Headwinds are Growing from Low Oil prices, Strong Dollar, Trade Tensions

By | December 10, 2018

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 stocks attempted a rebound on Friday with Asian and European markets gaining modestly after Thursday’s selloff. The pan-European STOXX 600 Index was up 1.2% on Friday, after falling as much as 3.2% during Thursday’s rout. The arrest of a top Huawei executive in Canada to be extradited to the U.S., triggered a downfall in trading on renewed trade tensions between the U.S. and China. The arrest came on the heels of a trade truce between the U.S. and China and triggered fears that the trade dispute could escalate further. The MSCI All-Country World Index, which tracks shares in 47 countries, was up 0.3% on Friday but was on track to end the week down 2%. Investors are concerned abut new yield-curve developments that could mean a slower economy in coming months. Other analysts say the changes in the curve represent a more neutral Fed going forward. Which is possible considering the slowing of the global economy and the disinflationary effects of oil prices in coming months. Oil prices fell as OPEC delayed a decision to cut production, while waiting for a decision from non-OPEC member, Russia.

Wall Street’s indexes fell more than 2% on Friday led by declines in big internet and technology companies and posted their biggest weekly percentage drop since March, as concerns over U.S.-China trade and interest rates convulsed the equity markets. The Dow Jones Industrial Average fell 2.24% on Friday, the S& 500 2.33% and the Nasdaq Composite dropped 3.05%. The S&P 500’s 50-day average fell below its 20-day moving average, a phenomenon known as a “death-cross” which some market watchers interpret as a near-term signal for more market weakness. The Dow Jones was down 4.5% for the week. Following a weekend truce between Washington and Beijing, stocks have been volatile on signs of whether trade tensions would be renewed as comments from administration officials and the arrest of a Huawei executive flamed trade tensions. Also, employment data came out weaker than expected and Wall Street focused on bond yields and the direction of interest rate policy. Statements from Fed officials raised the possibility that the Fed may not raise rates in 2019 as much as previously expected.

Part of the U.S. Treasury yield curve “inverted” last week, setting off debate over whether it is delivering a classic signal of oncoming recession, or it just a technical aberration. The inversion sent a chill down investors’ spines in regarding the future of the U.S. economy. Right now, it’s a what-if scenario. The inversion is limited to the front-end of the yield curve rather than the more closely watched gap between the 2-year and 10-year notes. In the current instance, yields on the 5-year notes dropped below both the 2-year and 3-year securities. Still, in December 2005 a comparable inversion at the front-end of the curve was followed shortly afterward by an inversion between the 2-and 10-year yields. The Great Recession started in December 2007. That pattern was also evident in late-1988 in advance of the 1990 recession. Ahead of the 2001 recession, the entire curve dropped into inversion in sync in February 2000.

A technical explanation suggests that bond traders are second-guessing the Fed, that is a reversal of large speculative bets on declining bond prices and the Fed’s large holding of Treasuries. The bond market does not believe the Federal Reserve’s current plans to raise rates through 2019. The moves coincide with some positioning shift in the Treasury markets. Hedge funds and other speculators have amassed a record level of bets on declines in Treasury prices in the futures market, with heaviest bets against the five-year yields. But they slashed that in half the last few weeks and may have contributed to an out-sized rally in five-year notes. Bond prices and yields move in opposite directions. It could just be momentum that’s over done in the short-covering and unwinding of money losing positions. This process could be reversed after the Fed meeting this month and new interest rate projections are released, or the release of several good economic reports. Still, ignoring the inversion is dangerous. Yield-curve inversions have preceded every recession in the last 50 years from anywhere from 15 months to two years, with just one false signal. The 2-year and 10-year note is at the lowest level since June 2007, with the 10-year Treasury note yield only around 10 basis points above the 2-year note. It is a time for concern, but not yet a time for panic. A lot depends on what the Fed does. The Federal Reserve’s rate moves influence the short-end of the curve. If the Fed becomes more cautious, the yield curve could stop flattening and might steepen a bit, suggesting in the market’s mind, the economy may have more time to run. Or, the yield curve could be pointing to a recession on the horizon, adding to the uncertainty in financial markets.

Economic data this week showed a relatively healthy economy. Both the indexes from the Institute for Supply Management pointed to robust activity in both the manufacturing and non-manufacturing sectors in November. The ISM manufacturing index improved to 59.3 in November from 57.7 in October. New orders, production, employment and inventories saw an improvement for the month. The non-manufacturing index increased to 60.7 from 60.3. The suppler delivery index retreated, suggesting the bottlenecks in the transportation network is easing slightly. U.S. vehicle sales were unchanged at a stronger than expected 17.5 million, a good sign of continued consumer strength. Factory orders fell 2.1% in October on aircraft weakness. The closely watched core capital goods sector was unchanged. Data on business investment has been a little worrisome and considering the low price of oil, further weakness may follow. Data from the employment markets was weaker than expected. 155,000 jobs were created in November and revisions subtracted 12,000 from the previous two months. Data on future employment gains is still solid, but as the labor market continues to tighten in 2019 and the economy slows, employment growth should also slow.

