If Trade Tensions Continue the Outlook will be Bleaker as the Year Unfolds

By | November 19, 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.


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European stocks recovered but the sterling and euro remained fragile on Friday, after some of the most dramatic 24 hours yet in the Brexit process and another turbulent week for world markets. London, Paris and Frankfurt markets gained 0.4% on Friday, having been punished on Thursday by the resignation of Britain’s Brexit Minister roughly 12 hours after a draft agreement with the European Union was released. Reports of a UK leadership coup are still continuous, and the country could crash out of the EU without an agreement is placing downward pressure on the sterling. Asian shares ended the week on a highe note, as reports surfaced that the United States might pause on further China tariffs. That hope faded as the vice president of the U.S. doused hopes of a quick agreement.

Global equity markets remain volatile as the slowing Chinese economy and uncertain future earnings coincide with the impact of higher interest rates in the U.S. Political tensions in Europe, ranging from Italy to Great Britain are coinciding with political change in Germany and slower economic growth to undermine sentiment. Meantime, low oil prices are stoking renewed worries about weaker global economic growth. The trade war has also cast a dark shadow over the future.

Global worries in the equity markets are seeping into the U.S. markets. The S&P slipped 1.6% last week, trimmed by reports by Donald Trump saying he was optimistic about a trade deal with China and doused by opposite statements by the American vice president. News stories about potential trade deals have lifted markets and negative stories have depressed the market several time in recent months. Earnings were decent in the third quarter, but investors are increasingly worried about 2019. Over the past three months, firms saying sales will miss analysts estimates outnumbered those who say they will exceed them, the most since 2009.  Volatility has clearly increased. The S&P has fallen five days in a row three different times, a cluster of pain not seen since 1984. The Nasdaq is at risk of dropping three months in a row. It looks like a good holiday season, but investors are increasingly worried that we may be at the peak and darker days will follow.

Data last week was decent but worries about moderation in coming months did surface. The CPI increased a stronger than expected 0.3% in October, largely driven by a 2.4% increase in the energy CPI. Given the decline in oil prices in November, the rise will not be sustained. Core CPI increased 0.2% in October, continuing the slow but steady advance in inflationary pressures. Inflation is trending near the Fed target and Fed policy will continue its scheduled course. Retail sales rose 0.8% in October, the best month for the consumer since May. October’s strength did follow two weak months that were in part, influenced by hurricanes. Holiday shopping should be decent, but analysts are wondering about the continuation of strength in 2019 as interest rates rise and tariffs raise prices for the consumer.

Industrial production grew a less than expected 0.1% in October, held back by declines in morning and utilities. Manufacturing increased 0.3% for a second consecutive month. Despite decent production numbers, other indicators, including the latest ISM index, are pointing to moderation in production in coming months. Rising interest rates, the fading effect of the tax cut and slower global growth will slow consumption and production as 2019 passes.

The near-term outlook for the economy remains solid. Real GDP will likely track near 3.5% in the fourth quarter. However, the outlook for the global economy is darkening and the rise in interest rates and trade effects will slow the economy over the course of 2019. The volatility in the equity markets will likely carry into 2019. If a trade deal with China is reached, the outlook for 2019 will likely be more upbeat. If trade tensions continue and more tariffs are imposed, the outlook will be bleaker as the year unfolds. The economy is set to slow to its long-term growth path in the 2020-21 period. A slower economy, in a higher interest rate environment, will be vulnerable to outside shocks. The trade war could be that outside shock.

Latest Data

The U.S. Economy:

The NFIB small business index slipped slightly in October, falling from 107.9 to 107.4. Hiring plans edged lower, but views about the economy and capital expenditure plans were unchanged. Plan to raise compensation fell in October. Uncertainty increased in October, rising from 79 in September to 83, no surprise concerning the midterm elections and the impact of tariffs and trade tensions. With the elections over, the most likely scenario is gridlock in Washington with a low probability for additional tax cuts and budget stimulus. Medicare reform and infrastructure investment remain possibilities. The economy is doing well and likely to continue to moderate as 2019 passes. Small business confidence should hold up in 2019 but maybe tested as the economy slows and nations faces a presidential election.

The CPI came in stronger than expected in October, rising 0.3%, following a 0.1% advance in September. A bounce-back in energy prices provided much of the headline lift. The CPI for energy rose 2.4% in October, after 0.5% decline in September. Used car prices also rebounded in October, rising 3%, after a 2.6% decline in September. The core CPI increased 0.2%, following a 0.1% advance the previous two months. On a year-over-year basis, the headline CP was up 2.5% and the core index was up 2.2%. Inflation was stronger than expected in October, but the trend remains near the Fed target. The central bank will stay on course on its tightening schedule.

Retail sales rebounded in October after two months of declines. Sales rose 0.8% in October, following a 0.1% decline for both September and August. Energy drove the headline number, with sales at gasoline stations rising 3.5% and auto sales rose 1.1%. Sales excluding autos rose 0.7% and excluding autos and gas, rose 0.3%. Other leaders were department stores and building supply shops. Year-over year growth was 4.6% in October, up from 4.2% in September. Sales in September were likely weakened by the impact of Hurricane Florence. Consumer fundamentals are healthy, and spending should remain upbeat for most of 2019, but rising interest rates and the impact of tariffs could slow spending more than anticipated. We do look for consumption to moderate in 2019 as the economy starts to slow. There is a risk the Fed may go too far, with downside risks increasing as we approach 2020.

