Thursday, August 6, 2015

US Economy: Not on Fire (excerpt)

The US economy continues to cruise along at a leisurely pace. On a year-over-year basis, real GDP has been growing between 2.3% and 2.9% since Q2-2014. It certainly isn’t showing any signs of overheating despite tightening labor market conditions. Let’s review the latest developments:

(1) Exports. The stronger US dollar and slower global growth continue to weigh on US merchandise exports. A 3/11 WSJ article highlighted Duke University’s CFO Magazine Business Outlook Survey. Not surprisingly, the results for 489 US firms showed that 80% of the firms that derive at least one-fourth of total sales from exports said the dollar has had a negative effect on their revenues. Soft global growth is also keeping a lid on exports of capital goods and industrial supplies as overseas companies cut back on expansion plans.

Inflation-adjusted exports have stalled around $1.45 trillion (saar) over the past 11 months through June. They are down 6.3% y/y in current dollars and 0.2% in real dollars.

In current dollars, exports are highly correlated with S&P 500 revenues, which is no surprise since at least 50% of these revenues are generated outside the US. June’s weak export growth is consistent with the negative surprises in Q2’s S&P 500 revenue growth.

(2) Factory orders. S&P 500 revenues are also highly correlated with factory orders. These orders fell 6.2% y/y during June. Leading the decline was petroleum orders, which are the same as shipments. They were down 27.9% y/y. However, even excluding them, orders were down 2.5%.

(3) Transportation. Railcar loadings of intermodal containers always dip during the winter and rebound during the spring and summer as retailers restock their inventories. The dip was a bit worse than normal this year as a result of the West Coast dock strike. However, the rebound has been solid. On the other hand, the ATA trucking index dipped in June and was 3.5% below its record high during January.

(4) Auto sales. While manufacturing data show lots of soft patches, the auto industry is doing well. The level of sales remains high. It averaged 17.0 million units (saar) during the first seven months of this year, up 4.8% from the same period a year ago. The problem is that domestic automakers are scrambling to produce more of some of their most popular models, but may be capacity constrained.

(5) Services. While the manufacturing sector seems to be cooling, with the notable exception of the auto industry, the services sector is hot. It isn’t affected as much by the dollar and overseas economic growth. The national NM-PMI rose to 60.3 in July, the highest since August 2005. Wednesday’s ADP payroll report for July showed that nearly the entire gain of 185,000 was attributable to services companies.

Today's Morning Briefing: We Didn’t Start the Fire. (1) 16,000 fans. (2) Islanders vs. Rangers. (3) Joel & Simon. (4) Headlines as verses. (5) New service. (6) Pieces of the puzzle. (7) Lots of debt in the big picture, and more coming. (8) More can kicking in China and Greece. (9) Companies borrowing lots to buy other companies. (10) Big banks back in the big mortgage business. (11) US economy isn’t on fire. (More for subscribers.)

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