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.
A smoother tone by the world’s top central banks helped global stocks maintain their strong start to the year on Friday, while another leap came from China’s yuan with the best week since being cut loose from the dollar in 2005. With promises of patience from the Federal Reserve and the ECB mulling another dump of cheap money and news that the trade talks between Washington and Beijing are moving to higher levels, investors are feeling more confident. Asia crawled to another 5-week high thanks to China and Japan and European stocks are up for what was a fourth day of gains and the longest winning streak since September. At the Economic Club on Thursday, Fed Chairman Jerome Powell reiterated that the U.S. Federal Reserve would be patient about hiking rates. Similarly, Trump has softened his stance on China after the steep fall in stock prices and has offered an olive branch and there is no reason for China not to accept it.
The S&P just posted a third week of gains, the longest streak since August and the best performance since early-2016. Reasons for the uplift vary, ranging from “serious” trade talks with the Chinese to a more patient Fed. U.S. stocks rose 2.5% for the week and the stage looks set for the rally to continue, at least in the short term. The Cboe Volatility Index, a gauge of expected price swings for the S&P 500 Index, sank back to 20 after peaking at 35 just before Christmas. Investors are not fooled, volatility is still high. In a post-QE and forward guidance world, with rising interest rates, volatility is expected to be higher, but that doesn’t mean an immediate collapse in growth expectations.
The government shutdown continues and although a significant slowdown in the economy is unlikely, spillover effects are surfacing. If the shutdown continues through the first quarter, Economy.com estimates a full 1.5% of GDP growth will be lost. The longer the shutdown continues, real consumer spending growth will slow because of delayed purchases from furloughed workers. Spending will be affected by delayed tax refunds. The lapse in food stamps is $4.8 billion a month. Some of these cuts will resume when the government reopens. Business and consumer confidence will start to be undermined, the longer the shutdown continues. Home sales are being affected for those consumers who rely on the Federal Housing Administration. Economic data is being delayed. Although it is not planting season, famers are being kept in the dark about soybean stocks here and in Brazil. Financial market conditions usually deteriorate during government shutdowns. So far, that has not happened but the longer the shutdown continues the higher the probability markets will turn south. We also don’t think the shutdown will lead to recession, but the longer the shutdown persists, the higher the probability that impact of the shutdown could lead to negative economic results.
Not all federal government agencies are closed but economic data reporting is missing in action. The Bureau of Labor Statistics is open for business and we did get CPI data. The index fell 0.1% in December, on falling energy prices. Given the low price of oil, downward pressure on inflation is likely for the next few months. The service sector of the economy is preforming well. The ISM non-manufacturing index did retreat from 60.7 in November to a still lofty 57.6 in December. New orders for services edged higher to a six-month high of 62.7, suggesting the service sector is poised to advance at a solid pace. The NFIB small business index fell for a fourth month in December. Most of the decline came from expectations concerning the economy, likely a result of the financial market volatility in December.
The U.S. Economy:
The NFIB small business optimism index retreated slightly, falling from 104.8 in November to 104.4 in December. Hiring plans edged higher but it may not be easy as the share of respondents with at least one job that is hard to fill rose from 34% to 39%, a record high. In fact, 23% of respondents said that finding qualified workers is their single most important business problem. Expectations concerning the economy fell to 16% in December from 22% in November, as trade worries and tightening financial conditions have weighed on confidence. Expectations concerning the economy were at the lowest level since November 2016. Capital expenditure plans fell from 29% to 25%. Considering the tightening labor market, the number of respondents who plan on raising compensation fell from 25% to 24%. Despite the December decline, the index remains elevated and consistent with an economy growing above its potential rate. The government shut-down may affect the index in January.
The ISM non-manufacturing index fell to 57.6 in December from 60.7 in November. Business activity slipped from 65.2 to 59.9 but new orders advanced from 62.5 to 62.7. Thirteen industries reported an advance in new orders, while only one a decline. Supplier deliveries sipped from 56.5 to 51.5. There was a mention of an increase in available truck capacity. Backlogs of orders fell 5 points to 50.5 in December. Inventories fell from 57.5 to 51.5, with eight industries reporting higher inventories. Prices paid slid from 64.3 to 57.6. Among commodities down in price were cheese, computers, diesel fuel, gasoline and lumber. Those listed in short supply were construction sub-contractors and labor, temporary help and medical supplies. Despite the decline in December, the index remains elevated, consistent with an economy growing at a 3.2% annual rate. Anecdotal evidence suggest that residential construction has slowed significantly, but the delay in tariffs has slowed expected increases in material costs. Retail trade seems strong and managers are suggesting clients make purchases early in the year before tariffs are imposed. That could mean some front-loading of purchases in the first quarter.
Consumer prices fell 0.1% in December, slowed by a 3.5% drop in energy prices. Food prices rose an above trend 0.4% in December. The core CPI rose 0.2% for the third consecutive month. On a year ago basis, the headline CPI was up 1.9% and the core was up 2.2%. Weakness in oil and other commodity prices will limit inflationary forces in coming months. Without a quick decline in the unemployment rate, the Fed will be less worried about inflation and allow them to be patient in the path of rate increases for 2019.
Euro-zone economic sentiment deteriorated markedly in December in a year that saw sentiment fall every month. The European Commission’s index of sentiment fell from 109.5 in December to 107.3. It was the 12th consecutive monthly decline. The gloomier assessment reflected declining confidence in industry and consistent with a third consecutive monthly decline in industrial output for Germany, the largest economy of the 19-nation bloc. The falling confidence suggests that real GDP, which slipped to 0,2% in the third quarter, may fall again to0.1% in the final quarter of 2018. Industrial production fell in Germany, Italy and several other nations in November. Retail sales held up in November, suggesting that domestic activity is keeping economic growth in the positive zone, if only slightly.
Important Data Releases This Week
Retail sales for December is scheduled to be released on Wednesday, January 16 at 8:30 AM EST. Steady and modest growth is expected for December retail sales. A 0.2% advance is expected that will match November’s gain. Ex-auto sales will also rise 0.2%. This report will likely be delayed due to the government shutdown.
Business inventories for November is scheduled to be released on Wednesday, January 16 at 10:00 AM EST. A moderate 0.3% increase in business stocks is expected for November, the eighth consecutive monthly increase. This report will also likely be delayed due to the government shutdown.
Housing starts for December is scheduled to be released on Thursday, January 17 at 8:30 AM EDT. Housing starts have been struggling over the past year. Starts are projected to come in at a 1.256 million pace in December, matching November. Permits are forecast to come in at a 1.297 million rate, down from the 1.328 million pace. This report is likely to be delayed due to the government shutdown.
Industrial production for December is scheduled to be released on Friday, January 18 at 9:15 AM EST. Total IP is forecast to rise 0.3% for December versus the 0.6% jump in November. Manufacturing was soft in November with no change and only a 0.1% advance projected to December.