Next week will be busy on the economic front. The NFIB small business optimism index will be released, as well as both major inflation indexes and the feed-in to inflation, the import and export price data. You can add on industrial production, retail sales and business inventories to the busy week. The present state of the economy remains basically in good shape. Consumer spending is strong and job creation positive and wages are advancing. The industrial sector is still solid, but headwinds are growing from low oil prices, the strong dollar, slowing global growth and trade tensions. Housing is weak and there are concerns about business investment. The last time housing and oil prices weakened together was in 2014-15 and the economy and freight didn’t fare too well. 2019 will present some challenges, as the economy downshifts to hopefully a “soft-landing.” The trouble with “soft-landings” are they are rare and not smooth. The inverted yield curve could be pointing to the next recession. On the other hand, softened trade tensions could help smooth the landing to a 2% economy. One thing 2019 won’t be and that is boring.

Latest Data

The U.S. Economy:

Total construction spending fell 0.1% in October, following a similar decline in September. Residential construction declined 0.4% ad fell 0,5% excluding home-improvement declined 0.5%. Nonresidential construction dropped 0.3% for the month. Public construction increased 0.8%. Residential construction declined in October despite the fact housing starts advanced in October. Of the biggest components of nonresidential investment, manufacturing structure spending fell 1% m/m and was 3.1% higher year-over-year. The largest component of public construction, state and local construction, which accounts for more than 90% of total construction, rose significantly in October and is up at a double-digit growth compared with a year earlier. Residential construction has been weak lately and the multi-family sector is likely topped out.

The ISM manufacturing index bounced back slightly in November, rising to 59.3 from 57.7 in October. Details were positive, with new orders, production, employment and inventories rose during the month. The production index strengthened from 59.9 to 60.6. 11 industries reported growth over the month, while 3 industries reported a decrease in production. New orders were a standout, rising from 57.4 to 62.1. The weakness was likely a payback from weakness in the past two months and in November all 18 industries reported growth in new orders. The inventory index rose from 50.7 to 52.9. Supplier deliveries fell from 63.8 to 62.5. According to the ISM, lead times continue to expand because of supply chain labor and transportation issues, but levels seem to be more manageable than in past months. The employment index increased from 56.8 to 58.4, the 26th straight month of improvement. New export orders held steady at 52.2. Prices paid dropped sharply from 71.6 to 60.7. Manufacturing is forging ahead despite growing headwinds. Demand for manufactured goods remains strong. Supply deliveries are still plaguing production. The global economy is clearly slowing of trade volumes are also decelerating. The trade deal between the U.S. and China might help, but there is also a large probability that things could go south after the 90-day period. The near-term outlook is still decent, but there are a lot of dark clouds.

U.S. vehicle sales equaled an annual pace of 17.5 million units in November, the second consecutive month at that level Sales volumes were down less than 1% from a year earlier. Car sales plunged 17% on a year ago basis to a 5.4 million annualized pace. Light duty trucks improved to 12.1 million a 6.8% increase. Sales beat expectations again for a third consecutive month. The strength is somewhat surprising as the average vehicle price hit a new record of $33,697 and the fact that interest rates are rising. The strong macro-economy and job market are supporting sales. Low oil prices are a plus for sales of light trucks. The future looks less bright as the economy will slow in 2019. Still, sales should remain strong through the first half of 2019.

The nominal trade deficit widened to $55.5 in October, its highest sine 2008. Nominal goods exports decreased 0.3% on a monthly basis, while services exports rose 0.1%. Performance was mixed across exports, with consumer goods rising 0.1% and industrial supplies increased 0.6%. Auto exports fell 1.8% and capital goods exports fell 1.1%. Food, feed and beverage exports fell for a fifth consecutive month, down 6.1%.  The decline was driven by a 46.9% decline in soybean exports. Nominal goods imports rose 0.2% and service imports gained 0.4%. Auto imports rose 2.3% and consumer goods imports rose 3.5%. The trade war has been a drag on trade. Exports to China fell 26% from September to October and imports fell 4%. Year-to-date, the trade deficit with China increased by $35 billion. The cease fire with China may be good for trade if it holds but that remains to be seen. The high dollar and slow global growth will remain headwinds to trade in 2019.

