On the Fast Track?

Surprise, surprise: A few recent economic indicators suggest that the US economy could be turning red hot. That would be a very big surprise indeed given all the recession fears at the year’s start. Consider the following:

(1) Record tonnage. February was an awesome month for truck tonnage. The American Truck Associations’ measure soared 7.2% m/m and 8.6% y/y. The index, which is a good indicator of the broader economy since trucks account for 69% of tonnage carried by all carriers, jumped to a new record high.

However, ATA’s Chief Economist Bob Costello cautioned: “The strength was mainly due to a weaker than average January, including bad winter storms, thus there was some catch-up going on in February.” The result was a big seasonally adjusted gain. Costello also cited inventory overhangs as a reason he’s waiting to see March’s data before getting too excited.

There is a good correlation between the trucking index and real business inventories, which may be somewhat bloated as Costello notes. However, even if there is some payback in March, the uptrend in the trucking business may boost sales of medium-weight and heavy-weight trucks, which have been stalled at a cyclical high over the past year. (See our Truck Tonnage Index.)

(2) Coast to coast. What are trucks hauling? Imports have surged recently at the West Coast ports. Inbound traffic of 20-foot equivalent containers made a good showing during February, jumping 8.6% y/y based on its 12-month moving sum. Of course, a year ago imports were depressed by strikes at the ports. (See our West Coast Ports Container Traffic.)

(3) Regional factory boom. Manufacturing business survey results came in strong for three of the earliest reporting Fed districts: New York, Philadelphia, and Richmond. The average of their composite manufacturing indexes shot straight up from -7.8 in February to 11.7 this month, the highest since November 2014. Of the contributing components, new orders and shipments rose sharply, while employment readings were steady to slightly positive.

Fed Has Slack

Fed officials must be very pleased to see that the unemployment rate is under 5.0% and that the core PCED inflation rate is approaching 2.0%. However, the doves among them, especially Fed Chair Janet Yellen, might justify slowing the pace of monetary normalization so that they can be more certain that the economy has normalized for sure. They can argue that there is still slack in the labor market. The recent rapid increase in the labor force suggests that workers are coming back because they’ve heard that there are plenty of job openings and they are finding jobs. The influx of reentering as well as new workers seems to be keeping a lid on wage inflation, which is another sign of slack in the labor market.

With regard to inflation, a few Fed officials recently have signaled that they prefer to target the headline rather than the core inflation rate since the plunge in oil prices seems to be having a depressing impact on inflationary expectations. Using the PCED measure, the former was 1.3% y/y while the latter was 1.7% during January. I wouldn’t be surprised if Fed officials started to suggest that they wouldn’t mind if the core rate overshot their 2.0% target for a while. Now let’s have a close look at all the recent data that members of the FOMC are likely to depend on when they meet on March 15-16--and most likely decide to do nothing and to signal nothing about another rate increase at the next meeting on April 26-27:

(1) Earned income. Friday’s employment report for February was sweet and sour. Payrolls rose solidly (0.2%), but wages edged down (-0.1) and weekly hours worked declined (-0.6). As a result, our Earned Income Proxy, which tracks private-sector aggregate wages and salaries, declined by 0.5% m/m. (See our YRI-EIP.)

(2) Employment. Payroll employment rose 242,000 last month, and the previous two months were revised up to 172,000 during January and 271,000 during December for a total gain of 685,000. Even more impressive is that the household measure of employment jumped by 1.6 million over the past three months, while the labor force surged by 1.5 million. With the significant influx of reentering and new workers in the labor force, the civilian labor force participation rate finally seems to be turning up.

(3) Wages. This is Yellen’s dream scenario. However, it is only starting to play out. The rise in the labor force confirms her view that there is plenty of slack still in the labor market as previously discouraged workers who dropped out come back into the labor force. The slack thesis is also corroborated by the relative weakness in average hourly earnings, which rose only 2.2% y/y last month for all workers. Yellen has previously said that she would like to see wages rising between 3% and 4%.

(4) Trade. Also on Friday, the Commerce Department reported that the US trade deficit widened more than expected in January as a strong dollar and weak global demand helped to push exports to more than a five-and-a-half-year low, suggesting that trade will continue to weigh on economic growth in the first quarter. On an inflation-adjusted basis, exports fell 2.2% m/m and 3.8% y/y to the lowest since February 2014. West Coast ports’ outbound container traffic fell 8.1% y/y through January.

The trade-weighted dollar is down 3.0% from its recent peak on January 20, but remains up 19% since July 1, 2014. That’s clearly weighing on exports. This is yet another reason to postpone further rate hikes so that the dollar doesn’t move still higher.