Are We Seeing the Beginning of a More Serious Slowdown?

By | February 25, 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

Signs the United States and China were tackling some of the stickiest issues in their trade war kept global shares near a four-month high last week. MSCI’s main Asian-Pacific index rose to a four-and-a-half month high after U.S. and Chinese negotiators were drawing up six “memorandums of understanding” to solve their trade differences. The MSCI Emerging Market Index rose 0.5% on Friday, the sixth-straight daily rise and the longest streak since May 14. Europe’s Stoxx 600 Index gained 0.1% on Friday to the highest level in 19 weeks. The euro-zone’s manufacturing PMI rose to 51.4 in February, up from 51 in January, but still below the readings of the last four years. Europe’s economy remains near stagnation amid worries about slowing global growth and trade issues.

The S&P 500 posted its highest closing level since Nov. 8 on Friday as investors clung to signs of progress in the ongoing trade talks between the U.S. and China. Investors assessed a slew of headlines on the talks, with top trade negotiators between the two countries wrapping up a week of discussions on some of the thorniest issues in their trade war. If the two sides fail to reach an agreement by midnight on March 1, then their seven-month trade war could escalate. People are expecting positive news on trade and tariffs on China but won’t know till the end of the week and there has been a lack of specifics. The Dow Jones rose 181.18 points, or 0.7% to 26,031.81 and the S&P gained 17.79 points to 792.67. The S&P has rallied nearly 18% since its Dec.24 low, helping lead the overall market out of a year-end shakeout but another multi-year run of growth may not be in the cards.

Data for 2019 is still somewhat limited but several signs point to a modest slowdown in economic activity relative to the strong pace registered in 2018. The weakness in housing we saw in the latter months of 2018 has extended into the new year. Existing home sales fell 1.2% in January, as the lingering effects of rapid price appreciation and higher mortgage rates in the last few months of 2018 dampened sales for a third consecutive month. While overall sales have slumped, lower mortgage rates do make us more optimistic that sales should pick up some velocity over the next few months. The NAHB Housing Market Index did post its second consecutive monthly increase in February after a sharp fall in December. More builders are feeling confident about future market conditions heading into the spring months. Mortgage applications have picked up since the beginning of the year.

Meantime, durable goods orders rose 1.2% in December. However, most of the strength came from a 28.4% surge in nondefense aircraft orders. Core capital goods orders, which are an important barometer of future business investment, slipped for a second straight month and fell 0.7%. We still expect business investment to a plus for GDP growth in 2019, but the pace of growth is likely to downshift to a lower gear. The leading economic indicator index continues to point to favorable economic conditions in coming months, although decline 0.1% in January. The January weakness was driven by a drop of consumer expectations, likely a fallout from the government shutdown. With the government back to work and there could be good news on trade with China, we do expect at least a modest rebound in consumer confidence over the next few months.

The economy is likely to have increased just under 3% in 2018, when the first estimate of fourth quarter GDP is released on February 28. The Federal Reserve released an economic scorecard that revealed that last year was a good year for the U.S. economy. The outlook for 2019 is more mixed as some of last year’s drivers will run short of gas in the new year. The tax cuts and federal government spending increased added extra strength last year, pushing the economy towards the 3% mark. However, the effect of that stimulus is starting to fade. On the upside, employment growth is still strong, with 220,000 jobs added per month in the second half of the year. By the end of 2018, signs of weakness were starting to emerge. Consumers stepped back, business investment weakened and international trade, which was strong in the first half of the year, may be a net negative for 2019. The federal deficit, widened to 3.75% in fiscal year 2018, compared to 3.4% for the year before. Mr. Trump may be conservative, but not on issues like debt and spending.

So where are we heading? The economy is throttling back closer to its long-term trend of near 2%. With the slower growth, uncertainty has increased. The list of negative things to worry about has grown. A slowdown in the global economy, Brexit, trade tensions and government disfunction are making consumers and businesses more cautious. The big question now is while we do expect a slower economy in 2019, are we seeing the beginning of a more serious slowdown, or perhaps, the first steps towards recession?

Next week, we get a peek at the Chicago Fed National Activity Index, wholesale trade, housing starts, the Conference Board’s index of consumer confidence, international trade in goods, factory orders, pending home sales, Q4-2018 GDP, personal income and outlays, the ISM manufacturing index and the University of Michigan’s index of consumer confidence.

Latest Data

The U.S. Economy:

Homebuilder sentiment increased 4 points to 62 in February. After dipping sharply in December, builder confidence is rebounding thanks to lower mortgage rates and a strong job market. For a second consecutive month, all three housing market indicators posted gains. Improvement was concentrated in the South in the latest reading. The current sales component increased 3 points to 67. Sales expectations rose by 5 points to 68 and buyer traffic climbed 4 point to 48. The housing industry still faces problems of affordability and supply tightness. Rising wages are a plus. We don’t expect the single-family market to explode, but we may see a slow improvement in coming months.

Existing home sales are not off to a good start in 2019. Existing home sales registered their third straight monthly decrease in January, falling 1.2% from December and down 8.5% from January 2018. Sales came in at an annual pace of 4.94 million units in January, down from 5.0 million in December. The decline was led by single-family homes, which saw sales fall 1.8% to 4.37 million and were down 8.4% y/y. Inventories in the single-family market loosened slightly to 1.41 million in January, up 5.2% from December and up 3.7% from January 2018. Pricing is leveling off. The median single-family home price for January was $263,750, up 0.5% m/m and up 3%, but the trend f price appreciation has slowed considerably in recent months. The January decline in sales is mainly due to the high mortgage rates we saw in December. Rates have fallen in recent months. The pause in raising rates by the Federal Reserve could bring more life into the housing market. Aon average, the price of a house relative to disposable income is not excessive. We may see more life in housing than we have the last few months.

