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.
World stocks rose on Friday as plans for U.S.-China trade talks soothed nerves over their tariff war, while the recovery in Turkey’s lira ran out of steam. The MSCI All-Country World Index, which tracks share in 47 countries, as up 0.2% on Friday, but set for its third straight weekly fall. A Chinese delegation will meet U.S. representatives in trade talks on Aug 21 and 22. Turkey’s lira dropped nearly 3% to almost 6 to the dollar again, having recovered ground rapidly in recent days. The fall in the Turkish currency brought back memories of emerging market crisis, such as the Asian financial crisis of 1997 and Turkey’s 2001 crisis. Emerging market stocks are hovering near the brink of a bear market.
Stocks on Wall Street have been caught in cross winds of good earnings, solid economic fundamentals and fear of the impact of a trade war. The result has been a mostly upward trajectory that has yet to it the January peak. Last week, the S&P gained 0.59 percent, just a bit above its average weekly return of 0.31% since March 2009. The VIX hovered around 13, calm compared to the average mean of 18 since the rally began. Stocks in developing countries sank into a bear market, but bigger declines erupted twice in this bull market, and neither killed the rally. The FANG complex of internet mega-caps suffered the worst week in five months, but the S&P stood firm, closing less than 1.% from its all-time high. The fact that the economy is doing well is a firm is a good foundation for stocks. Safety is at a premium, a turnaround from earlier this year, when faster growth was sought in chipmakers and internet companies. Now money is flowing to industries less sensitive to economic swings, such as utilities and soap makers.
Broad-based strength in retail sales was the headline this week in economic data. Retail sales grew 0.5% in July, led by spending at food service and drinking places. The strength in retail sales extended beyond that sector, as clothing stores, non-store retailers and even department stores posted a strong start to the third quarter. Industrial production increased only 0.1% in July but the weakness was mostly caused by a 0.5% fall in utility output. Mining dipped for the first monthly decline in a year, but the manufacturing sector showed no signs of slowing. While the outlook for manufacturing loos hazy amid trade war concerns, the near term trend in manufacturing remains solidly upward. The 12-month in manufacturing payrolls through July (+327,000) is the highest since 1995.
Housing starts increased to a 1.168 million unit pace, rising 0.9% in July. While expectations for housing are shaky, the trend is still upward on a year-over-year basis. Single-family housing starts are still grinding forward as they have been doing for much of this cycle. Homebuilding remains a much smaller portion of the economy than it was in the last cycle. There are signs of cracks in the housing sector. Existing home sales fell 0.6% in June to 5.38 million units, the third monthly decline. Existing home sales are down 6.6% annualized rate in the second quarter, following a 6.1% drop in Q1. Lean inventories, an industry working at full capacity, affordability and rising interest rates will weigh on housing. While not expected to decline, we may have seen a peak.
Next week will be light on the economic calendar. We will get a look at new and existing home sales and durable goods orders. The economy continues on a solid track but there are clouds on the horizon. The deadline for the next stage of tariffs with China is fast approaching, but with A Chinese delegation visiting Washington, there is still some hope a full-blown trade war could be averted. The situation in Turkey stabilized for most of the week. There could still be repercussions in emerging economies but so far the situation looks fairly stable. The action from tariffs remains a significant threat. The next round includes a wide range of products, including consumer items. Higher input prices and higher consumer costs translate into higher inflation and less demand. The economy’s near term direction and speed are impressive, but the sailing will be a lot tougher if the trade war gets accelerated to a higher level. A great number of economists believe that 2020 will be a pivotal year and an increasing number of them fear things are started to point towards recession.
The U.S. Economy:
The NFIB small business optimism index increased from 107.2 in June to 107.9 in July. The July increase more than offset June’s decline. The index has a historical tendency to fall in June, having done that the last five out of seven years. In July, expectations for the economy and hiring plans both improved. Plans to raise worker compensation improved slightly, but they haven’t changed substantially over the past year. Plans to increase capital expenditures improved slightly but there is little evidence pf a post-tax legislation bump. It is important that this index did improve in July, as most measurements of sentiment have retreated lately. So far, business confidence is holding up despite growing uncertainty over trade. Small businesses are having trouble finding workers but few are exposed to trade and are not exhibiting a lot of worries in that direction.
