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.
President Trump’s tweet last week announcing his intent to boost tariffs to 25% from 10% and possibly extend tariffs to virtually all Chinese imports rattled the financial markets last week. The prior thinking was that trade negotiations were making progress and a formal agreement would be signed in mid-June. That may still happen, but the latest rift, which appears to have been brought on by the inability to agree on an enforcement mechanism, reintroduced considerable uncertainty as to when, of if, an agreement can be reached. The lack of a trade deal and a rise in tariffs will slow global economic activity even further. U.S. manufacturing activity is likely to slow further. Inflation will be boosted by higher prices for goods, but lower demand will limit the overall impact. The overall direct effect would be to lower GDP growth by a few tenths of a percent, but that effect could be magnified by how financial markets react and what damage to business confidence is caused by these proceedings. The Dow Jones Industrial Average gained 0.44% on Friday but fell 2.12% for the week. The S&P 500 increased 0.37% on Friday but declined 2.17% for the week.
The latest tame inflation data is giving the Fed plenty of room to maneuver. Both inflation indexes were tame. The PPI rose 0.2% and the PPI 0.3% in April. Energy provided most of the push to inflation in the last few months. Core PPI for final demand goods was up just 1.6% from a year earlier and core CPI was up 2.1%. The lack of inflation and the unknown effects of further tariffs have raised the probability that the Fed’s next move will be a rate cut, according to the latest Fed futures data. While some Fed officials have raised the possibility of too low inflation, the outlook for the economy is resilient, much stronger than early this year. Job creation is solid and an unemployment rate of 3.6% presents a pretty high bar for the Fed to cut rates.
The increase to 25% from 10% went into effect last Friday and with it the notion that “cooler heads will prevail” was dashed once again. Still, a new deal with China could emerge soon and the administration had positive remarks concerning a letter sent by Chinese leader President Xi Jinping. Prior to last week, there was something of a truce in the trade war. Soybean exports umped by more than half a billion dollars in March. Barring an agreement, the Chinese will put tariffs on U.S. products, placing downward pressure on exports. Businessmen, who thought an agreement was near are certainly discouraged and have greater uncertainty about future business relations with China. The increased tensions will lead some business leaders to infer that the Trump administration will become more aggressive on trade with other targets including the EU and Japan.
The U.S. Economy:
The U.S. trade deficit edged higher to $50.0 billion in March, up from $49.3 billion in February. Nominal exports rose 1%. The goods exports were up 1.4% on a monthly basis. Foods, feeds and beverage exports surged 7.1%. Industrial supplies exports gained 4% and consumer goods exports were up 0.4%. Total nominal imports rose 1.1%. Goods imports were up 1.2%. Industrial supplies imports surged 5.6%. Near term prospects for trade are mixed. Exports and imports both gained ground, but imports were slightly higher, largely driven by energy imports. The U.S. expansion is intact and will support demand for imports. The global economy is looking better except for the new threat of a deterioration in U.S.-China trade relations. Exports to China were down 18% in the first quarter compared to last year and imports were down 14%.
Inventory build took a breather in March. Wholesale inventories fell 0.1% in March, following the 0.4% advance. The decline was due to a 0.6% decline in durable goods. Durable goods stocks rose by 0.3%, led by machinery and metals, which rose 1.2% and 1%, respectively. On the nondurable goods side, winners were apparel, alcohol and chemicals. There were declines in drugs and miscellaneous nondurables. After two months of strong gains, inventory build took a break in March. Trade and tariffs have disrupted the normal relationships between final demand and inventory build. The trade war is likely to disrupt supply chains even further.
Producer prices rose 0.2% in April, following a 0.6% in in March. April’s gain was led by final demand goods, which increased 0.3%, the third consecutive monthly gain. Energy prices drove most of that gain, with gasoline prices rising 5.9%. On a year ago basis, the PPI for final demand was up 2.3%. Core goods prices were unchanged in April and are up 1.8% y/y. Inflation was slightly more vigorous on the consumer side. The consumer price index rose 0.3% in April, following a 0.4% increase in March. The CPI for energy was up 2.9% in April, after a 3.5% gain in March. Excluding food and energy, the core CPI only rose 0.1%. On a year ago basis, the headline CPI was up 2.0% and the core CPI was up 2.1%. Inflation remains in the Fed’s target. The tariffs on Chinese products will fuel inflation by adding 0.1% to 0.2% to consumer prices, if no deal is reached. The tariffs would also reduce global and domestic economic activity by a few tenths directly, but that effect would be magnified by the negative reaction of financial markets and falling confidence.
Important Data Releases This Week
April NFIB small business optimism index will be released on Tuesday, May 14 at 6:00 AM EDT. The index came in at 101.8 in March and we project a slight rise to 102.0 for April. Small businesses are responsible for a majority of job creation and the NFIB focuses on that part of the economy.
April retail sales will be released on Wednesday, May 15 at 8:30 AM EDT. Mixed acceleration is the call for April. Total sales, which came in up 1.6% in March, will rise 0.3% for April. Excluding autos and gas, ales are projected to rise 0.4%.
April industrial production will be released on Wednesday, May 15 at 9:15 AM EDT. Manufacturing has been very weak, showing no change in March, after declining 0.3% and 0.5% in the two preceding months. We look for total IP to be unchanged and manufacturing to increase only 0.1%.
March business inventories will be released on Wednesday, May 15 at 10:00AM EDT. Business inventories were up 0.3% in February, but the wholesale report for March was more restrained. We think stocks will advance a more modest 0.2% for March.
April housing starts will be released on Thursday, May 16 at 8:30 AM EDT. Significant improvement is projected for April as both March permits and starts came in well below expectations. Starts are forecast to rise from 1.139 million to 1.2oo million. Permits are projected to rise from 1.269 million to 1.290 million.