Slowing Global Economy Could Tip the U.S. Economy into Recession

By | August 19, 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.


Coffee and Economic Review

Asian shares found some footing on Friday after a turbulent week as China hinted of more support for the economy and growing expectations of aggressive stimulus from all the major central banks. Sentiment got a lift when China’s state planner said Beijing would roll out a plan to boost disposable income, though details were lacking. MSCI’s broadest index of Asia-Pacific shares outside of Japan responded by climbing 0.4% on Friday, although down 1% for the week. ”Tariffs remain the largest source of risk for equities,” analysts at J.P. Morgan said in a note. “Existing U.S./China tariffs have weighed in on corporate profits during 1H19 with S&P companies delivering flat earnings growth compared to mid-single-digit trend growth rate prior to implementation of tariffs,” J.P. Morgan analysts said. With no settlement in sight, investors have hedged against a global slowdown by buying bonds. Yield on 30-year debt hit an all time low of 1.916% on Thursday, down 27 basis pints for the week and the sharpest such decline since 2012.

U.S. stocks rebounded on Friday as an ebbing bond rally and news of potential German stimulus brought back buyers to the equities market on a tumultuous week. All three major Wall Street stock averages ended Friday higher but they still logged their third consecutive weekly loss. Germany’s coalition government is willing to suspend its balanced budget rule and take on debt, according to Der Spiegel magazine, raising that Europe’s largest economy could steer its way from recession and cooling worries about a global recession. German stimulus hopes helped the benchmark 10-year U.S. Treasury yield rise three-year lows, closing the book on a fraught week which saw 10-year yields dip below those of two-year notes, a classic recessionary red flag.

Markets gyrated this week as the spread between the ten-and-two-year Treasuries turned negative for the first time since 2007. Financial markets seem to expect the sharp slowdown overseas will soon spread to the U.S. Trade tensions remained a prominent theme in markets this last week. Although the U.S. delayed tariffs on some products from China until December, it may not be enough to stop Chinese retaliation. Economic data continues to be, for the most part, positive. Retail sales beat expectations by rising 0.7% in July. Sales were boosted by the 2.8% surge in non-store retailers (Amazon Prime Day). Sales were also broad based with sales rising in ten out of 13 categories. Consumer confidence got another boost when Trump a delay of the 10% tariff on approximately $155 billion of Chinese imports. The consumer has been carrying the weight of the economy the last few quarters and has largely avoided the spill-over from the trade uncertainty. How the consumer reacts to increased prices caused by Trump’s tariffs will have a lot to do with the future course of the economy. The consumer has been standing tall over the last year but the impact of the tariffs is about to be felt.

There are still worries about the economy. The most cyclical sectors are slowing and those segments that usually do most of the declines during a recession. Manufacturing remains in negative territory with output down five of the seven months so far this year. Industrial production fell 0.2% in July, but manufacturing fell a steeper 0.4%. The energy related manufacturing recession in 2015-16 was significantly deeper from what we are experiencing now and that did not pull the nation into recession. It was the last time yields were this low. The Fed takes signals from the bond market seriously and Powell has stated that maintaining the expansion is his number one goal. Although CPI inflation did heat up a little last month to 0.3%, we expect the Fed to focus on the downside risks to growth. The Fed will likely cut rates again at the meeting in September. Housing starts fell again in July, but permits rose, suggesting housing will maintain its flat pace we’ve seen the last three years.

After the ton of data last week, next week will be light. New and existing home sales data will be released and the leading economic indicators will provide some insight. The minutes from the July Open Market Committee will be released and attention will focus on Chairman Jerome Powell’s speech at Jackson Hole on Friday. The Fed Chairman likely won’t refer much to policy but will talk about economic conditions. With the word recession in the headlines, a lot of attention will be focused on not only current conditions, which are still decent, but on how trade uncertainties and a slowing global economy could tip the U.S. economy into recession. Only the consumer is standing firm now and if the uncertainties and bad trade policy start to erode confidence, then the headlines will be right.

Latest Data

The U.S. Economy:

The NFIB small business sentiment index increased from 103.3 in June to 104.7 in July. The gains erased most of the decline in June but didn’t capture the increase in trade tensions between the U.S and China. Plans to increase employment rose from 19% in June to 21% in July but it is weaker than in the second half of 2018. Plans to make capital expenditures over the next six months increased from 26% to 27% but was at 30% in May. Expectations that the economy will improve in the next six months rose from 16% to 20%. The share of respondents with at least one job that is hard not fill rose from 36% to 39%. Finding qualified workers remains one of the most important business problems. The escalation of trade tensions is causing some tightening of credit conditions and we will be watching business confidence and capital expenditure plans. As the manufacturing ISM surveys retreat to near negative readings, we expect business investment, already fragile, to retreat further. Business investment went negative in Q2 and may weaken further as trade tensions escalate.

Retail sales increased 0.7% in July, more than expected and the strongest since March. Growth was revised to 0.3 % from 0.4% but was revised up to 0.5% in May. Sales excluding gasoline and autos increased 0.9% in July. Sales were up 3.4% year-over-year, up slightly from the 3.3% increase in June. July continued the trend of healthy retail sales over the last few months after a turbulent start of the year. Some of the improvement comes from Prime-Day promotions and sales, as non-store retailers contributed 0.3 percentage points to growth. They contributed 0.2% in May and June and the average in 2018 was 0.1%. Although the spending trend remains healthy. Several factors threaten growth. The stock market has gained little ground in the last 18 months. A big increase in the price of consumer goods caused by Trump’s trade policy will affect consumer spending habits. The labor market is the key, but as global growth slows and manufacturing weakens, an increase in the unemployment rate may follow. When that happens, consumers may become more cautious. So far, the consumer has been solid but the economic waves that are accompanying trade uncertainties could swamp the boat or slow it down significantly.

