Growth is Tracking at a Slightly Cooler Pace in the First Quarter

By | March 4, 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

World shares had a lively end to an otherwise slow week on Friday, with Chinese A-shares leaping after MSCI quadrupled their weight in its global benchmarks and decent U.S. data lifted the dollar and bond yields. Chine figured heavily in the sudden end-of-week flurry of news. China’s blue-chip CSI300 Index surged 3.2% to land its best week since November 2014, after MSCI’s move. It could potentially draw more than $80 billion of fresh foreign inflows to the world’s second largest economy. The Chinese manufacturing PMI remains in contraction territory, but it did surprise by an increase in the new orders index component. There were also encouraging comments from the ongoing China-U.S. trade talks that helped major Chinese indexes post their best month in nearly four years in February amid hopes for additional stimulus from the Chinese government.

Despite a brighter note for global stocks, the outlook for the global economy continues to darken. Both of China’s manufacturing PMIs are in negative territory. Factories across the globe slammed on the brakes last month as demand crashed, hurt by the ongoing U.S.-China trade war and political uncertainty ahead of Britain’s imminent departure from the EU. Euro-zone manufacturing went into reverse forth first time in five year in February. British factories slashed jobs last month and have been stockpiling goods at the fastest pace seen in any Group of Seven countries since records began in the early-1990’s in case the country fails to get a transition deal to smooth the shock of Brexit. The euro-zone’s manufacturing index fell to 49.3 in February, the first time it has been below 50 since June 2013. Faced with a slowdown, the ECB will re-launch cheap bank loans as early as June and delay rate hikes to 2020 in a bid to stave off recession. Readings from South Korea are grim with exports falling 11.1% in February from a year earlier and shipments to major buyer China, down 17.4%.

U.S. stocks closed higher on Friday, with the S&P finishing above 2,800 for the first time since Nov. 8 on news that trade negotiations between the U.S. and China may conclude as soon as two weeks. However, the latest data on manufacturing disappointed, tempering investor’ optimism. The Dow Jones Industrial Average gained 10.92 points, or 0.4% to 26,026.32, but fell 0.1% for the week. The S&P Index gained 19.20 or 0.7% on Friday but was up 0.4% for the week.

U.S. stocks are outpacing those in most other regions of the world to start 2019, but the gap between them is narrowing and some investors are looking for possible events that might swing the scales to the rest of the world. The 11 percent gain in the S&P so far this year is helping expand its global edge since the U.S. equities bull run began a decade ago. U.S. stocks are ear 70-year highs relative to other global developed markets, according to Bank of America Merrill Lynch. Earnings are expected to slow this year compared to a stellar 2018. U.S. corporate earnings are expected to climb 5.3% this year after rising 24.4% in 2018, according to FTSE Russel. European companies excluding the U.K. are expected to see profits rise 9.1% this year and profits for the emerging markets are expected to climb 13.9%. However, the S&P 500 is trading at 16.4 times earnings estimate for the next 12 months, more expensive than the 13.4% for Europe’s STOXX and 11.5% for MSCI’s emerging market’s index. The U.S. economy is doing better than much of the world, but it is slowing. With a conclusion of U.S.-China trade talks and additional stimulus in several areas of the world. The global economy might perk up just as the U.S. slows and may even enter recession in 2020-21. That would certainly  change the dynamics of the global equity markets.

Economic data last week provided some insight on the economy. Personal income declined 0.1% in January but that followed a large 1.0% jump in December. This report contained two months of data due to the government shutdown but personal spending and the PCE deflator only released December data at this time. The increase in income in December was the largest increase since December 2012. The fall in January is not unusual because of seasonal issues and was partly related to the government shutdown and delayed payments to farmers. Personal spending fell 0.6% in December, the biggest monthly decline since 2009. Consumer spending was weak in December and may have been influenced by the slump in the stock market, as well the government shutdown. Consumption is still expected to remain solid in 2019, supported by decent job and income gains. The PE deflator only rose 0.1% in December and was unchanged in November. inflation is quiet ad is not expected to pick up speed over the next few months.

