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.
Asian stocks followed their U.S. counterparts, finishing the quarter on a positive note after waves of volatility shook investor confidence that the synchronous global expansion that was so profitable last year will continue. Investors are waiting details on U.S. plans for tariffs for China amid concerns that an escalation in trade tensions could disrupt global supply chains and hurt corporate earnings. China has warned it could target a broad range of U.S. businesses if Trump slapped tariffs on $50-$60 billion of largely high tech Chinese goods. The market regained ground early in the week on the fact that discussions were ongoing between Beijing and Washington and a full-blown trade war might be averted Still, investors will remain nervous over the next month until more details are released.
Economists at ING have split the trade tensions into four stages, starting from a lone Trump attack to a tit-for-tat battle to U.S. trade escalation, such as including EU cars and finally a full blown trade war. The last, ING estimates, would harm all economies, with the U.S. taking the biggest hit, of some 2% of GDP over two years, with U.S. exported facing high tariffs at all borders, while the rest of the world keeps the existing arrangement in place. Only in the first scenario, where Trump imposes tariffs and no one retaliates, would the U.S. make any noticeable gain of some 0.3% of GDP. ING sees the current situation somewhere between the first scenario and the second tit-for-tat stage.
It was a short week for markets and a quiet week for economic data. The final release of fourth quarter 2017 GDP showed growth at 2.9%, stronger than the 2.5% initial release. Upward revisions showed personal consumption increased 4% in the quarter. Incoming data show spending has been weaker in the first quarter. Personal spending was unchanged in February, after falling 0.2% in January. However, prospects for future spending look good. Personal income increased 0.4% in February, the third consecutive monthly rise at that level. Consumers are taking a break from spending after the strong fourth quarter, but a bounce back is likely. Inflation came in at a softer pace in February, with the PCE rising only 0.2%. With the PCE only rising 1.8% y/y and the core 1.6%, the Fed may be content with only three increases in the fed funds rate this year.
The focus this week will be on employment, but there will be a host of other indicators. The ISM manufacturing and non-manufacturing indexes, vehicle sales for the U.S., international trade and construction spending will also be released.
The U.S. economy is doing fine, currently strong and will accelerate further in the next few quarters. The fiscal stimulus and tax cuts will propel growth to near 4% for a couple of quarters and momentum is likely to remain brisk through 2019. A payback will come after the stimulus fades. Growth will revert back to the long term trend in 2020-21. There is an increasing risk that inflation will accelerate further in the next few quarters and the Fed will respond and perhaps shoot too far. When the economy slows, we may see too high inflation and interest rates, and downside risks will increase significantly. The probability of a recession in 2020-21 becomes uncomfortably high. Adding trade tensions and tariffs further clouds the picture because tariffs will slow growth. The development of events in the next few weeks, will have a big impact over the next few years.
The U.S. Economy:
The pace of economic growth surged in February. The Chicago Fed National Activity index jumped to 0.88, following a 0.2% gain in January. The performance marks the second highest reading since the recovery from the Great Recession began. Strong contribution from production and incomes components and in the employment and hours worked sectors drove the index’s gain. The three-month moving average increased from 0.16 to 0.37 in February. Production-related indicators added 0.5 to the headline measure. The 1.1% advance in total industrial production helped deliver the improvement. Employment-related indicators added 0.31, helped by the impressive 313,000 gain in employment helped buoy the index. The headline index suggests the economy is firing on all cylinders. The global economy is helping support production. The fiscal stimulus and tax cuts will further aid growth in coming months.
Nominal personal income increased 04% in February, the third consecutive rise at this magnitude. There was not a meaningful impact from the tax legislation, compared to January, Nominal disposable income rose 0.45 9n February, compared to 1% in January. Meantime, personal spending was unchanged in February after falling 0.2% in January. Durable goods spending held up, rising 0.6%, but nondurable goods spending fell 0.3% and motor vehicle and parts spending dropped 0.2%. Spending has started off the year on a weak note, but coming of the strong fourth quarter, there are little cause for concerns With incomes coming in at a decent rate, the consumer will bounce back.
The PCE increased 0.2% in February, following the energy fueled 0.4% surge in January. The core PVE rose a trend-like 0.2% in February. On a year ago basis, the PCE was up 18% and the core 1.6%. Inflation is increasing but at a gradual pace. This suggests the Fed will stay on track for three interest rate increases this year. Inflation is expected to step up gradually, but the Trump administration’s tariffs could lead to greater input prices. The Trump administration has pivoted on steel and aluminum since his initial announcement so that some 67% of steel imports are exempt. Increasing the tariffs on input prices doesn’t necessarily mean inflation would gain ground although one sector might see prices increase. Even if imported steel and aluminum prices rose by 25%, it would add less than 0.1 percentage points to import prices. However, if China decides to retaliate against U.S. tariffs, the likely impact would likely lower exports and put downward pressure on the dollar and implies lower economic growth but implies less inflation and lower interest rates. A full-blown trade war could lead to a global recession, which means negative economic growth and a back-tracking Fed. The future of trade and inflation will depend on how events proceed in the next few months.
The Conference Board’s index of consumer confidence fell 2.3 points in March to 127.7, reversing some of February’s gain. Both the present and future indexes lost ground in March. The present situation index dropped from 161.2 to 159.9 and the expectations index declined from 109.2 to 106.2. Purchasing plans took a hit, with autos falling to the lowest level in six months and home purchasing plans fell to the lowest level in a year. Consumers also expect less stock price appreciation and higher interest rates in months to come. The index remains elevated which suggests the consumer still feel pretty good about the economy. However, despite employment gains and a tight labor market, consumers don’t anticipate decent income gains. The fiscal stimulus and tax breaks do suggest much stronger economic growth in coming months. This should spur spending and open the consumer’s wallets.
Important Data Releases This Week
- March ISM manufacturing index will be released on Monday, April 2 at 10:00 AM EDT. The ISM manufacturing index is staying elevated, rising from 59.1 in January to 60.8 in February. New orders fell 1.2 percentage points to a still high 64.2 and production also fell. Manufacturing was strong in the first quarter and prospects are positive. There are risks from trade but details are needed to ascertain risks.
- February construction spending will be released on Monday, April 2 at 10:00 AM EDT. Construction spending increased for five consecutive months before flattening out in January. Private construction is driving the expansion, but the public sector is also contributing, a big turn from last year.
- March vehicle sales will be released on Tuesday, April 3 at 4:00 PM EDT. February vehicle sales fell to an annual rate of 17.1 million units from 17.2 in January. We expect sales to track near 17 million for the remainder of the year.
- February international trade will be released on Thursday, April 5 at 8:30 AM EDT. The U.S. trade deficit widened from December, increasing to $56.5 billion from a revised $539 billion. Exports decreased 1.3%, while imports were unchanged. The outlook for exports is good barring Mr. Trump’s trade policies. The strength of the U.S. suggests strong imports, again barring disruptions in supply chains.
- March payroll employment will be released on Friday, April 6 at 8:30 AM EDT. Payroll growth soared in February, rising by 313,000 jobs. We don’t look for repeat in March. Weather will be a temporary drag. Look for 200,000 jobs to be created, a decent, but not robust reading.