The ISM non-manufacturing index increased to 60.7 in November, up from 60.3 in October, a surprise on the upside. The business activity index rose from 62.5 to 65.2 and all 16 industries reported growth. New orders rose from 61.5 to 62.5 and 15 industries reported growth in new orders. Supplier deliveries fell from 57.5 to 56.5. Comments from respondents include: “A shortage of drivers has delayed deliveries to the point where it impacts operations and Distributor stockouts and manufacturer back-orders are increasing.” The prices paid index rose from 61.7 to 64.3. Among materials up in price were aluminum, construction labor, medical supplies, paper and steel. Down in prices was fuel, lumber and cheese. In short supply were construction subcontractors, temporary labor, medical supplies and trucking services. In all the non-manufacturing sector looks good. Labor is a big concern for businesses and that problem will continue through 2019.

Factory orders fell 2.1% in October, following a 0.2% increase in September. The weakness was largely concentrated in the aircraft industry. Transportation orders fell 12% but were up 11.4% from a year earlier. Core capital goods orders were unchanged in October and are up 3.4% from a year earlier, a disappointing trend in recent months. Durable goods orders were down 4.3% in October, but nondurable goods saw a 0.3% increase. Shipments fell 0.1%. The manufacturing sector is moving forward, but there are likely to be bumps in the road in 2019. Business investment is showing signs of stress. A slowing global economy, rising interest rates, falling oil prices and uncertainty over trade are making businesses more cautious. Still, demand seems to be decent despite rising headwinds. A renewal of trade tensions, on top of the weak global outlook and a slower U.S. economy will present challenges in 2019.

Payroll gains slowed in November, adding just 155,000, following a downward revised addition of 237,000 in October. Both goods producers and service providers eased net hiring in November. Service industry providers slowed hiring across the board. Only holiday-related sectors such as retail trade and transportation made gains because of the early-Thanksgiving. Cold weather depressed construction hiring but manufacturing was steady. Average hourly earnings increased 0.2%, up 3.1% in the past year. The tight labor market could be starting to limit the number of new workers. We do expect that process to manifest itself more in 2019. Wage growth remained above 3% for a second month and is likely to push higher in 2019. Hiring will slow in 2019, in part because of a lack of supply of workers, but also because of the impact of a projected slower economy.


Asia’s prospects looked gloomy as factory activity and export orders weakened across the region in November. Analysts expected no quick rebound amid simmering global trade frictions. Manufacturing activity slipped in Indonesia, Taiwan and South Korea. Taiwan’s manufacturing PMI fell to 48.4, a 37-month low. South Korea’s new export orders shrank by the most in five years, a sign of increasing pressure on businesses from slowing global demand.  Japan’s PMI fell to 52.3, a 15-month low. Japan’s economy shrank at an annualized rate of 1.2% in the third quarter as natural disasters and slowing global demand hurt factory output and exports. On the other hand, Singapore’s PMI rose to 52.6, a 3-month high. On a global level, the manufacturing PMI sank to 52.1, a 23-month low. Mexico’s manufacturing index equaled 51.3 in November. A 6-month high. The euro-zone’s index fell to 51.8, a 27-month low. The truce between the U.S. and China may help turn global growth around, but that is not certain. Also, the truce is scheduled to last only 90 days. Renewed tensions could follow that period.

Important Data Releases This Week

The November NFIB small business optimism index will be released on Tuesday, December 11 at 6:00 AM EST. The small business index is expected to ease slightly to 107.0 in November versus October’s 107.4 reading. October saw a little less optimism in expansion plans and earnings trends.

The November PPI will be released on Tuesday, December 11 at 8:30 AM EST. The PPI did post a substantial increase in October, but the reversal in oil prices point to limited pressure in November. Following October’s 0.6% jump, no change is expected n November. Excluding food and energy, prices are projected to rise only 0.1%, bringing the year-over-year increase to 2.8%.

The November CPI will be released on Wednesday, December 12 at 8:30 AM EST. The CPI did post a 0.3% advance in October, driven by an advance in energy prices. We project a 0.2% advance in the CPI index and the core index for the month. Both indexes will be up 2.2% y/y.

November import and export prices will be released on Thursday, December 13 at 8:30 AM EST. We project import prices to fall 0.7% in November and export prices to rise just 0.1%.

November retail sales will be released on Friday, December 15 at 9:15 AM EDT. A solid 0.8% increase in sales happened in October. Sales are expected to post only a 0.1% rise in November as unit auto sales did not advance and sales at gasoline statins likely declined. Excluding autos and gas, sales are projected to rise a more solid 0.4%.

November industrial production will be released on Friday, December 15 at 9:15 AM EDT. We project a more solid 0.3% advance for November’s industrial production index. October was held back to a 0.1% advance because of hurricane effects and warm weather on utility output. Manufacturing will also advance 0.3% for the month.

October business inventories will be released on Friday, December 15 at 10:00 AM EST. A sizable 0.5% gain in inventory build is forecast for October.

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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.