The outlook for the economy has weakened. The Conference Board’s index of leading economic indicators fell 0.1% in January, following no change in December. This was the second decrease in four months. Stock prices and the leading credit index made the largest positive contributor to the index, each rising 0.06%. The average workweek for production workers, initial claims for unemployment insurance and consumer expectations for business conditions fell into negative territory. On net, financial market conditions were positive in January. On the production side, the ISM manufacturing index was positive, but industrial production was negative. The report suggests that the economy was spinning its wheels over the last two months, not broadly advancing, but not falling apart either.

New orders for durable goods increased 1.2% in December, the second consecutive monthly gain. The December gain was driven by the volatile transportation component and there were weak spots. Excluding the transportation sector, orders only advanced 0.1%. The important core capital goods orders fell 0.7% in December, following a 1.0% decline in November. Among manufacturing industries, the results were mostly negative. Orders for electrical equipment fell 0.1%, whereas orders for computers and electronic products were unchanged. The ISM survey on manufacturing suggests that manufacturing is holding up, but the hard data is unimpressive. The topline gain for two consecutive months is good news, but the gains came from the volatile aircraft sector. Outside of transportation, orders are weak. Core orders have fallen four out of the last five months. Trade remains the biggest risk to manufacturing. Trade talks appear to be progressing, but the outcome is uncertain. We will continue to track core capital goods orders, capital expenditure plans and industrial production data closely.


Euro-zone consumer inflation slowed slightly in January because of a sharp deceleration of energy price growth, but core inflation edged slightly higher recent data showed. The European Union’s statistics office Eurostat said consumer prices in the 19-nation bloc fell 1.0% in January on a month-to-month basis. Energy prices fell 0.9% in January but were 2.7% higher than in January 2018. Excluding food and energy, core inflation fell 1.2% m/m but remained up 1.2% year-over-year. The European Central Bank took a gloomy view of the euro-zone economy at their last policy meeting and asked for swift preparations for giving banks more long-term loans, minutes of the meeting revealed. With growth weak for a third quarter, policymakers are increasingly concerned that global uncertainty is derailing the euro-zone’s recovery, undoing years of work by the ECB to kick-start the region’s economy. Although the EB ended a 2.6 trillion bond purchase program, it is now preparing ground work to give more multiyear, cheap loans, to banks to ensure they keep credit flowing to the economy even during the slowdown.

Important Data Releases This Week

The January Chicago Fed National Activity Index will be released on Monday, February 25 at 8:30 AM EST. Forecasters see the index coming in at a more modest 0.13 versus the unexpectedly strong 0.27 in December. Production indicators surged in December and we expect a softer January.

Wholesale inventories for December will be released on Monday, February 25 at 10:00 AM EST. Wholesale inventories are expected to rise 0.2% in December, following the 0.3% rise in November. Even with a modest build in inventories, stocks do seem to be getting ahead of sales.

December housing starts will be released on Tuesday, February 26 at 8:30 AM EST. Housing starts and permits have been struggling with no improvement expected for December. Starts are expected to come in at an annual pace of 1.256 million, unchanged from November. Permits are projected to come in at 1.280 million, down from 1.328 million in November. Single-family data has been particularly weak in recent months in contrast to a much stronger growth n the multifamily sector.

The Conference Board’s February consumer confidence index will be released on Tuesday, February 26 at 10:00 AM EST. The reopening of the federal government points to a rebound in confidence, expected to increase to 124.5, up from 120.2 for January.

December international trade in goods will be released on Wednesday, February 27 at 8:30 M EST. The advance goods deficit was cancelled due to the government shutdown, but the census total came in at $70.5 billion. December should see the deficit rise to $73 billion.

December factory orders will be released on Wednesday, February 27 at 8:30 AM EST. Advance data on the durables side showed orders rising 1.2%. Ex-transportation orders, however, only rose 0.1% and the core capital goods sector fell a steep 0.7%. We see total orders rising 0.6% for December.

The January pending home sales index will be released on Wednesday, February 27 at 10:00 AM EST. No bounce back is forecast for January pending home sales, which are expected to decrease 3.0% after falling 2.2% in December. Pending home sales were down 9.8% y/y in December.

Real GDP for the fourth quarter of 2018 will be released on Thursday, February 28 at 8:30 AM EST. With data delayed because of the government shutdown, the first and second estimate will be compressed showing annualized growth of 2.4% versus 3.4% in the third quarter.

December personal income and outlays will be released on Friday, March 1 at 8:30 AM EST. Personal income is seen rising 0.4% in January, the same increase as in December. Spending should see a more modest 0.2% increase in the first month of the year. The PCE price and the core indexes are seen rising 0.2%. This will bring the headline index up 1.8% y/y and the core index up 1.9%.

The ISM February manufacturing index will be released on Friday, March 1 at 10:00 AM EST. We seen the index retreating slightly to 55.o for January, down from January’s 56.6 reading.

The University of Michigan’s February consumer confidence index will be released on Friday, March 1 at 10:00 AM EST. We see the index remaining unchanged at 95.5 for February.

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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.