The ISM manufacturing index softened in February, falling to 54.2 from 56.6 in January. The details were weak across the board, as new orders, production and employment fell during the month. Despite the February fall in the index, it does remain well above the expansionary 50 mark. Still, manufacturing faces some headwinds as the U.S. economy and the global economy are slowing and trade tensions have sapped some life out of manufacturing. Tariffs have caused prices to increase and some respondents are starting to exhibit recession fears. Vehicle sales came in at a 16.6 million pace in February, slightly below January’s 16.7 million rate. We think that sales will track near the 17 million mark this year.

The U.S. economy moderated at the. end of 2018 but not as much as U.S. Stock prices are outpacing most other regions of the world, but the gap is narrowing and some investors are eying potential catalysts that might tip the scales to the rest of the world. Real GDP increased 2.6% in the fourth quarter, down from 3.4% in the third quarter. The slumping housing market and a bigger trade deficit softened up the economy’s growth, but consumers and businesses still showed plenty of resilience despite rising headwinds. The drop off kept the U.S. economy from achieving 3% growth for the first time since 2005. Real GDP came in at 2.9% for 2018. The BEA said that the government shutdown cost the economy 0.1% of growth in the fourth quarter. Consumer spending increased 2.8% in the fourth quarter, down from the previous two quarters, but still a decent rate. Business investment surprised on the upside. Inventories rose by $97.1 billion, more than the third quarter. Investment in new construction fell 3.5% in Q4, the fourth quarterly drop in a row. Another drag on the economy were imports, which climbed 2.7% outrunning the 1.6% gain in exports. The PCE index rose 1.5% in the fourth quarter and the core rate was up 1.7%. Inflation ran about 2% for the year.

The fourth quarter GDP report is mainly looking in the rear-view mirror. Growth is tracking at a slightly cooler pace in the first quarter. If growth slows to potential, it will be about half the pace of the second and third quarters of last year, when the stimulus effect of the tax cuts and fiscal increases was at its peak. That stimulus has faded and so has growth. On top of the economy downshifting, uncertainty over trade and fiscal stability has grown. Confidence was starting to unwind early in the new year. Evidence that the global economy is slowing is adding to unease over concerns over the economy’s future. The fact that the government is back to work is a plus and so is the current shift in monetary policy. There appears to be progress on a trade deal with China, which would also have a positive impact on confidence and reduce uncertainty. Of course, if trade negotiations fall through, one could expect a negative reaction, most certainty in the financial markets. So where is the economy heading? We will likely continue slowing to trend. If the trade deal falls through with China and tariffs are added to imported cars, we could be starting to head towards recession. If all goes well, we will end this year near 2%, which in the context of a sub-4% unemployment rate, not a bad thing, unless politics and bad policy brings the recovery to its knees on near its 10th birthday of the expansion.

Next week will be enlightening for economic data. We will see insight on construction spending, new home sales, the ISM non-manufacturing index, international trade, employment and housing starts.

Latest Data

The U.S. Economy:

The pace of economic activity slowed in January. The Chicago Fed National Activity Index declined to -0.43 in January, down from 0.05 in December. One of the four broad categories that make up the index decreased and two made negative contributions to the headline index. The index’s three-month moving average decreased to a neutral reading from 0.16 the previous month and January was no exception. Production related indicators contributed -0.45, compared to 0.08 the previous month. The sales, orders and inventories indicators category contributed 0.02, in contrast to a neutral contribution in December. The employment-related indicators contributed 0.05, compared to 0.02 the previous month. The personal consumption and housing category contributed -0.04 compared with -0.06 the previous month. The negative reading for January indicates that the economy is growing below average.