Import prices increased 0.5% in October, following a 0.2% advance in September. Energy provided a boost in October, with crude oil prices rising 2.6%. Excluding petroleum, import prices rose 0.2% in October and were unchanged in September. The strong U.S. dollar is putting downward pressure on import prices. Inflation is largely controlled, as upward pressure in labor markets is faced with slower global growth and downward pressure on goods. The Fed will likely keep on schedule with its current pace in raising rates.

Business inventories rose 0.3% in September, following a 0.5% advance in August. Manufacturers saw a 0.5% increase during the month, wholesale stocks rose 0.4% and retail inventories increased only 0.1%. Business sales rose 0.4% in September. This kept the inventor-to-sales ratio unchanged at 1.34 months. The I/S ratio has hardly moved this year and is only marginally lower now than in September last year. This suggests inventory clearance is moving slowly and keeping production subdued. Trade remains a wild card. China is hurrying exports to the U.S. ahead of the end of the year deadline for an expected boost in tariffs. This means lower exports in the first quarter unless some deal is reached between the two countries. There are significant downside risks to production associated with trade tensions.

Industrial production advanced 0.1% in October, the fifth consecutive monthly gain. The gains were mixed across industries. Utility output fell 0.5% and mining dropped 0.3% in October. Total IP was up 4.1% above year earlier levels. Manufacturing increased 0.3% in October, the second consecutive advance at that level and was up 2.7% from a year earlier. Motor vehicle production dropped 2.8% in October. Non-auto output advanced 0.5% in October, following a 0.2% increase in each of the last two preceding months. Business equipment production increased 0.8% and is up 4.1% from a year earlier. Fundamentals remain healthy of the industrial sector, but the slowdown in global growth will be a headwind in 2019. Trade remains a wild card. Slower global growth is raising uncertainty levels and trade is adding to the tensions. There are upside risks if a trade deal with China could be reached, but that is doubtful at this time. Ny trade deal with China is likely not to be straightforward and may take a long time to achieve.


Germany’s economy contracted for the first time since 2015 in the third quarter as global trade disputes and problems in the auto industry put the traditional engine of growth of exports in reverse. Real GDP fell 0.2% in the third quarter, according to the Federal Statistics Office. The Economy Ministry did state that the fourth quarter could be positive, as much of the slowdown was temporary as car companies struggled to adjust to new pollution standards known as WLTP. The Ministry said that problems adapting to WLTP probably shaved 0.4% off growth in the third quarter. Also, the Ministry noted that foreign trade developments showed fewer exports and more imports in the third quarter. The Ministry projects growth to proceed in the fourth quarter. However, the ZEW research institute projects that Germany may not recover quickly from the weakness. In addition to Trump’s abrasive trade policy, there are concerns about instability at home as Chancellor Angela Merkel’s days as leader are numbered. Weak exports, despite a weak euro exchange rate, trade tensions and weakness in emerging markets could continue to weigh on Germany’s growth, as well as political instability.

China delivered a mixed economic report card for October. Retail sales rose 8.6% in October from a year earlier, the slowest pace since May. Fixed investment growth quickened more than expected to 5.7% in October. Infrastructure spending showed signs of life, picking up to 3.7% n the first ten months of the year, up from 3.3% and suggesting the government’s growth steps are starting to take effect. However, property investment grew 7.7% in October on a year-over-year basis, down from 8.9% in September. The report shows the mixed results as the government tries to offset what will be a blow to its exports as President Trump is likely to raise tariffs at the end of the year. So far, the industrials side is holding up as firms rush to sip goods ahead of the deadline. Facing the weakest economic growth since the financial crisis, Chinese policymakers are fast tracking big road and rail projects, pushing banks to increase lending and are cutting taxes to ease strains on businesses. Policy measures do need time to take effect and some analysts say GDP growth could fall below 6.5% in the fourth quarter and track near to 6.0% in 2019.

Important Data Releases This Week

October housing starts will be released on Tuesday, November 20 at 10:00 AM EST. Housing starts are forecast to rise modestly to 1.240 million in October, up from 1.201 million in September. Permits are seen at 1.260 million in October, up slightly from the 1.241 million reported for September.

October durable goods orders will be released on Wednesday, November 21 at 8:30 AM EDT. Reflecting a sizable decline in aircraft orders, durable goods orders are projected to fall 2.4% in October. Excluding transportation, orders are projected to rise 0.4%. We look for an 0.3% increase in core capital goods orders for the month.

October existing home sales will be released on Wednesday, November 21 at 10:00 AM EDT. September existing homes sales were weak at 5.150 million units. Sales are projected to hit 5.200 million units for October.

October leading economic indicators are scheduled to be released on Wednesday, November 21 at 10:00 AM EDT. We look for a slight gain 0.1% gain for the indicators in October, following the big 0.5% increase in September. Positives include credit and yield curve spread and strength in consumer expectations. Negatives include the stock market.

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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.