Fed meeting this week and clues to any changes in the timetable to lift rates. Personal income will likely see a 0.3% rise, the same as in August.

The U.S. economy appears quite solid, although financial market turbulence has raised the level of uncertainty. The combination of the strength of the current economy, plus the boost to spending from lower gas prices and lower interest rates, will keep growth near the 3% mark for the next few quarters. The economy is being hit by crosscurrents. On the positive side, the growth is being driven by steady job and although lagging, income gains. The industrial sector is vibrant, driven by growing business investment. On the negative side, a decline in equity prices, an appreciating dollar and the weak global economy do pose headwinds. At the moment, the pluses outweigh the negatives. The U.S. economy will stay on track at near the 3% mark. However, if equity markets stay depressed, interest rates rise and global economy worries hurt confidence, the U.S. economy will likely slow. Time will sort events out and we will be keeping a sharp weather eye for future events.

Review of Last Week’s Data: October 20-24, 2014

The U.S. Economy:

Existing home sales rose 2.4% in September to an annual pace of 5.17 million. Sales remained still down 1.7% from year earlier levels. Inventory declined in September and also the inventory-to-sales ratio. Overall, housing is still recovering modestly, but is not yet accelerating at a meaningful rate. Sales volumes are still down year-over-year and inventory is still trending up. This is a little troubling given the inventory-to-sales ratio should be holding steady or slightly falling in a sustained recovery. Progress is being made but it is slow. Sales are improving for the more expensive homes, but are flat and at a cyclical low for first time buyers. Sales should improve in 2015 as job growth and income growth pick up more speed.

The Chicago Fed National Activity Index rebounded sharply in September, rising from -0.25 to 0.47. August was the only negative reading in the last six months. On a three-month basis, the CFNAI indicates that growth is slightly above its historical average and that inflation will be modest over the coming year. Production related-indicators led the September improvement in the index. Employment indicators were also positive. Inflation is modest and will remain so for several quarters. By the time inflation picks up to 2% or higher, the Fed will already be in a tightening mode.

The Conference Board’s index of leading economic indicators rose 0.8% in September. This followed a flat reading for August and marked the 12th increase in 14 months. The financial components and the rise in the ISM new orders component led the index higher. In the six months ending in September, the index has increased 7.1% annualized rate, down from 7.5% in August. The September gains were broad-based, as nine out of 10 components increased. The index suggests that the U.S. economy will continue to accelerate in coming quarters.

Sales of new single-family homes increased 0.2% to 467,000 units. There was a sizable downward revision to August sales from 504,000 to 466,000. Despite the August revision, the September report was good news. The housing market is still recovering at a modest pace. The ratio of new homes for sale to sales volume is still above pre-recession ratios but below its historical average. This suggests additional room for construction. Single-family construction has lagged behind confirmed family formation and is still behind household formation since then.


China’s economic growth came in stronger than expected, bolstering the government’s case for stronger stimulus measures. Real GDP grew 7.3% in the third quarter from a year earlier, the Statistics Bureau reported. The third quarter was the slowest growth since the first quarter of 2009. The report showed decent exports and a somewhat stronger domestic economy than some analysts expected. Barring a further slowdown, the government will likely to remain relatively restrained. Industrial production rose 8% in September from a year earlier, compared with August’s 6.9%, which was the slowest in five years. GDP in the January-to-September period rose 7.4%, led by a 7.9% increase in services. Growth in agriculture was 4.2% and mining and manufacturing grew 7.4%. According to Bloomberg, China will set a growth target of 7% in 2015.

The euro-area economy may have sidestepped recession. The euro-area PMI for manufacturing rose to 50.7 in October from 50.3, according to Markit Economics. The services PMI held steady at 52.4. Within the survey, new orders for manufacturers did decline, while new orders for services. The PMI for Germany jumped to 51.8 from 49.9. The data suggests that recession might be avoided. Growth remains at very weak levels. In separate data, the unemployment rate in Spain fell to 23.7% in Q3 from 24.5% in Q2. Inflation in the euro-bloc was 0.3% in September, far from the ECB’s target of 2%. The ECB lowered its growth forecasts for2014 and 2015 to 0.9% and 1.6% next year. It predicts inflation rates of 0.6% I 2014 and 1.1% next year.

A Chinese manufacturing gauge rose in October, adding to signs that a resilient labor market and stronger exports is helping the world’s second largest economy weather a housing market downturn. The preliminary PMI from HSBC and Markit Economics was 50.4, the same as the September reading. Real GDP rose 7.3% I Q3 from a year earlier, the slowest pace in five years. Output, new orders and new export orders all increased at a slower rate, while output and input prices decreased at a quicker rate, suggesting deflationary pressures intensified. The PPI index fell 1.8% in September from a year earlier, a record-breaking 31st monthly decline. The final HSBC-Markit PMI reading is due Nov.3. A separate manufacturing index from the National Bureau of Statistics and the China Federation of Logistics and Purchasing will be released Nov.1.

Important Data Releases This Week

September Pending Home sales will be released on Monday at 10:00 AM EST. We expect pending home sales to advance in September after a 1.1% decline in August. Housing conditions are slowly improving and mortgage rates are retreating, proving some relief to buyers.

September Durable Goods Orders will be released on Tuesday at 8:30 AM EST. Durable goods orders declined in August, but only gave some of the gains in previous months. We think orders will decline by half a percent driven by the transportation sector. Look for stronger capital spending, as both the IP report and recent advances in manufacturing activity point in this direction.

October Conference Board’s Consumer Confidence Index will be released on Tuesday at 10:00 AM EST. Confidence took a 7.5 point nose dive in September. We look for a small gain, as labor market conditions improved in October. On the plus side is lower oil prices. However, the Ebola outbreak and the volatility in the financial markets are negatives for confidence.

October FMOC meeting on Wednesday at 2:00 PM EST. The FMOC will end its QE program as planned this month. There will be details about the program. If policymakers are concerned about growth, they could signal a change about a later first rise in interest rates.

GDP Third Quarter will be released Thursday at 8:30 AM EST. Real GDP will come in near 3%, down from the 4.6% advance in the second quarter. Spending probably moderated in the quarter, in the 2.5% range. Durable goods spending likely fell short of the double-digit increase in the second quarter. Capital investment will be strong, but residential will only advance a little.

September Personal Income will be released on Friday at 8:30 AM EST. September probably brought a 0.3% rise, in line with August’s gain. The deflator will likely rise 0.1%, bringing the year-ago increase to 1.5%.

Author: 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.

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