Tariffs Raise the Price of Goods and Slow Demand

By | June 10, 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

U.S. stocks closed higher Friday, following a weaker-than-expected jobs report. The employment data, which supported the case for the Federal Reserve to ease interest rates, came amid fears that the U.S. economy is decelerating as trade tensions between the U.S. and China persist. Tensions with Mexico eased after an announcement that President Trump struck a deal with Mexico surfaced after markets were closed. The Dow Jones Industrial Average rose by 1% to 25,983.94, while the S&P 500 gained 1.1% to 2,873.34 on Friday. For the week, the Dow gained 4.7% and the S&P was up 4.4%. The tariffs were set to be implemented on June 10 and would have left the U.S. fighting a trade war on two fronts, with two of its biggest trading partners. The threat had further unnerved financial markets already on edge about a global economic slowdown.

The United States slapped tariffs on up to $25% on $200 billion in Chinese imports last month, prompting Beijing to levy its own tariffs on $60 billion of American goods. Trump said Thursday he would decide later this month whether to it Beijing on an additional $300 billion in Chinese goods. Economists have said the two trade disputes could damage supply chains and hurt consumers at a time when the global expansion is starting to sour, and the risk of recession has risen. The U.S. Labor Department reported on Friday that job creation slower sharply in May and wages less than expected and a loss of economic momentum was spreading to the labor market.

Investors were tense this week with the prospect of a more prolonged and pronounced trade war. On top of the trade uncertainty, data this week added to the feeling that the domestic economy might be beginning to succumb all the uncertainty poised by the Trump administration. Payrolls added just 75,000 jobs in May and downward revisions shaved another 75,000 from March’s and April’s job count. Average hourly earnings also missed expectations, up 0.2% for the month and 3.1% for the year, the slowest rise since September. The reaction in the bond market was swift, yields on both the two-year and ten-year fell more than six basis points. The bond market believes that a rate cut will soon be necessary and perhaps even more by year’s end. The Trump administration is willing to use tariffs as policy levers. Mexico escaped this time, but odds are rising he will use tariffs as a threat for a host of political agendas.

The Fed might be caught in a quandary. Tariffs are like taxes. They raise the price of goods and slow demand. The market expects three cuts in a 3.6% unemployment rate economy and the fed may see broad price increases if no deal with China is reached. Evidence the economy is slowing is accumulating. The ISM manufacturing index fell 0.7 points to a 31-month low, but the non-manufacturing rose index rose 1.4 points to 56.9. This suggests that the trade tension and global manufacturing weakness has not yet spread to the rest of the economy. However, another month of labor market weakness may show that the deceleration is more advanced than currently thought. The cyclical components of the economy are already slowing, and the uncertainty caused by trade is already here. If the Fed doesn’t move, it may already be too late.

Next week, we will see data on inflation, industrial production, retail sales, small business optimism and business inventories.

Latest Data

The U.S. Economy:

The ISM manufacturing index fell from 52.8 in April to 52.1 in May, accenting the weakness in manufacturing caused by trade tensions between the U.S. and its trading partners. New orders did rise from 51.7 to 52.7. Of 18 manufacturing industries, 12 reported growth in new orders and among them were furniture/related products, plastic/rubber products and computer/electronic products. Production fell by 1 point to 51.3 in May. 11 industries reported stronger production, while four noted a decline. The inventory index fell from 52.9 to 50.9, the lowest since October 2018. Suppler deliveries dropped from 54.6 to 52 in May. According to the ISM, supplier deliveries are improving, with many respondents noting readily available supplier inventory, faster supplier response and generally suppliers’ catching up despite land and river-transportation bottlenecks. The escalation of trade tensions with China and Mexico could disrupt the supply chains. Backlogs fell from 53.9 to 47.2. The ISM noted that production is exceeding growth in new orders. Prices paid increased from 50 in April to 53.2. New export orders rose from 49.5 to 51. Trade tensions are weighing on manufacturing and things may get much worse.

Construction spending was virtually unchanged in April from March, which registered only a 0.1% advance for the month. Total private construction sending fell 1.7% in April, after being unchanged in March. Residential construction spending fell 0.6% in Aril, following a 1.2% decline in March. Nonresidential construction spending declined 2.9% in April, offsetting a 1.3% advance in March. Public construction sending advanced 4.8%, after a 0.5% increase in March. Residential construction spending has been weak but lower mortgage rates and higher wages should breath some life into housing. Public construction has been strong, up 15.1% y/y on the strength in highway and street construction. Despite the need, there is little chance that Congress will pass an infrastructure bill.

U.S. vehicle sales bounced back in May to 17.4 million units. Sales of light duty trucks increased from 11.5 million in April to 12.4 million in May. Car sales rose from 4.9 million to 5.0 million. Gas prices were steady in May, boosting the light truck sector. The pace of sales is expected to be below last year and may slip below the 17 million mark. Vehicle sales have been volatile this year. This suggests the volatility in the stock market and trade tensions are having an impact on consumer confidence. The wild card is now the prospect of tariffs, which will increase prices. The increase in price will make the consumer delays purchases to see if tariffs might get rolled back. It could hit domestic manufacturers harder than imported ones because the domestic producers have such integrated supply chains.

