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
Uncertainty about the fate of trade negotiations between the
U.S. and China kept markets on their toes on Friday, with European
stocks mimicking their Asian peers and retreating from the previous
day’s highs. The Dow and the S&P 500 reached new records on
Thursday on hopes of a truce to end the damaging trade war but a
Reuters report that the White House opposed aspects of the
tentative deal limited Friday’s gains. The mood contrasts with
Thursday’s hopes that Washington and Beijing had agreed to roll
back tariffs as part of a first phase of a trade deal. Meantime,
German exports posted their biggest rise in almost two years in
September, easing some concerns that Europe’s biggest economy
would dip into recession in the third quarter.
Oil prices faltered and global equity markets slipped on Friday,
halting a week-long record setting rally on hopes of a U.S.-China
trade deal was close. Statements out of Washington cast fresh
doubts about progress between Beijing and Washington. Optimism
about a deal earlier in the week darkened after fierce opposition
from the White House to roll back tariffs after the U.S. President
Trump reinforced negative feelings. He then reversed himself later
in the day and optimism returned to the marketplace, with all three
major indexes ending trading at record highs. MSCI’s gauge of
stocks across the globe pared losses to close little changed, down
0.03% on the day and just 1.5% from a record high set in January
2018. The Dow Jones Industrial Average rose 6.44 points, or 0.02%
to 27,681.24. The S&P gained 7.9 points, or 0.26% to 3,093.08.
Optimism around a deal has run into uncertainty about the strength
of the global economy and corporate results, which is driving fear
of more weakness ahead. It is very difficult to forecast what this
administration will do. People are pretty-pessimistic even though
logic suggests the administration needs a deal going into an
Optimism soared last week on hoes of a forthcoming trade deal.
Equity markets soared to an all-time high and interest rates
climbed, with the ten-year yield rising almost 20 bps this week to
1.91 and was up almost 50 bps from a month ago. However, market
chatter about a “phase-one” deal has been completely devoid of
any concrete details. Until we hear reports of a material pause or
de-escalation of the trade war, it is best to assume that the 15%
tariffs on the $150 billion of consumer goods imports will go it
effect on December 15. This suggests some of the recent gains in
the equity markets remain at risk. Still, the economy is showing
signs of stabilization. The Fed’s willingness to adjust policy to
confront factors out of its control, that is trade policy and
slowing global growth-and its actions to shore up liquidity in
short-term funding have eased fears of recession.
The ISM non-manufacturing index beat expectations last week by
climbing to 54.7 from a three-year low of 52.6 in September. The
fall in the non-manufacturing survey in September came just two
days after the manufacturing counterpart fell to 47.8, indicating
contraction at the fastest rate since 2009. The improvement of both
surveys, with the manufacturing index rising to 48.3, was a welcome
sign of stabilization, given the forward-looking new orders rose in
both surveys. To be clear, the manufacturing index is still
negative and fears continue that the weakness in manufacturing will
spill over to the service sector. That remains a risk but the
spread between the two rose in September and healthy consumer
fundamentals point to continued resilience.
There are both up and downside risks. If a trade deal is
reached, there could be a short-term rebound. However, the trade
war has already exacted long-term damage to the economy. Business
fixed investment, which drives long-term productivity growth, as
fallen the last two quarters. Productivity growth declined 0.3%
annualized in Q2, the weakest pace since 2015. Tariffs have played
a large role in the slower pace of capital formation, imports of
industrial supplies and capital goods are down 14.8% and 6.0%,
respectively, over the past year. The slowdown in productivity
growth and rising compensation have lifted unit labor costs growth
to the highest in five years. A failure to close a trade deal may
push the consumer to retrenching. An easing of tensions could lead
to an upside exposure. Deal. Or no deal, the Fed may be in the
right position now by staying where they are at.
Latest Data The U.S. Economy:
U.S. vehicle sales decreased in October to a seasonal adjusted
annual rate of 16.6 million, following a 17.2 million rate in
September. October sales were down 4.3% from a year earlier.
Economic growth has slowed but has been supported by strong
consumer sentiment. The October reading may be the beginning of a
slower sales trend that will proceed into 2020. Both car and light
truck sales fell in October. Light truck sales fell 6.5% to an
annual pace of 12.2 million. Car sales fell from 4.8 million to
4.5. The contraction in manufacturing may be partly to blame. When
economic growth slows, manufacturers slow down production and use
less incentives to push sales. With less incentives, consumers slow
purchases. It’s the classic chicken and egg question. The October
decline in sales came mainly from cars. Car sales accounted for 27%
of sales, down from nearly 50% in 2013. The average price of a new
vehicle has increased much faster than wages. The price increases
may be starting to hurt marginal consumers. Vehicle sales will
likely slow further in 2020.
Factory orders fell 0.6% in September, following a 0.1% decline
in August. Transportation orders were down 2.8% after a 0.2%
advance in August. Motor vehicles and parts orders fell 0.8%,
following a 1% decline in August. Some of the weakness can be
attributed to the UAW strike. Nondefense aircraft orders dropped
11.8%, while defense aircraft orders fell 41.7%. Excluding
transportation, orders were down 0.6%. Core capital goods orders
fell 0.6% in September and 0.8% in August. Fundamentals for
business investment have turned less supportive. Real equipment
spending fell in the third quarter. It is unusual for capital
spending to decline for two consecutive quarters outside of a
recession or early in a recovery. Capital spending did fall in 2015
and 2016 but that was because of weak energy investment. Part of
the weakness can be attributed to Boeing, which is not shipping
many aircraft. There is a strong correlation between corporate
profits and equipment investment. Corporate profits are forecast to
be in the low single digits well into 2020. Business investment in
equipment is likely to struggle for some time.
