Tax Reductions and Fiscal Stimulus are Juicing the Economy

By | November 26, 2018

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

European markets opened higher on Friday, with most indexes rising modestly after a volatile week in which company earnings and growth worries hit stocks. The euro sank after a weaker than expected German business survey. The pan-European STOXX 609 was up 0.3% on Friday and stood in contrast to Asia, where steep losses in Chinese markets amid the trade war with the U.S. and worries about global growth worried investors. MSCI’s broadest index of Asia-Pacific shares outside of Japan fell 0.23% on Friday. Europe’s stocks on Friday did stand in contrast to several reports that pointed at European economic weakness. German exports fell 0.9% in the third quarter and the economy contracted 0.2%, the first contraction since 2015. Although the third quarter was thought to be an aberration, because of new auto air standards, worries about German and European growth are increasing. The euro-zone’s composite PMI fell to 52.4 in November, the lowest since late-2014. The manufacturing PMI fell to 51.5 from 52, a level not seen since mid-2016.

U.S. stocks closed lower on a shortened post-holiday trading session as the energy sector tumbled on continued weakness in oil prices. The three indexes all fell well over 3% for the week, with the Dow Industrials and the Nasdaq posting their biggest weekly percent declines since March. The S&P ended about 10.2% down from its Sep. 20 closing record high, confirming it had entered a correction. The Dow Jones Industrial Average fell 178.74 points on Friday. investors are worried about the economy going forward, the effects of higher interest rates, slower global growth and trade. Meantime, early signs of Black-Friday shopping were mostly positive. Although combines results won’t be available for a few days, early signs were good.

Data last week was focused on housing. The National Association of Home Builder’s confidence index fell 8 points to 60, the largest drop since February 2014. Notably, foot traffic dropped below the 50 mark, where more builders see bad than good. Housing starts did rise 1.5% in October, but most of the gain was in the multi-family sector. Single-family starts fell 1.8% in October. Near-term prospects don’t look good, as total permits fell 0.6%. Meantime, existing home sales did increase 1.4%, following six months of declines. For homebuyers, income gains are a plus, but rising mortgage rates and affordability are negatives. At best, the housing market will remain flat in coming months.

Durable goods orders fell 4.4% in October as both civilian and defense aircraft orders declined. Excluding transportation, orders rose 0.1%. Core capital goods orders were unchanged, following a 0.5% decline in September. Data on business spending is moderating. After double-digit increases in the first half of 2018, business spending slowed in the third quarter and may be flat in the fourth. Slower projected earnings, a weaker stock market and worries about rising interest rates and trade are slowly undermining business confidence.

The near-term prospects for the economy look good. The tax reductions and fiscal stimulus are juicing the economy, but the impact will fade as 2019 progresses. 2019 will be a year of transition, as the economy slows from the current red-hot 3% level to one near 2%. Political gridlock will prevent the administration from further deficit-fueled stimulus. The deficit this year will breach $1 trillion this year, or 5% of GDP, long thought to be an unsustainable pace. Uncertainty is rising as evidence accumulates that the global economy is slowing. The trade war has not had a big impact on the economy, but if the tariffs are extended, there will be significant negative effects. The economy will be vulnerable as it slows to near 2%. The Fed will likely keep raising rates, as trade policy and a tight labor market will fuel inflation. This all could have a bad ending in 2020-21. There is potential good news for 2019. Political gridlock means little bad legislation will be passed. If the U.S. and China reach a trade deal, there could be a positive turnaround in the global economy and some fresh wind for the U.S. economy.

Latest Data

The U.S. Economy:

Housing starts increased 1.5% in October to an annual rate of 1.228 million units. Starts remained down by 2.9% from a year earlier. The gain was driven by the multi-family sector, where starts increased by 10.3% to an annual pace of 363,000 units. Single-family starts fell 1.8% in October to 865,000. Near-term future construction does not bode well as total permits fell 0.6% to 1.263 million. Both single-family and multi-family permits fell 0.65 for the month. Total permits are down 6% from a year earlier. The hurricane season may have played a small part in the residential construction numbers, as starts and permits increased slightly in the South, a month after Hurricanes Florence and Michael. The real news is that new home sales are well past peak and demand for multifamily units has flattened out. New single-family home sales are down 10% from a year ago and the inventory-to-sales ratio has surged from 5.5 months earlier this year to 7 months in September. Affordability is a big issue. Existing home prices are 25% more affordable than new single-family homes and that gap is unlikely to come down soon. The 30-year fixed rate mortgage started climbing since late-2016 and unlikely to peak before 2021 at the earliest. Changes in the tax laws on deductibility has also hurt home ownership. Home construction is unlikely to fall apart barring a recession, but construction is not likely to go anywhere for some time.