The U.S. non-manufacturing index increased from 55.5 in April to a better than expected 56.9 in May. The business activity index rose from 59.5 to 61.2. Twelve industries reported an increase in business activity, while agriculture and information reported a decline. The new orders index rose from 58.1 in April to 58.1 in May. Eleven industries reported growth in new orders, while agriculture and information and other services reported declines. The supplier deliveries index fell to 49.5 in May, the first time since December 2015, the index dropped below the 50 mark. Respondents noted lower order volume and extended delivery dates, a sign of weakening demand rather than faster delivery times. The trade war creeping in the report as some respondents are wondering how the tariffs would affect business. The non-manufacturing side is less exposed to tariffs and trade than the manufacturing side, but a fall in business will affect everybody.

Stockpile growth rebounded in April. Wholesale inventories increased by 0.8% in April, after being unchanged in March. Durable goods stocks increased 1% in April, after a 0.3% increase in March. Nondurable goods advanced 0.5% in April, after falling 0.6% in March. Wholesale sales disappointed in April, falling 0.4%, after a 1.8% gain in March. The I/S ratio rose to 1.34 months in April, up from 1.33 months in March. Increased tariffs are bad news for wholesalers, as they buy many imported goods. This means extra costs, worse margins and lower demand.

Payrolls fell well below expectations, increasing by only 75,000 in May. In addition, both March and April were revised down by total of 75,000 jobs. The private sector added 90,000, less than half the 205,000 added in April. Goods producing industries added 8,000, spread across component industries. Average hourly earnings increased by 0.22% in May, slightly less than the average of the last three months. The year-over-year increase was 3.1%, the lowest since last September. The household survey revealed that the unemployment rate stayed steady at 3.6% and the participation rate was unchanged at 62.8%. The survey week was later than usual and that should have translated into more jobs being captured. We expected a loss for retail as Payless shoes and Dress Barn closed doors. Trade tensions did not really surface until after the survey week, so the weakness in manufacturing was disappointing. So far this year, payrolls gains have averaged 164,000 more than needed to keep the unemployment rate steady. Average gains for year should track near 160,000 and 180,000.

International:

German industrial production and exports fell sharply in April, highlighting the vulnerability of Europe’s largest economy to trade friction and Brexit uncertainty. Industrial output dropped 1.9% in April, the sharpest decline since August 2015, after a steep fall in the production of investment and intermediate goods. Exports fell 3.7, the biggest drop since August 2015. The German economy grew 0.4% in the first quarter, but the latest IP report suggests that GDP growth would slow or stall in the second quarter. The Bundesbank slashed its growth forecast recently to 0.6% from a December forecast of 1.6% for all of 2019.

Important Data Releases This Week

U.S. stocks closed higher Friday, following a weaker-than-expected jobs report. The employment data, which supported the case for the Federal Reserve to ease interest rates, came amid fears that the U.S. economy is decelerating as trade tensions between the U.S. and China persist. Tensions with Mexico eased after an announcement that President Trump struck a deal with Mexico surfaced after markets were closed. The Dow Jones Industrial Average rose by 1% to 25,983.94, while the S&P 500 gained 1.1% to 2,873.34 on Friday. For the week, the Dow gained 4.7% and the S&P was up 4.4%. The tariffs were set to be implemented on June 10 and would have left the U.S. fighting a trade war on two fronts, with two of its biggest trading partners. The threat had further unnerved financial markets already on edge about a global economic slowdown.

The United States slapped tariffs on up to $25% on $200 billion in Chinese imports last month, prompting Beijing to levy its own tariffs on $60 billion of American goods. Trump said Thursday he would decide later this month whether to it Beijing on an additional $300 billion in Chinese goods. Economists have said the two trade disputes could damage supply chains and hurt consumers at a time when the global expansion is starting to sour, and the risk of recession has risen. The U.S. Labor Department reported on Friday that job creation slower sharply in May and wages less than expected and a loss of economic momentum was spreading to the labor market.

Investors were tense this week with the prospect of a more prolonged and pronounced trade war. On top of the trade uncertainty, data this week added to the feeling that the domestic economy might be beginning to succumb all the uncertainty poised by the Trump administration. Payrolls added just 75,000 jobs in May and downward revisions shaved another 75,000 from March’s and April’s job count. Average hourly earnings also missed expectations, up 0.2% for the month and 3.1% for the year, the slowest rise since September. The reaction in the bond market was swift, yields on both the two-year and ten-year fell more than six basis points. The bond market believes that a rate cut will soon be necessary and perhaps even more by year’s end. The Trump administration is willing to use tariffs as policy levers. Mexico escaped this time, but odds are rising he will use tariffs as a threat for a host of political agendas.

The Fed might be caught in a quandary. Tariffs are like taxes. They raise the price of goods and slow demand. The market expects three cuts in a 3.6% unemployment rate economy and the fed may see broad price increases if no deal with China is reached. Evidence the economy is slowing is accumulating. The ISM manufacturing index fell 0.7 points to a 31-month low, but the non-manufacturing rose index rose 1.4 points to 56.9. This suggests that the trade tension and global manufacturing weakness has not yet spread to the rest of the economy. However, another month of labor market weakness may show that the deceleration is more advanced than currently thought. The cyclical components of the economy are already slowing, and the uncertainty caused by trade is already here. If the Fed doesn’t move, it may already be too late.

Next week, we will see data on inflation, industrial production, retail sales, small business optimism and business inventories.


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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.

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