Spending is Unlikely to Be Down for Long When Income Growth is Still Healthy

By | February 18, 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

European shares recovered on Friday after weak U.S. and Chinese economic data earlier sent global stocks into a dive. The Stoxx Europe 600 Index gained 1.3% on Friday to the highest level in more than four months. The MSCI Emerging Market Index fell 0.7% on Friday. MSCI’s global index was flat on Friday. The S&P rose early on Friday, on reports that the U.S. and China have reached consensus in principal on the main topics in their trade negotiations. Talks broke off with a promise to resume next week. Stocks fell after a report showed U.S. retail sales fell to the lowest level since 2009 and data on producer prices, which were little changed for a seventh straight month.

The S&P advanced 2.5% in the last five working days and capped its seventh straight weekly gain in the last eight weeks. Optimism about a U.S.-China trade agreement is helping drive U.S. stocks higher but the market may be heading for a make-or-break moment as the year long clash between thee world’s two largest economies come to a head. Optimistic investors are hopeful that a positive resolution, as a March 1 deadline nears, will have positive impact on equities because businesses will have greater confidence in the global economy. However, equities are vulnerable should talks collapse and signs that the U.S. economy may be slowing more than expected are gathering like dark clouds on the horizon.

The list of unpleasant things is growing but there is some signs of progress. The federal government went back to work and will stay there until September, at least. On the other hand, there are still plenty of negative things to worry about. The global economy has clearly slowed. Brexit and U.S.-China trade are creating uncertainty. The latest retail sales and industrial production report suggest the U.S. economy may be sputtering. Add to the mixture, the Trump administration may impose tariffs on imported cars that could add thousands of dollars to the cost of a car and cause hundreds of thousands of jobs in the auto industry to disappear. If the pessimists are right, the rally in stocks will be short lived. A lot more than equities may be at stake. If the U.S. economy enters a weak phase, the global economy will come close to recession.  Positive thing feed on positive things and negative things feed on negative things. If the global economy starts teetering and there is no resolution to the trade conflict, the weight of dark things will take the U.S. economy into recession.

Another government shutdown seems to have been averted last week, which is good news. We are still catching up with economic data that was postponed as a result of the December-January shutdown. The retail sales report was a eye-opener, as sales dropped unexpectedly by 1.2%. Control group retail sales dropped 1.7%, the sharpest decline since 2000. There is some skepticism in this report, as private reports from red-book and master card sources pointed to a decent December but have alluded to a slowdown in spending since the new year. There was some good news last week as price pressures continue to be subdued. The headline CPI was unchanged in January, mainly due to falling energy prices. The core CPI did stay on trend, rising 0.2% and suggests that inflation is still trending higher, although still at a subdued rate. Industrial production also disappointed last week, falling 0.6% in January and was weaker than expected. The decline can be traced to the 0.9% drop in manufacturing output, which was driven by a steep decline in auto output. Small business optimism seems to have adversely impacted by the government shutdown. The NFIB index slipped 3.2 points to 101.2 in January, the lowest level since 2016. Financial market weakness likely played a role but uncertainty from the 35-day shutdown clearly weighed on sentiment.

Next week, we get a look at the housing market index, durable goods orders, existing home sales and leading economic indicators. Despite the weak retail sales report, our confidence in the U.S. economy is still intact. Although economic data is coming in weaker than expected, fundamentals are still solid. Spending is unlikely to be down for long when income growth is still healthy. December sales was a dud, but low inflation is helping support house-hold purchasing power. Financial market conditions are easing. The Chicago Fed’s financial stress index has reversed a good portion of the increase that occurred last year. The Fed is unlikely to move for at least six months. Confidence was damaged during the government shutdown and trade with China uncertainty. The fact the government will be working until September and there seems to be progress in the China talks. If trade talks are unsuccessful and the Trump administration imposes stiff auto imports, the case for a recession becomes more significant. Odds are that we will see some deal with China and confidence will bounce back. The economy is slowing from the 3% rate last summer to closer to 2%. However, the economy is still unlikely to fall into recession in the near term. The recovery should have a happy birthday next summer.

