Industrial Activity has been Weak All Year, A Victim of Global Weakening

By | June 17, 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.

Overview

Coffee and Economic Review

World stock suffered and safe-haven bets were back in play on Friday, with German bond yields plunging to record lows as weak Chinese data rekindled woes about the global economy. Industrial output from China rose 5.0% in May, down from April’s 5.4% and the lowest level since early-2002. Exports were a major drag, sowing only minor growth. The pan-European STOXX 600 Index fell 0.5% on Friday. Yields on 10-year Bonds, seen as one of the safest assets in the world, fell to a fresh record lows in recent days amid rising speculation by monetary easing by major central banks.

In the U.S., stocks ended Friday lower as investors were cautious about next week’s Federal Reserve meeting, while a warning from Broadcom of a global weakening weighed on chipmakers and added to U.S.-China trade woes. Investors are going on pins and needles until they get information from the Fed, who has a meeting next week. The Dow Jones Industrial Average fell 17.16 points to 26,089.61 on Friday, while the S&P 500 lost 4.66 points to 2,886.98. For the week, the Dow Jones rose 0.4% and the S&P rose 0.5%. In a bright spot, U.S. retail sales increased in May and the prior month was revised higher, suggesting a pickup in consumer spending that helped ease fears the economy was slowing.

The Fed will likely find it difficult to read the economic tea leaves in upcoming meeting of the Open Market Committee. Taken at face value, the latest employment report suggests that the addition of just 75,000 in May and the revised April addition of another 75,000 suggests the labor market is weakening. On the other hand, the May retail sale showed strength, with a 0.5% gain, following a revision in April that took that moved much higher that was better than expected. Industrial production rose 0.4% in May, following a 0.5% decline in April. Inflation remained tame, as both the CPI and PPI reports showed a modest increase in May, a factor that may lead to decreases in the fed funds rate. The Fed must weigh the differences in the cold and hotter parts of the economy and deal the consequences of how events in the U.S.-China trade war could affect the economy in the future.  The possible outcomes range from just inflationary increases from increased tariffs to a weakening of global demand and a possible recession. This may be the most important meeting of the Fed since 2009, when the Fed faced a possible global slowdown and war in the middle east that threatened the expansion. How the message is textured will be watched closely, as financial markets expect rate cuts, possibly in July. The China trade issues loom heavily over the atmosphere, with the future ranging from continued talks and no additional tariffs to a full-blown trade war and possible global downturn that would engulf the U.S. economy.

Economic data has been weak lately, but Friday’s reports on retail sales and a slightly better outlook from the industrial sector does provide some optimism. Retail sales increased 0.5% in May and the April report was revised to a 0.3% advance instead of a 0.2% decline. This made the second quarter growth estimates much stronger. Growth was broad-based, with sales excluding gas and autos, up 0.5%. Industrial production rose 0.4% in May, offsetting the 0.4% decline in April. Manufacturing advanced 0.2% in May but did not offset the 0.5% decline in April. Industrial activity has been weak all year, a victim of global weakening, the high dollar and Trump’s trade policies. How the industrial sector fares in the next few quarters will depend on developments on trade.

Next week, we get a look at housing and the important Fed meeting, as well as leading economic indicators. The U.S. economy still has strength but developments in U.S.-China trade may overcome a somewhat better outlook for the economy.

Latest Data

The U.S. Economy:

The NFIB small business optimism index increased from 103.5 in April to 105.0 in May. The index is now above past government shut-down levels. The share of businesses reporting capital improvements jumped 6 percentage points to 64%, the highest reading since February 2018.Moreover, 30% plan capital improvements in the next few months, up 3 percentage points. A net 9% reported higher nominal sales in the past three months, unchanged from April. Respondents that expect the economy to improve in the next few months increased to 16% from 13% in April. Finding qualified workers remains the most important business problem. 62% reported hiring or trying to hire employees. Up 5 percentage pits from April. However, 54% reported few or no qualified applicants, an increase of 5 percentage points. The report suggests that confidence is not retreating because of threats from trade, so far. However, if no deal is reached with China, business can expect significantly higher costs of key inputs. Consumers will also see much higher prices for goods.

Growth in producer prices remains weak. The PPI for final demand increased 0.1% in May, following a 0.2% rise in April. Final demand goods fell 0.2% in May, driven down by a decline in energy prices, which fell 1%. Core goods were unchanged for a second consecutive month. Services increased 0.3% in May, following a 0.1% advance in April. On a year-over-year basis, the headline final goods index was up 1.9% in May, while the core goods index was up 1.6%. On the consumer side, the CPI increased just 0.1% in May, following a 0.3% rise in April. Energy prices fell 0.6%, but food was up 0.3%. The core index rose 0.1%. On a year-over-year basis, the headline CPI was up 1.8% and the core was up 2.0%. The inflation reports reflect the impact that energy has on inflation, which is weak. This is considered by the Federal Reserve as a “transitory” factor. However, core inflation remains weak. The Fed is not likely to raise rates until 2020 and stands ready to move early and aggressively to fight off the treat of recession. What happens with China has a lot to do with Fed policy. If there is no deal and tariffs are escalated, look for a Fed move as early as July.

