If Employment is Weak Again, the Economy Might Be in Real Trouble

By | April 1, 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.


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Global stocks rose on Friday on optimism over trade talks between the United States and China and were set for the best quarterly performance since 2012. European markets opened higher, where the pan-European Stoxx 600 was up 0.4%. This came on the back of strong gains in Asia, where Chinese stocks climbed more than 1.1%, after U.S. officials had made proposals in trade talks with the U.S. on a range of issues that go further than they have made before, including forced technology transfer. Strategists at USB wrote in a note to clients, “Our base case is for the current tariff truce to yield only a partial resolution, including select U.S. tariff rollbacks in exchange for some Chinese concessions on imports, market access and intellectual property.” MCSI’s All-Country World Index, which tracks equities in 47 countries, was up 0.17 percent on Friday and was set to post the best quarterly performance since 2009 if sustained.

U.S. stocks rose on Friday as optimism over progress on U.S.-China trade talks appeared to overshadow concerns about a slowing U.S. expansion, while investors embraced the debut of the rise-sharing company Lyft Inc. The Dow Jones Industrial Average rose 0.8% to 25,928.68 and was up 11.2% for the quarter. The S&P ended the week with a 1.2% gain and advanced 13.1% in the first quarter, the best performance since the third quarter of 2009. Although stocks are shining, the bond market is giving a much more pessimistic reading. German and French government bond yields were poised for their biggest monthly decline since June 2016. The 10-year U.S. bond yield edged up to 2.406 on Friday from a 15-month low of 2.352 percent on Thursday after an almost relentless fall since the Federal Reserve’s dovish tone last week sparked worries about the U.S. economy. Investors have been on heightened alert since the yield on the 10-year note fell below the 3-month Treasury bill, an inversion of the yield curve that is widely seen as an indicator of recession.

Last week ended what will later be termed a soft quarter. Estimates of first quarter growth range from 1.4% to 0.4% and the slowdown will be attributed to weaker consumer spending and the lingering effects of the slowdown in housing in December 2018. Some of the Q1 weakness was temporary. The closing of the federal government also had an impact on spending and there was uncertainty over U.S.-China trade and Brexit. Through all the uncertainty, the U.S. economy proved resilient. Real GDP in the fourth quarter was revised to a 2.2% annual growth rate, lowering the bar for the first quarter. The trade deficit fell in the first quarter, which should boost Q1 growth. Most recent economic data show weakness in the first quarter. Personal income rose 0.2% in February, after declining 0.1% in January. Data on spending is still being delayed, so personal spending only increased 0.1% in January, following the sharp 0.6% decline in December. Inflation is running below the Fed’s target, with the PCE deflator falling 0.1% in January. The weakness in inflation does keep monetary policy on hold, which will be important if the expansion is to continue to its 10th birthday.

The softer economic news, combined with the drop in long-term rates, has produced an inverted yield curve. The yield on the 10-year Treasury felling below the three-month T-bill. On an ominous note, every recession in the last 60 years has been preceded by an inverted yield curve. Not every inverted yield curve, however, has not been followed by a recession. Since the mid-1960s the yield curve has been nearly perfect in predicting recessions. On average, a recession occurs 15 months after the yield curve inverts. The shortest time between an inversion and a recession was eight months in the early 1970s. The longest was 20 months in the late-1980s. It has only given one false signal, in 1966, when a slowdown, not a recession followed the inversion.

Inversions do not cause recessions. In the post-war era, most recessions are caused by an asset bubbles or the economy overheating, causing the Fed to aggressively raise rates until the economy breaks. Economy.com found that since WWII that recessions were caused by a few factors, including an inventory-imbalance, an oil supply sock, overheating, monetary policy error, financial imbalance and fiscal tightening. Changes in the economy make some of these potential threats more unlikely than in the past. Better inventory management and the shift from manufacturing to services make an inventory induced recession unlikely now. The shale revolution in the U.S. and the decline in oil prices may hurt growth but likely won’t lead to a recession. The U.S. economy has slowed and is in little danger of overheating. The Fed is not raising rates and current rates are well below rates associated with a recession. The government loosened fiscal policy last year, but there is no sign of fiscal tightening. There is an argument that this time, the yield curve may be sending a false signal.

This leaves an asset bubble, which are hard to see. The equity markets may be an asset bubble, but usually corrections take care of equity overvaluations. This leaves trade policy and the slowdown in the global economy as likely causes of any new recession. The biggest worry is the slowing of the global economy. If some trade deal with China is achieved than there would be a spark in the equity markets. That doesn’t guarantee extra economic activity for the globe, but likely the loss of uncertainty would spark some stimulus for the global economy and confidence would turn more optimistic. That may lead to stronger U.S. growth than the current weak first quarter’s pace. The Fed could cut rates in an expansion, like they did in the early 1990s, when, like today, recession risks were rising. Odds are they won’t cut rates, but stronger economic growth may steepen the yield curve and boost the 10-year rate, cancelling the inversion. The jury will be out on recession risks for a time. A trade deal might save us from recession. Conversely, failure to achieve one may prove that the yield curve inversion is correct once again.

With the economy slowing in the first quarter, all eyes will be on incoming data. Retail sales will be featured, as consumer spending is 70 of the economy. We expect only a small advance in sales, in part because many tax refund checks are delayed until March. Durable goods orders will fall because of falling Boeing orders. Vehicle sales will track near their January-February totals. The ISM surveys should stay in safe ranges. This leaves a lot of eyes on the employment report. Since February was weak, a bounce back is expected. If employment is weak again, the economy might be in real trouble.