Business inventories were unchanged in June, following a 0.3% increase in May and a 0.6% increase in April. Among the categories, wholesalers did not add stocks, retailers sipped 0.3% and manufacturers added 0.2%. Motor vehicles and parts inventories decreased 0.5%. Excluding the auto sector, retail trade inventories declined 0.1% in June. Business sales advanced 0.1%, following May’s 0.1% decline. The inventory-to-sales ratio declined to 1.39 in June from 1.40 in May. The uncertainty surround trade o China will weigh on inventory build. Increased tariffs on imports raise final finished products prices for both wholesalers and retailers who buy these products. Increased input prices will hurt manufacturers who rely on imported inputs.

Industrial production fell 0.2% in July, following a 0.2% increase in each of the preceding two months. The results were mixed across industries. Mining fell 1.8% but utility output jumped 3.1%. Manufacturing fell 0.4% and was down more than 1.5% year to date. Motor vehicle and parts output declined 0.2%. The segment was still up 3.7% from a year earlier. Non-auto production fell 0.4%. That segment was down 0.9% on a year ago basis. Business equipment production decreased 0.4%, not boding well for future productivity gains. July marked the first decline in total IP in three months. Mining fell sharply, in part caused by Hurricane Barry, which caused a sharp decline in oil production in the Gulf of Mexico. Manufacturing is weak and continue with a bumpy rise the rest of the year because of slowing global growth, sharply higher tariffs, the appreciation of the U.S. dollar and lingering trade uncertainties. Trump’s threatened tariffs on Chinese imports include a wide range of consumer products. Some of the duties won’t be imposed until December 15. Other risks to the manufacturing sector other than trade include labor supply shortages of skilled workers.

Housing starts dipped again in July, falling 4% from revised June totals, but single-family starts gained 1.3% and remained 1.9% above July 2018 totals. Starts came in at annual rate of 1.191 million, down from 1.241 million in June. Single-family starts increased 1.3% to an annual pace of 876,000, while the multi-family sector declined by 16.2% to 315,000. Permits did promise greater activity in coming months, rising 8.4% to an annual pace of 1.336 million units. Single-family permits increased 1.8% to 838,000, while the multifamily permits rose 21.8% to 498,000. The July numbers were better than the headline number suggested because the permit number came in decent. Still, there is no denying housing starts have peaked and are down from earlier this year. This is occurring in despite low interest rates, suggesting the uncertain economic climate is partly holding back housing investment. The median price for single-family homes has been on a downward trend since late-2017 but the trend is still down only slightly from the early-2018 peak. Construction is not currently in a great free-fall, but also is not advancing either. Affordability is an issue, especially among first-time buyers. Barring a recession, we aren’t likely to see a sharp decline. On the other hand, not much upward movement is also expected over the next few quarters.


The euro-zone’s GDP barely grew in the second quarter, as economies across the bloc lost steam and the largest, Germany, contracted thanks to a global slowdown and uncertainty over Brexit. Real GDP in the 19-country euro zone was 0.2% in the second quarter, down from the 0.4% growth in the first quarter. The bloc saw growth hit 1.1% from a year-ago basis. Germany’s GDP fell 0.1% in the second quarter from the previous quarter. On an annualized basis, Germany’s GDP slowed to 0.4% in the second quarter from 0.9% in the first. Industrial production in the euro zone fell by 1.6% in June from May and by 2.6% from a ear earlier. Employment growth slowed to 0.2% in the second quarter from 0.4% in the first. Although employment growth is slowing, unemployment in Germany is just above its record low of 4.9% and France’s fell to 8.5% in the second quarter, the lowest since the end of 2008.

China’s economy stumbled badly in July, with industrial production cooling to more than a 17-year low as the intensifying trade war is taking on a heavier toll. Industrial output slowed to a 4.8% rate in July from a year earlier, far below analyst’s projections of a 5.8% pace. It was the weakest reading since February 2002. Crude steel output declined for a second straight month as the output of motor vehicles continued to fall at double-digit figures. The country’s power output edged up 0.6%.  Retail sales grew 7.6% in July, well off the consensus projection of 8.6%. Authorities announced hundreds of billions of dollars in infrastructure spending and tax cuts this year to boost the economy.

Important Data Releases This Week

July existing home sales will be released on Wednesday, August 21 at 10:00 AM EDT. Existing home sales firmed in the early Spring but have sputtered since then. Big improvement is the call for July at a 5.385 million pace versus the 5.270 million pace for June.

July leading economic indicators will be released on Thursday, August 22 at 10:00 AM EDT. We project the index to rise 0.2% in July, not quite offsetting the 0.3% decline in June.

July new home sales will be released on Friday, August 23 at 10:00 AM EDT. After a bright start to the year, new home sales flattened out in April and May. We look for sales to hit 645,000, not uch moved from the 646,000 rate in June.

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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.