Retail sales accelerated in July as consumer spending remains strong. However, growth was revised down in previous months. Retail sales rose 0.5% in July, following a 0.2% advance in June and a 1.2% rise in May. Sales rose 0.6% excluding autos and excluding autos and gas. The sales increase was widely distributed. Motor vehicles and parts sales rose just 0.2% and gas prices were a factor with sales at gas stations up 0/8%. Sales fell at sporting goods and at furniture stores. Sales were up a strong 6.4% y/y in July, up from 6.1% in June. July was the strongest month on a year ago basis in five-and-a-half years. Spending fundamentals remain healthy but there are risks. Vehicle sales are likely to see little growth and trade remains a powerful threat. A trade war would push up prices and slow economic growth. Inflation is starting to erode income gains. However, incomes have allowed the consumer to shrug off gas prices that are up 40 cents a gallon over the past year. Interest rates are going up. So far, the consumer remains strong and such strength may linger for a few months.
Business inventory build took a breather in June. Inventories only increased by 0.1% in June, following a revised 0.3% gain in May. Manufacturers, retailers and wholesalers all added just 0.1% to stocks in June. Stocks are up 4% year-over-year. Motor vehicles and parts stocks slipped 0.1% in June, following a 0.9% rise in May. Excluding the auto sector, retail stocks inched 0.2% forward. Business sales slowed to a 0.3% advance in June, after the stunning 1.3% gain in May. Sales were strong enough to lower the I/S ratio from 1.34 to 1.33 months. The I/S ratio has been declining slowly for two years and now sits at the lowest level since November 2014. The light is green for further inventory build. The I/S ratio is retreating and for the right reason, stronger sales. We should see decent inventory build the next few quarters. There are downside risks concerning trade. Tariffs will raise the price of key inputs and raise the price of finished goods. At some point, inventories will feel the pinch as prices increase, demand weakens and producers cut back.
Industrial production increased a meager 0.1% in July, a second consecutive monthly gain. Total IP had increased a revised 1.0% in June, following a 0.9% decline in May. Manufacturing led the headline gain, rising 0.3% in July, following a 0.8% advance in June and a 0.9% decline in May. Mining fell 0.3% after rising for five consecutive months. Utilities retreated for a third consecutive month, declining 0.5%. Auto production grew 0.9%, after surging 7.6% in June. Auto output had declined 8.5% in May as a fire hit a parts supply plant. Non0auto production only gained 0.1% in June and is up only 2% from a year earlier. Business equipment output increased 0.8%, up 4.1% from a year earlier. Fundamentals for production remain healthy, despite rising interest rates. The industrial sector is facing supply constraints from a lack of labor and rising transportation costs. Also, supplier deliveries continue to slow making just-in-time production more difficult. Trade is a wild card that threatens to add costs and curtail final demand. Trump’s treat to impose $500 billion on all imports from China will pose a significant threat to the global supply chain and weaken production. Certain inputs like rate-earth metals are only available through Chinese imports.
Housing starts picked up slightly in July, rising 0.9% to an annual pace of 1.168 million units. Starts did remain 1.4% below July 2017 levels. Single-family starts rose 0.9% to an annual pace of 862,000, while the multi-family sector saw a 0.7% rise to 306,00 units. Total permits rose 1.5% to 1.311 million units, up 6.4% y/y. The residential market numbers were modestly good, but nothing spectacular. Housing starts are still down year-over-year and have generally out over the past nine month after seven years of steady increases. The increase in housing starts in July, plus the permit number indicate that a sizable decline in residential construction is not around the corner. Neither the permit backlog nor the construction backlog shows any sign of decreasing, which is good news. The multi-family sector has leveled out over the past two years and is starting to retreat slightly. The market is tight for single-family homes and price is an issue.
Important Data Releases This Week
July existing home sales will be released on Wednesday, August 22 at 10:00 AM EDT. Existing home sales have been flat and at the low end of expectations. Based on a rise in pending sales, we do think there will be an improvement in July to a 5.425 million rate, up from June’s 5.380 million.
July new home sales will be released on Thursday, August 23 at 10:00 AM EDT. New home sales have been struggling to move higher but an improvement is projected for July. June sales are projected to hit 648,000 versus 631,000 in June.
July durable goods orders will be released on Friday, August 24 at 8:30 AM EDT. Lower aircraft orders will be responsible for a projected 0.2% decline in durable goods orders. Excluding transportation, orders are forecast t rise a stronger 0.4%. Core capital goods orders are expected to rise at a strong 0.6% pace.