New orders for durable goods fell 4.4% in October, the third decline in four months. The October weakness was mainly driven by the transportation sector. Both civilian and defense aircraft orders declined sharply. Orders, excluding transportation increased 0.1%. Core capital goods orders were unchanged in October, after a 0.5% drop in September. Shipments shed 0.6% and the trend is softening. Also, the trend in core capital goods orders is weakening. Trade tensions are starting to undermine business confidence, although the impact is not large on a macro-level. Worries about a global slowdown, higher interest rates and weaker corporate earnings are affecting global equity markets and uncertainty is increasing. This suggests that business capital investment plans will face greater scrutiny in 2019. The outlook for industrial sector still looks solid for the new year but dark clouds are gathering, and caution is slowly seeping in.

After six months of decreases, existing home sales had a slight increase in October. Sales increased 1.4% for the month but remained down 5.1% from October 2017. Sales equaled an annual pace of 5.22 million in October. Sales led by the condo/co-op sector, but single-family homes had a slight increase. three out of for census regions had sales increases. Despite the October advance, the trend is sales is weak. The peak was early this year. Higher interest rates and affordability are placing downward pressure on demand. Rates are unlikely to come down before 2021 and demand is projected to be flat next year.


Weaker exports were the primary driver behind Germany’s first quarterly contract since 2015. Real GDP fell 0.2% in the third quarter, the first contraction since 2015. Exports fell 0.9% for the quarter, while imports rose 1.3%. Net trade knocked a full percent off GDP growth in the third quarter. Economist blamed the third quarter weakness an aberration, as new pollution standards affected output and sales. Evidence has been accumulating that the German economy is slowing and is also weakening the euro-zone economy. The composite PMI survey fell to 52.2 in November from 53.4 in October, the lowest reading since December 2014. The third quarter contraction was mainly due to weakness in the auto industry as it struggled to adjust to new emission testing requirements. Some economists see a fourth quarter bounce back but others see further cooling.

The euro-zone business growth was much weaker than expected this month as export fell sharply by the slowing global economy and the ongoing U.S. trade war. The composite PMI Index fell to 52.4 in November, the weakest reading since late-2014. The service PMI fell to a 25-month low of 53.1 in November from October’s 53.7. The manufacturing PMI fell to 51.5 from 52.0, a level not seen since mid-2016. The index for output, fell to 50.4, a level very near contraction, from 51.3. Backlogs fell to 48.4 from 49.0.

Important Data Releases This Week

The Chicago Fed National Activity Index for October will be released on Monday, November 26 at 8:30 AM EST. The index should get a boost from the October employment report, with payrolls jumping and from consumer spending. An offset will come from weaker utility output. The index should move upwards from the current 0.17 to 0.20 and the moving average increasing to 0.21.

Q3 GDP (second estimate) is scheduled to be released on Wednesday, November 28 at 8:30 AM EST. The second estimate for Q3 is projected to come in at 353% annualized rate unchanged from the first estimate. Inventories were a central positive in the first estimate, with trade and residential investment major weaknesses.

October international trade in goods will be released on Thursday, November 28 at 8:30 AM EST. The goods deficit is expected to widen to $76.7 billion in October from $76.6 billion in September. The result will update progress in net exports in the fourth quarter, which were unfavorable in the third quarter.

Wholesale inventories will be released on Thursday, November 28 at 8:30 AM EST. Wholesale inventories are expected to rise 0.4% in October, following the 0.3% rise in September.

The October new home sales index will be released on Thursday, November 28 at 10:00 AM EDT. After a weak 553,000 rate in September, we project sales to rebound sharply to 575,000. Prices have been still increasing despite the weak sales.

The October personal income and sending and PCE deflator report will be released on Thursday, November 29 at 8:30 AM EDT. Personal income is seen rising a solid 0.4%, following the 0.2% rise in September. Spending I also projected to rise 0.4% after the 0.4% advance in September. The PCE and core deflator is projected to increase 0.2%. this will bring the year-over-year increase to 2.1% for the headline number and the core will have increased 1.9%.

The October pending home sales index will be released on Thursday, Thursday, November 29 at 10:00 AM EDT. Pending home sales are expected rise 0.5% for a second straight month.

FTR is the leader in economic analysis and forecasting for the commercial freight and transportation equipment markets. For more information: Click here

Category: Monday Morning Coffee Tags:

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.