Wholesale inventories shifted to a higher gear in December, increasing by 1.1%, following a 0.4% increase in November. Among the durable goods category, stocks grew by 1.5% following a 0.7% advance in November. Nondurable goods saw a 0.3% rise in December, after falling 0.1% in November. Wholesale sales fell 1% in December and 1.2% in November. The inventory-to-sales ratio increased to 1.33 months from 1.30. The I/S ratio was as low as 1.26 in August. The increase in the I/S ratio is not of enormous concern because so much the increase was attributed to a11% reduction in petroleum sales, which weighed down the top line figure. Weak oil prices have hurt wholesalers in the final months of 2018. A trade deal with China might help wholesalers because tariffs have brought costs to them, who buy and sell products for foreign and domestic producers.

New residential construction took a tumble in December. Housing starts fell 11.2% in December to an annual rate of 1.078 million units. The largest decline was for multi-family units, where starts fell 20.4% to an annual pace of 320,000 units. Single-family starts fell 6.7% m/m to 758,000. Permit activity was more promising. Total permits increased 0.3% to an annual pace of 1.326 million units. Part of the December weakness in housing activity can be traced to the runup in mortgage rates in early-December and the general feeling at that time that rates were going to go higher. Since December, the Fed has placed monetary policy on hold, mortgage rates have fallen since the beginning of the year and applications have increased. This suggests that we could see some new life breathed into the housing sector. There are still problems with affordability and price and weaker confidence in the economy. Whether, we see renewed confidence and an impact from lower mortgage rates remains to be seen.

The advance international trade goods deficit widened to $79.5 billion in December, up from $70.5 billion in November. Nominal goods exports fell 2.8% in December following a 0.9% decline in November. Industrial supplies fell 4.8% in December after losing ground in November. Capital goods exports fell 3.5% in December, but that followed a 3% increase in November. Nominal goods imports rose 2.4% after a 3.6% drop in November. Performance was largely positive across import categories. Capital goods imports surged 4.5% and automotive imports rose 0.2%. December’s goods deficit was the biggest of 2018, returning to trend after an unexpected large decline in November. The decline in exports is of more concern than a surge in imports. Goods exports slid nearly $4 billion from November and were slightly lower than in December 2018. Factoring in inflation and exports are worse than moving sideways. The global economy is decelerating, and the trade war is taking a toll, disrupting supply chains. A trade deal with China would help restore confidence and reduce uncertainty but it may not help the slowing of the global economy.

Factory orders rose 0.1% in December, following two consecutive months of declines. Orders for nondurable goods fell 1.1%, while orders for durable goods advanced 1.2% for the month. Core capital goods orders fell 1.0% in December after declining 1.1% in November. Orders in this segment were up 2% y/y but the growth trend has been showing weakness for nearly a year. Transportation orders rose 3.2% in December and were up 3.2% from a year earlier. Hard data on manufacturing continues to disappoint. Core capital goods orders have declined four out of the last five months. The growth in this sector has been weak since late-2017. Soft data on manufacturing has been more upbeat with the ISM manufacturing index increasing in January. Trade is a risk for manufacturing even though there as been a progress towards a trade deal with China. Potential tariffs on the EU and auto imports still are risks. The global economy is slowing. A lack of labor personal may also limit growth in U.S. manufacturing industries.

Income growth remains strong. Nominal personal income did decline 0.1% in January, but that followed a 1.0% surge in December. The December increase was the biggest jump in comes since December 2012 Income growth has been steady, helping firm spending. Personal spending was weak in December, falling 0.6%. The decline was puzzling in the light of the strong job and income growth and may be revised later. While growth in spending is expected to moderate in coming months, it is likely to remain solid. Consumers will spend unless the American job machine stumbles. While, payrolls gains are projected to soften, as we start to push the limits of available workers, there will be enough to support decent income gains. Weak inflation is a help for the consumer, with the PCE deflator only advancing 0.1% in December and remaining unchanged in November. Core inflation is up 1.9% from a year earlier, near the Fed’s target.