Latest Data

The U.S. Economy:

The NFIB small business optimism index declined from 104.4 in December to 101.2 in January. The January decline placed the index at the lowest level since November 2016. Details were generally weaker as hiring plans declined and those with a current job opening that is difficult to fill slipped in January. Expectations for the economy to improve fell from 16% to 6%. Capital expenditure plans inched higher but are lower than seen at the end of last year. The government shutdown affected confidence and that is expected to bounce back in coming months. Also, the index remains at historically high levels, suggesting a decent outlook for the economy and small businesses. However, the trend in the index over the last few months is disturbing. The index has weakened substantially since October. A trade deal with China and a more stable fiscal policy may help boost small business’s confidence about the future. An unfavorable outcome in these areas would likely lower confidence levels.

Energy prices continue to put a dent in U.S. producer prices. The PPI for final demand fell 0.1% in January, the second monthly decline at that level. Final demand goods prices dropped 0.8%. Within the category, energy fell 3.8%. The report suggests that inflation pressures will remain modest early in the new year, mainly due to energy prices. With a slowing global economy, commodity price pressures should remain restrained, despite tariffs. The Fed is likely to sit still till June and await more data on the economy’s progress. Inflation data on the consumer side was also subdued. The CPI was unchanged in January for a third straight month. Energy prices declined 3.1%, the third consecutive monthly decline. Food prices were up 0.2% in January and 0.3% in December. Excluding food and energy, core prices rose a trend-like 0.2%. The CPI is up 1.5% for the headline number from a year earlier and 2.1% for the core. The report also suggests the Fed will not make any moves until the downside risks to the economy abate.

Business inventories fell by 0.1% in November, following a 0.6% gain in October. Wholesale stocks did increase by 0.3% in November, but retail inventories fell 0.4% and manufacturing saw a 0.1% decline. Sales took a step back, falling 0.3%. The inventory-to-sales ratio remained unchanged at 1.35 months. Trade headwinds may explain the trend weakness among manufacturers and wholesalers. Increased tariffs on imports raise wholesalers’ product prices, as these entities buy and sell imported products. Manufacturers rely on foreign inputs to produce finished products and higher import prices cut into the bottom line. Trade tension will weigh on near-term inventory builds.

Retail sales fell far more than expected in December. Top-line sales fell 1.2%, following only a 0.1% advance in November. Motor vehicles and parts dealers saw sales increase 1.0% but sales at gasoline stations fell a sharp 0.5%. Excluding autos ad gas, sales were weak, falling 1.4%. Declines were led by sporting goods and hobby stores, miscellaneous retailers and non-store retailers. In December, sales were only up 2.3% year-over-year, a sharp fall from November’s 4.1% reading. The report suggests that holiday spending did not live up to expectations. Although falling gas prices were expected, the additional widespread declines were not expected. Cold weather in many parts of the country likely played a part in the weakness. However, the weakness in non-store sales is puzzling. Considering the strong labor markets and rising incomes, spending should rebound in coming months. However, delays in federal tax refunds and lower refunds due to last year’s change in withholding brackets are a near term risk. With the government back to work, federal government fiscal stability and a possible trade deal with China may help support confidence. Failure to achieve a positive outcome could undermine confidence and spending.

International:

Euro-zone industrial production fell more than expected in December, pulled down by a decline in capital goods, used for investment. The European Union’s statistics Eurostat said that industrial output in the 19-nation currency union fell 0.9% month-on-month for a 4.2% decline from a year earlier. Production of capital goods fell 1.5% from November and the year-over-year fall was 5.5%, accelerating from a 4.4% decline in November. The fall in industrial output is reflecting a trend of slowing economic growth in the euro-zone. The European Commission expects growth to decelerate to 1.3% this year from 1.9% n 2018.

Important Data Releases This Week

February housing market index will be released on Tuesday, February 19 at 10:00 AM EST. A second month of improvement is expected for the hosing market index where the call is 59, up from 58 in January. The sudden plunge in the index occurred in November, when the index dropped 8 points to 60.

The December durable goods orders will be released on Thursday, February 21 at 8:30 AM EDT. We look for durable goods orders to increase 1.2% for December, following the 0.8% advance in December. Ex-transportation orders have been soft but are expected to post a 0.3% advance. Core capital goods orders will remain soft, only rising 0.1% for the month.

The January existing home sales will be released on Thursday, February 21 at 10:00 AM EST. Lower mortgage rates and a easy comparison with a weak December suggests an improvement for January. Sales should hit 5.050 million for January, up from 4.990 million for December.

The January retail leading economic indicators will be released on Thursday, February 21 at 10:00 AM EST. We look for a 0.2% rise in the index of leading economic indicators for January, an improvement over December’s 0.1% decline.


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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.