Last Week’s Overview

By | August 5, 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

Global stocks took a beating, with investors piling into safe havens after U.S. President Donald Trump said he would slap another 10% tariff on the remaining $300 billion of Chinese imports starting September 1. The pan-European Stoxx 50 futures shed 2.0% in late-Asian trading. MSCI’s broadest index of shares outside of Japan fell 1.6% to its lowest level since late-June. Chinese stocks were hit hard, with the benchmark Shanghai Composite and blue chip CS1399 down 1.5% and 1.6% respectively. Trump’s decision threw the Federal Reserve another curve ball that may force them to lower interest rates again to protect the U.S. economy from trade-policy risks after its first rate cut in a decade on Wednesday. The new tariffs would hit a wide swathe of consumer goods from cell phones and laptop computers to toys and footwear, at a time when manufacturing is already reeling from the accumulative impact of the trade war. The manufacturing ISM manufacturing index fell to 51.2 last month, the lowest reading since August 2016. The Dow Jones Industrial Average notched a third day of losses as investors continue to weigh the implications of an escalating trade war with China. The Dow closed at 26,461, down 98 points, or 0.4% on Friday. The losses continued even as the Labor Department announced a solid pace of hiring in July.

Donald Trump’s decision to place tariffs on the remaining $300 billion in Chinese imports would place the effective U.S. tariff rate at 5.4%, compared with 4.4% today and 1.5% at the end of 2017. Tariffs are among the top issues for businessmen according to the Beige Book. References to “tariffs” have jumped recently, along with “uncertainty.” The two terms are clearly linked. Similarly, the July ISM manufacturing index had a number of references to tariffs. Financial market movements are not a deterrent to Trump. He has escalated trade tensions each of the prior two times when the S&P was near record highs. There is speculation that it is a tactic to get the Federal Reserve to ease monetary policy further. If this round of tariffs go into effect, the Fed would likely respond in an effort to sustain the expansion. The risk is that rump will push too hard on the trade front and businesses will respond cutting capital expenditures and hiring plans further. If they opt to laying off workers, recession could follow. Downside risks have increased with Trump’s announcement.

The Fed cut rates for the first time since December 2008. The initial market reaction to Trump’s announcement was negative in the financial markets. The 10-year Treasury fell 14 basis points in two days to a three-year low of 1.9%. Falling equities and a deeply inverted yield curve may compel the Fed to move again. Trade policy and tariffs are having a tangible effect on business investment and confidence and the downside risks may force Powell to move again in an economy that is still basically “favorable” in his insight. July saw 164,000 jobs created, a slower, but still solid pace from last year. Earnings perked up to 3.2%, a decent pace but not considered too hot for inflation. The ISM manufacturing index fell to 51.2, still positive but close to stalling out. Both the Euro-zone and the Chinese manufacturing PMI s are in negative territory, reflecting the global slowdown in economic activity. The trade deficit narrowed by $190 million to $55.2 billion as imports fell more than exports. Personal income rose 0.4% and spending was up 0.3%. spending was strong in the second quarter but did end on a softer note.

Next week will be light on the economic calendar, with the ISM non-manufacturing survey and producer prices to add to our knowledge. The outlook for the economy is still good, with real GD still projected to finish the year near 2.5%. However, the dark clouds surrounding trade have grown more threatening. Businesses are clearly becoming more worried. The consumer is standing tall but may have a hard time being positive, if businesses head for the exits.

Week of August 5-9, 2019

The July ISM non-manufacturing index will be released on Monday, August 5 at 10:00 AM EDT. The index is projected to inch up from 55.1 in June to 55.5 in July, as the service economy remains on solid ground. Most growth components, included new orders, slowed growth in June but remain very solid.

July producer prices for final demand will be released on Friday, August 9 at 8:30 AM EDT. Producer prices were mixed in June with the headline index rising just 0.1% and the core index up a solid 0.2. We project the headline index to rise 0.2% for the month and the core index up 0.2%. This brings the headline index up 1.7% y/y and the core up 2.4%.

Latest data: Week of July 29-August 2, 2019

Personal income rose 0.4% in June, the fourth consecutive increase at that level. The steady advance in income growth is a major support for spending. Personal spending rose 0.2% in June, a slight back track from the 0.3% advances the previous two months. Consumption was strong in the second quarter but did soften a bit in June. The second quarter strength in spending is not sustainable but does suggest a decent growth in consumption will continue. Inflation remains weak, showing that income gains are solid and a god support for spending. The GDP deflator rose just 0.1% in June, for a second consecutive rise at that low level. The core PCE deflator rose 0.2% in June, for a third consecutive month. The headline index was up 1.4% y/y and the core 1.5%. The lack of inflation gave the Federal Reserve some maneuvering room to lower rates at the end of July.

Pending home sales increased 2.8% in June to 108.3, extending its sharp but uneven rebound that started in late-2018. The index is now at the highest level since late-2017. The increase in sales corresponded with the decline in mortgage rates that started in ate-2018. The 30-year fixed mortgage rate has dropped 103 basis points from its recent peak. The existing home index has increased 9.7% since last November. Still, affordability is an issue, especially among first-time buyers. The increasing supply of new homes may eventually be able to satisfy housing demand in the existing home market, but buyers must still pay a significant premium on average for a new home versus an existing home.