The ISM manufacturing index edged lower, dropping to 54.2 in February, down from January’s 56.6 reading. New orders fell from 58.2 to 55.5 in January. Thirteen out of eighteen industries reported growth in new orders and among them were wood products, computer/electronics, printing and related support activities along with fabricated metal products. Nonmetallic metal products were the only industry reporting a decrease in orders. The production index declined from 60.5 to 54.8 and the ISM added that unfavorable weather may have contributed to the decrease. The inventory index edged higher from 52.8 to 53.4, with 10 industries reporting higher inventories and 3 reporting a decline. Supplier deliveries dropped from 56.2 in January to 54.9. Employment fell from 55.5 to 52.3, but still indicates growth in employment for manufacturing. Imports rose to 55.3 from 53.8 and new export orders rose from 51.8 to 52.8. Prices paid fell from 49.6 to 49.4. Among commodities up n price were aluminum, electronic components, paper products and plastic. Among commodities down in price was caustic soda, memory and various steel products. It appears that manufacturing went through a soft patch in February and the difference between hard” and “soft” data as narrowed. Industrial activity remains positive but is down from last summer’s robust days. Trade is an issue and adds uncertainty to the business outlook. With the U.S. economy downshifting and the global economy slowing, the outlook for industrial activity is still positive, but moderating.

Vehicle sales came in at a 16.6 million annual pace in February, off slightly from January’s 16.7 million rate. Some of the February slowdown could be traced to the government shutdown and bad winter weather in much of the U.S. The shift to quarterly reports from Ford and GM calls into question the reliability of some of these monthly numbers. Light truck sales rebounded to 11.6 million, but car sales fell from 5.5 million in January to 5.0 million. Vehicle sales will be supported by rising incomes and the healthy job market, as well as low gas prices. The higher interest rates and tighter credit are a headwind. We still project vehicle sales to track near 17 million this year.


China’s official manufacturing PMI fell to 49.2 in February, down from 49.5 in January, according to the National Bureau of Statistics. New export orders fell for a ninth month to 45.2, the lowest level since February 2009, from 46.9 in January. Total new orders did edge back into expansionary territory, rising to 50.6 from 49.6 in January and suggesting some improvement in domestic demand. Recent numbers on manufacturing and exports must be viewed with some caution as businesses scale back operations, or close around the Lunar Holidays, which began on February 4 this year. The gloomy findings are reinforcing the view that the world’s second biggest economy is losing steam, after growth last year cooled to a 30-year low. The non-manufacturing PMI fell to 54.4 in February from 54.7 in January. Record lending by China’s banks and the sharp rebound in the stock market have lifted some of the gloom hanging over the economy. Analysts do warn that it will take months to see of the strong credit impulse translates into improved business activity, assuming companies are borrowing for fresh expansion and investment, not merely refinancing existing debt.

Important Data Releases This Week

December construction spending will be released on Monday, March 4 at 10:00 AM EST. Residential multifamily and public sending drove November’s spending up 0.8%. A 0.6% increase is projected for December.

New home sales for December will be released on Tuesday, March 5 at 10:00 AM EST. Driven by an impressive gain in the South, new home sales reversed a run of weakness with a 16.9% surge in November to a 657,000 annualized rate. We look for a slip back to a 591,000 rate in December.

The February ISM non-manufacturing index will be released on Tuesday, March 5 at 10:00 AM EST. The ISM non-manufacturing index reported solid growth in January but was 1 point lower than December. We see the index rising to 57.2 for February, up from 56.7 in January.

December international trade will be released on Wednesday, March 6 at 8:30 AM EST. The trade deficit is expected to rise to $57.6 billion in December, up from the average of $52.9 billion for the first two months of the fourth quarter.

February employment will be released on Friday, March 8 at 8:30 AM EST. Moderation at a still healthy level is projected for February’s payrolls. Employment is projected to increase by 178,000, down from the strong 304,000 jobs added in January. The unemployment rate is expected to fall to 3.9%. Average earnings are projected to increase 0.3% for February, bringing the year-over-year increase to 3.4%.

January housing starts will be released on Friday, March 8 at 8:30 AM EST. Wild fires in California contributed to a sharp drop in housing starts in December. We see a bounce back to a 1.170 million level for January. Permits are projected to fall to 1.280 million.

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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.