Latest Data

The U.S. Economy:

Residential construction took another stumble in February, falling 8.7% to an annual ace of 1.162 million units. Total starts were down 9.9% below their year earlier level. The decline in starts was led by singe0famiy construction, which fell 17% to an annual pace of 805,000. Multifamily starts increased 17.8% to 357,000 units. Near term future activity does not bode well, as total permits fell 1.6% to 1.296 million units. Single family permits were unchanged from January and multi-family permits fell 4.2%. The permit backlog fell slightly n February. Permits authorized but not started totaled 195,000 at the end of February, down 1.5% from January but still up 21.9% from a year earlier. The good news from the report was that housing start activity was revised upwards for December and January, that more than offset the February decline. The fact is that starts have been trending downward since 2018 and the lack of spark in permits point to a flat trend in coming months, at best. With monetary policy on hold, there will be little upward bias for mortgage rates over the next few months. There could be some improvement in family formation this year, that might spark some additional activity.

Consumer confidence has been choppy lately because f the government shutdown, volatility in financial markets, trade uncertainty and signs of a slowdown in the U.S. economy. The Conference Board’s index of consumer sentiment fell to 124.1 in March, down from 131.4 in February. Consumers’ view of preset conditions fell from 172.8 to 160.6. The expectations component fell from 103.8 to 99.8. The index remains elevated and there is little evidence a recession is imminent. However, sentiment will be the key in making sure the recovery’s recent slid doesn’t turn into something worse.

New single-family home sales increased 4.0% in February to an annual pace of 667,000 units and were up 0.6% year-over-year. As expected, given the volatility of the new-homes sales series and the disruption of Census data due to the government shutdown, there were significant revisions to previous months. January sales climbed to 636,000 units and December was pushed down to 588,000 units. New homes listed for sale, totaled 340,000 at the end of February, down 0.6% from January, but up 13.3% from February 2018. The I/S ratio equaled 6.1 months of sales in February, down from 6.5 months in January, but still up from the 5.4 months reading in February 2018. Lack of growth in inventory has led to a tighter new home market but still looser than last year.

Personal income increased 0.2% in February, following a 0.1% decline in January. Personal spending increased 0.1% in January, following the steep 0.6% decline in December. Spending is off to a weak start for 2019, but income fundamentals are still a significant support going forward. The weakness in January spending was concreted in durable goods spending, which fell 0.2%. That decline was led by spending on motor vehicles, which fell 1.6%. Consumer spending has clearly slowed, but that should prove to be temporary. Inflation remains low. The PCE deflator fell 0.1% in January, following a 0.1% decline in December. The core PCE deflator rose 0.1% in January. The PE deflator was up 1.4% on a year ago basis and the core 1.8%, below the Fed’s target. This should help keep monetary policy on the sidelines for the remainder of the year.


Corporate lending growth rebounded in the euro-zone in February, easing fears tat the flow of credit might be slowing amid the growth slowdown. Corporate lending increased by 3.7% in February, up from 3.4% in January, although still short of the pre-crisis peak of 4.3% in September. With growth slowing on weak export demand for manufactured gods, the ECB has reversed course, putting plans to normalize monetary policy on old and announced new policies to stimulate the economy. Fearing that banks would shut off the flow of credit during the slowdown, the EB unveiled plans to give lenders a new line of ultracheap loans to jump start credit. Credit growth to households increased to 3.3% in February, up from 3.2% in January.

Important Data Releases This Week

March retail sales will be released on Monday, April 1 at 8:30 AM EDT. Sales are expected to increase 0.3% for March, following the 0.2% rise in February. Sales have been slowed by weak gas prices and slowing auto sales, as well as late tax refunds.

February construction spending will be released on Monday, April 1 at 10:00 AM EDT. Construction spending is projected to fall 0.2% in February following the big 1.2% jump in January. Housing has been weak, lately and the weather was bad in February.

The March ISM manufacturing index will be released on Monday, April 1 at 10:00 AM EDT. We see the index advancing to 54.5 for March, from from 54.2 in February. Manufacturing is weak but is still in the positive zone.

January business inventories will be released on Monday, April 1 at 10:00 AM EDT. We see inventories increasing by 0.4% in January, following the 0.6% advance in December.

February durable goods orders will be released on Tuesday, April 2 at 8:30 AM EDT. The Boeing cancellation of orders for the 737 MAX will affect durable goods orders. Orders are expected to fall 1.7% in February, offsetting the 0.3 advance I January.

March vehicle sales will be released on Tuesday, April at 4:00 PM EDT. We see sales turning higher to 16.7 million unit annual pace, up from 16.6 in February.

The March ISM non-manufacturing index will be released on Wednesday, April 3 at 10:00 AM EDT. We see the index decreasing to a still healthy 58 in March, down from 59.7 reading for February.

March employment will be released on Friday, April 5 at 8:3 AM EDT. We look for payrolls to increase by 178,000 in March, up from the weak 20,000 advance in February. Average hourly earnings are projected to increase 0.3%, up 3.4% year-over-year.

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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.

One thought on “If Employment is Weak Again, the Economy Might Be in Real Trouble

  1. Chris.Visser@jdpa.com'Chris

    “Better inventory management and the shift from manufacturing to services make an inventory induced recession unlikely now.”

    Can we say that for certain given the substantial front-loading of materials from China in early-mid 2018? We were definitely in a period of inventory imbalance at that point. I’m wondering if the industry is still working through that inventory, contributing to some of the cooler freight data.

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