Retail sales increased 0.5% in May, better than expected. Moreover, the April report was revised from a 0.2%n decline to a 0.5% increase, indicating the economy is growing at stronger pace than thought as early as last week. Growth excluding autos and gasoline were also up 0.5%, suggesting a broad-based pattern of sending. Gains in May were led by non-store retailers, sporting goods stores and hobby stores, electronic and appliance stores and general merchandise stores excluding department stores. Total sales were up 3.2% above year earlier levels. Despite the last decent two months, sending has been inconsistent, with sales declining five out of the last ten months. Temporary factors, such as the government shutdown, big swings in gas prices, late tax refunds likely had an influence. Important fundamentals are positive in terms of jobs and income growth. The wild card is trade and the possibility of a big increase in the price of Chinese consumer goods and falling confidence in the wake of a trade war. Even if the trade war is averted, future advances in spending are likely to be modest.

Business inventories expanded in April by 0.5%, following no change in March. All major categories added to stocks in April. Wholesalers added 0.8%, retailers 0.5% and manufacturing stocks advanced by 0.3%. Business stocks are up 5.3% from a year earlier. Business sales slipped 0.2% in April, following March’s 1.3% gain. The inventory/sales ratio inched up to 1.39 from 1.38. The business ratio one year ago was 1.36. The cycle low was 1.25 and recession high was 1.49. The China trade situation makes future inventory build more uncertain.

Industrial production increased 0.4% in May, following a 0.4% decline in April. Overall, industrial production stands 2% above it year earlier level. Manufacturing increased 0.2% in May, not offsetting the 0.5% decline in April. Manufacturing is up 0.7% y/y. Motor vehicles and parts output rose 2.4% in May. The removal of tariffs on Canadian and Mexican steel and aluminum will be supportive of the auto industry even if Trump places tariffs on imported cars and trucks. Nonauto production increased just 0.1% in May, following a 0.4% decline in April. Non-auto production is up 0.3% y/y. Production of business equipment, an important factor in productivity growth, was up 0.2 in May, not offsetting the 1.5% decline in April. That sector was up 3% y/y. Mining rose 0.1%, in May and 2.2% in April. Utility output surged 2.1% in May, a result of cooler temperatures in that month. Industrial production has only been positive two out the last five months. The global slowdown, high dollar and trade are significant headwinds for the industrial sector. A full-blown trade war with China could result in a global recession. Of course, a trade deal with China may result in a stronger global economy and better industrial demand.

International:

China’s economy flashed more warning signs in May, with industrial output, falling to a 17-year low. Industrial output grew 5.0% from a year earlier, well below April’s 5.4% rate. The reading was the lowest since early-2002. Exports were a major drag, showing only marginal growth. Fixed asset investment rose 5.3% y/y, compared to a 5.5% average for the first four months of 2019. Infrastructure investment grew 4.0% in May, moderating from 4.4%. Property investment grew 9.5% in May, the slowest pace so far this year. Retail sales did improve, rising 8.6% in May, an improvement from the 7.2% increase in April. The government is expected to pick up stimulus efforts. The People’s Bank of China has already cut reserve requirement ratios (RRR) six time since early 2018 to free up more money for banks to lend. More moves are likely. Opinions differ on whether the PBOC will cut benchmark interest rates, as it has done in the past periods of economic weakness. That move might fuel debt risks and put more pressure on the yuan, which is weakening to the psychologically important 7 per dollar level, last seen in the Great recession.

Important Data Releases This Week

June NAHB housing market index will be released on Monday, June 17 at 10:00 AM EDT. The index is expected to rise one point to 67 after May’s surprising 3-point jump in May.

May housing starts will be released on Tuesday, June 18 at 10:00 AM EDT. Starts are projected to rise to 1.240 million units in May, up from 1.235 million in Aril. Permits are projected to fall from the 1.296 million level in April to 1.290 million in May.

May leading economic indicators will be released on Thursday, June 20 at 8:30 AM EDT. We project the indicators to rise 0.1% in May.

May existing home sales will be released on Friday, June 21 at 10:00 AM EDT. We project that sales will climb to 5.290 million in May, up from 5.190 million in April.


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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.