The trade deficit narrowed to $52.5 billion in September from
$55 billion in August as imports fell more than exports. Changes in
goods exports were mixed. Nominal exports fell 0.9%, following a
0.2% gain in August. Goods exports lost 1.3%, after rising 0.3% in
August. Changes in goods exports were mixed. Food, feed and
beverage exports fell 12.3% after gaining 3.8% in August. Consumer
exports rose 2.9% after a 4.8% decline in August. Nominal imports
decreased 1.7% after gaining 0.5% in August. Goods imports fell
2.1%. Imports declined across most categories. Consumer goods
imports fell 4.4%, dropping to the second lowest level in 2019.
Capital goods imports lost 1.8%. The nominal petroleum balance
moved into surplus for the first time in the series, which extends
back to the late 1970s. The trade war remains a drag on the economy
but a potential agreement could remove some uncertainty. The
administration has indicated that any agreement would mean more
purchases by the Chinese of agricultural products. Some imposed
tariffs may also be rolled back.
The ISM’s non-manufacturing index shows the service side of
the economy is doing fine. The ISM non-manufacturing index improved
from 52.6 in September to 54.7 in October. Details were mixed.
Business activity increased from 55.2 to 57. New orders increased
from 53.7 to 55.6. 10 industries reported growth in new orders
during the month and six reported a decline. Super deliveries
increased from 51 to 52.5. Imports fell from 49 to 48.5. Exports
fell from 52 to 50. Backlogs fell from 54 to 48.5. Although the
factory sector is still struggling, the non-manufacturing sector,
which accounts for 88% of the economy, is doing just fine. After a
September stall, growth in this area bodes well for future growth.
On the downside, trade and supplier deliveries remain a sore spot.
The handshake deal between China and the U.S. will help. However,
two years of tariffs and World Trade Organization lawsuits and
settlements have shaken supply chains. This weight won’t lift for
at least a few quarters. Labor is a commodity listed in short
supply and this will be a headwind in 2020.
Euro-zone business activity grew slightly more than originally
thought but remain close to stagnation. The euro zone’s composite
PMI rose to 50.6 in October, up from September’s 50.1, its lowest
in more than six years. The headline PMI was consistent with GDP
growth of 0.1%. Risks are tilted toward the downside. The euro
zone’s manufacturing PMI contracted last month. There are fears
the manufacturing slump is increasingly acting as a drag on
services. The euro zone’s services PMI measuring new business was
at 49.6, above September’s 48.7 but the second consecutive month
below the 50 mark.
The German Federal Statistics Office reported that seasonal
adjusted exports increased by 1.5% in September, the biggest
increase since November 2017. The German economy shrank by 0.1% in
the second quarter and data suggested manufacturing fared badly in
the third, which could put Germany in a technical recession. The
trade data suggests that there will be little negative effect on
third quarter GDP and if private consumption increased slightly,
the economy may barely escape recession. The DIHK Chamber of
Commerce expected exports to grow by 0.3% this year but decline
0.5% next year, which would be the first fall since the global
Important Data Releases This Week
September retail sales will be released on Wednesday, October 16
at 8:30 AM EDT. After posting a soft August except for auto
sales, we are looking for a 0.3% in sales for September. Sales
excluding autos and gasoline are also projected to rise 0.3%.
The October NFIB small business optimism index will be released
on Tuesday, November 12 at 6:00 AM. The index has been on the
decline with business investment down and tariffs cited by 30% of
the sample as negative for their business. For October, the
forecast calls for 102 versus 101.8 in September.
The October consumer price index will be released on Wednesday,
November 13 at 8:30 AM. Consumer prices cooled in September
remaining unchanged and the core only rose 0.1%. We project a 0.3%
rise for October for the headline index and a 0.2% increase for the
core. This brings the year-over-year increase to 1.7% for the
headline and 2.4% for the core.
The October producer price index will be released on Thursday,
November 14 at 8:30 AM. Producer prices were soft in September,
with the headline and the core both falling 0.3%. We project a 0.3%
rise for October for the headline index and a 0.2% increase for the
core. This brings the year-over-year increase to 0.9% for the
headline and 1.6% for the core.
October retail sales will be released on Friday, November 15 at
8:30 AM. Retail sales came mostly flat in September but didn’t
break the mostly upward yearly trend. We expect sales to rise 0.2%
for total sales and 0.3% excluding gas and autos. Auto sales did
fall sharply in October.
October import and export prices will be released on Friday,
November 15 at 8:30 AM. Import prices fell sharply in September
because of petroleum. Export prices fell on agricultural products.
We look for import prices to fall 0.2% and import prices to decline
0.1% for the month.
The October industrial production report will be released on
Friday, November 15 at 9:15 AM. After a strong August, September
industrial production fell more than expected. We expect another
0.4% fall in total output. Manufacturing fell 0.5% in September, in
part a result of the UAW strike. We project another 0.5% decline in
manufacturing for October.
September business inventories will be released on Friday,
November 15 at 10:00 AM. Business inventories are forecast to rise
0.1% in September after no change in August.
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The Trade War has Already Exacted Long-Term Damage to the
Economy appeared first on FTR Blog.
Source: FS – Transport B.
The Trade War has Already Exacted Long-Term Damage to the Economy