Total U.S. construction spending fell 1.3% in June, following a 0.5% decline in May. The June total was off 2.1% from a year earlier. Private residential construction spending declined 0.5% from May and was down 8.1% from a year earlier. Of the components of residential construction spending, new single-family construction spending fell 0.7% m/m and was down 8.1% y/y. Spending on multi-family construction spending rose 0.2% from May and was up 11.5% from a year earlier. Nonresidential construction spending fell 0.3% from May. Public construction fell 3.7% m/m, but up 6.1% y/y. Spending on highways and streets fell 6.4% from May but was up 6.1% from June 2018. The report was weak and the largest in seven months. Spending on residential structures has now contracted for six consecutive quarters. The weakness is concentrated in the single-family sector, despite lower mortgages. Public construction has fallen for two months but is well above year earlier levels.

The ISM manufacturing index retreated in July, falling from 51.7 to 51.2. Details were mixed. New orders did advance from 50.0 to 50.8. Production fell from 54.1 to 50.8. Inventories rose from 49.1 to 49.5. Supplier deliveries increased from 50.7 to 53.3. Employment declined from 54.5 to 51.7, suggesting weakening growth in manufacturing employment. Trade details were negative, with new export orders falling from 50.5 to 48.1 and imports felling from 50.0 to 47.0. With slowing final demand, the price index fell from 47.9 to 45.1. Manufacturing is struggling and Trump’s additional tariffs in September on China are not going to help. Manufacturing’s troubles have fanned concerns the weakness may spread to the broader economy. Industrial production has been negative for two quarters. Industrial output has seen two quarters of negative returns in the expansion before without the broader economy falling into recession. This happened in 2013, 2015 and 2016. Manufacturing’s contribution to GDP volatility has been declining for several decades and is less than consumer spending and nonresidential structure investment. Manufacturing will not be the catalyst for the next recession unless manufacturers lay off enough workers to push the unemployment rate higher, which would weigh on the collective psyche and cause a pull-back in consumer spending. With more tariffs brewing and global growth slowing, downside risks to manufacturing are increasing significantly. The risk of a bleed-over to the broader economy is also rising, although not likely to push the economy into recession by itself.

U.S. vehicle sales slowed slightly in July, inching down to a annual pace of 17.0 million from 17.1 million in June. Light truck and SUV sales fell 1.1% to 12.2 million annualized units. Car sales fell 2.7% to 4.8 million units. July sales were slightly above the second quarter average of 16.9 million annualized units. The lack of volatility is indicative of the solid confidence of the American consumer. The ongoing trade war and slowing global economy has not slowed the American consumer, so far. Strong labor conditions continue to support vehicle sales. Average vehicle prices are at an all-time high, increasing more than 4% from last year, according to J.D. Power. Prices are rising faster than wages, making it more difficult for the marginal consumer to purchase vehicles. Sales are expected to track near 17 million for the remainder of the year.

The trade balance held steady in June, but details were unfavorable. The trade deficit inched down to $55.2 billion in June from $55.3 billion in May. Total nominal exports fell 2.1%. Goods exports fell 2.8% on a monthly basis Food, feeds and beverage exports rose 0.6% after rising 6.8% in May. Industrial supplies added 0.5% after a 0.5% slide in May. Total nominal imports decreased 1.7%, after gaining 3.3% in May. Goods imports declined 2.2% on a monthly basis. All major categories of imports lost ground in June. Industrial supplies imports fell 6.9% and consumer goods lost 1.6%. Exports were a substantial drag on second quarter growth and falling trade volumes reflect a weakening global economy and rising costs from tariffs. The strong dollar is also weighing on exports. Tariffs are undermining business confidence and prospects are more negative under Trump’s threat to impose more tariffs on China. Downside risks are high going forward.

Factory orders rose 0.6% in June, following a 1.3% decline in May. Durable goods orders rose 1.9%, while nondurable goods orders fell 0.5% in June. Transportation orders rose 3.7% but remain down 6.6% from a year earlier. Core capital goods orders rose 1.5% in June, following a 0.2% advance in May. Orders in tis segment are up 1.5% y/y but trend growth has decelerated since the second quarter of last year. Factory shipments were up 0.4% in June, following a 0.1% advance in May. There was not a lot of data in the June report. The topline number was driven by aircraft. Core capital goods orders rose in June, but May’s number was revised down. We expect a bumpy ride for manufacturing tis year. Trade policy is a major issue for manufacturers. The risk is that Trump will push too hard and companies will respond by cutting capital investment and lay off workers. Growth in manufacturing is also being slowed by the tightening labor supply.

The labor market preformed solidly in July. Payrolls increased by 164,000, following a revised addition of 193,000 in June. The unemployment rate was unchanged at 3.7% in July. Private payrolls increased by 148,000, with an addition of 50,000 in healthcare and an addition of 38,000 in business/professional services. Average hourly earnings increased by 8 cents to $27.98, but the workweek softened to 34.3 hours resulting in a dip in weekly earnings. Year-over-year earnings of 3.2% was the strongest since March. The July payroll number was solid, not too hot and not too cold. While job creation has eased this year, compared to 2018, it has remained healthy. There is weakness in the retail sector, which undergoing a structural shift. Wage pressures will remain under control, as long as the job market can pull in workers from the sidelines. Trade is a wild card because manufacturing is at risk ad companies may decide to pull back in investment. Average job creation should track near 170,000 for the remainder of the year.

International

A measure of China’s manufacturing activity remained in the contraction zone for a third straight month in July. The official manufacturing PMI did improve slightly to 49.7 in July from 49.7 in June. New orders improved to 49.8 from 49.6. New export orders rose to 46.9 from 46.3. New export orders are expected to remain dim we do expect the infrastructure category to show some life because of government investment. The non-manufacturing index fell to 53.7 from 54.2.


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Category: Monday Morning Coffee

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.

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