There is Plenty of Momentum Heading into the Second Half of the Year

By | September 3, 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

Global stocks fell for a second day on Friday as a report that U.S. President Donald Trump was preparing to step up a trade war with Beijing dampened risk appetite erased some of the gains made in a rally earlier this week. The MSCI’s broadest index of Asia-Pacific shares outside of Japan dropped 0.6% on Friday and was set for a monthly drop of 1.5%. Bloomberg News reported that Trump is ready to impose tariffs on $200 billion ore on Chinese imports as soon as the public comment period ends next week. Trump also threatened to withdraw from the World Trade Organization if “they don’t shape up”-a move that would further undermine one of the foundations of the modern global trading system.

The S&P ended Friday flat, while the Dow edged down as Canada and the United States concluded trade talks without resolution ahead of the Labor Day weekend. All three major indexes posted net gains for the week and were also up for the month. The Nasdaq had the best month since January. In recent days trade jitters abated as Mexico and the U.S. reached a bilateral deal, but tensions reemerged later in the week following a report U.S. President Donald Trump is prepared to impose tariffs an additional $200 billion of Chinese imports as early as next week. Talks with Canada will continue next Wednesday and Trump notified Congress of his intent to sign a bilateral trade pact with Mexico. Some U.S. lawmakers expressed concern about Canada not being part of the deal. “Anything other than a trilateral agreement won’t win Congressional approval and would lose business support,” the chief executive of the U.S. Chamber of Commerce, Thomas Donohue, said in a statement.

The U.S. economy is growing at a strong pace, supported by tax cuts and strong job additions. Real GDP grew at a revised 4.2% in the second quarter. Gains were driven by fixed investment, consumer spending and exports. Inventories were a major drag growth and housing investment slipped. Real disposable income slowed to 2.5% from growth of 4.4%., inflated by tax cuts. Growth remains on track by 3% this year. The biggest surprise of the week was the Conference board’s index of consumer confidence, which rose from 127.9 in July to 133.4 in August. The advance goods report showed the deficit widened by $4.3 billion to $72.2 billion in July. Goods exports fell 1.7%, with foods falling 6.7%, largely because of the effects of tariffs on soybeans. Meantime, wholesale inventories rose 0.7% in July. Pending hoe sales fell 0.7%, suggesting further declines in existing home sales.

Next week will be busy on the economic calendar. We will get a look at the ISM manufacturing and non-manufacturing indexes, construction spending, motor vehicle sales, international trade, factory orders and employment. The economy is doing well and there is plenty of momentum heading into the second half of the year. The biggest single threat is still the trade war. So far, the impact on the economy is minimal, but the downside risks become stronger as more tariffs are added. There are other risks to consider other than trade. As the Fed raises rates, some emerging economies with sizable debts in emerging economies come under stress. Turkey is an example, but several other Southeast Asian nations fall into this category. Some contagion coming out of this area is possible. Other issues to watch are some businesses that have taken out large amounts of debt. While businesses in aggregate look solid, there are some that will be on shaky ground as interest rates rise. Regulators need to be alert to the impact rising rates will have on some highly leveraged businesses. warns that some of these leveraged loan and corporate bond markets have debt loads of $2.7 trillion, the kind of numbers we saw in housing that caused the Great Recession.

Latest Data

The U.S. Economy:

The Chicago Fed National Activity Index eased in July, coming in at 0.13 down from 0.48 in June. Three out of the four categories decreased during the month but three made a positive contribution to the index. Production-related indicators contributed 0.05 to the index in July, compared with 0.45 the previous month. The sales, orders and inventories category contributed 0.03, compared to 0.06 the month before. Employment-related indicators contributed 0.12, compared to 0.03 the month before. The personal consumption and housing category contributed -0.7, compared to -0.06 in the previous month. The 3-month moving average equaled 0.05 in July, down from 0.20 in June. The economy keeps chugging along, but some months are stronger than others. Industrial production was weaker in July, but most of the weakness came from utilities. Employment growth was weaker in July but a little weaker than in June. The overall path for the economy remains quite solid.

The advance trade report indicates a weak start to the third quarter for trade. The nominal goods deficit swelled to $72.2 billion in July, up from $67.9 billion in June. Nominal exports fell by 1.7%, as exports of foods feeds and beverages fell 6.7%. Most of that decline was in soybeans in response to the newly implemented Chinese tariffs. Capital goods exports also fell 1.7%, while consumer goods exports fell 2.5%. Nominal imports increased 0.9% and gains were widespread. Foods, feeds and beverage imports rose 2.1% and capital goods and industrial supplies each edged up 0.9%. Although there may be progress with Mexico and perhaps Canada, the trade war with China shows no sign of cooling. Although tariffs may benefit some domestic producers, they will hurt importers of goods and finished manufacturers. In the end, the U.S. consumer will see higher costs. The dollar is up 6% since January and that will also weigh on exports.

Inventories started the third quarter on a solid note. Wholesale stockpiles rose 0.7% in July, following a weak 0.1% advance in June. Durable goods inventories rose 0.9%, following a 0.8% advance in June. Nondurable goods rose 0.2%, following a 1.0% decline I June. Retail stocks rose 0.4% in July, after declining 0.1% in June. Gains were largely in autos and parts, which grew 1%. The inventory build is picking up speed and will contribute more to growth in the second half of the year than in the first half. There is still risk from tariffs and weaker final demand may be a fall-out of trade tensions. The deal with Mexico does represent a step in the right direction, but big roadblocks still exist with China. The industrial sector still faces challenges.

The pending home sales index declined 0.7% in July to 106.2, down from 107.0 in June. The index retreated to a level slightly weaker than in April. The index remains 2.3% below its year ago level. The index has basically been holding its own since the beginning of the year. The steady increase in mortgage rates continue to weigh in on home sales, particularly for the existing home market. The inventory-to-sales ratio is at a rock bottom 4.3 months, indicating tight supply. The 30-year mortgage rate has increased 60 basis points since the beginning of the year and is likely to continue to increase. On the plus side, employment growth is strong and wages are rising, vital supports going forward. Sales will likely rise until late-2019-early 2020 when sales are projected to peak.

Nominal personal income rose by 0.3% in July, a touch less than the 0.4% gain in June. Meantime personal spending rose 0.2% in July, following a 0.3% rise in June. Consumers contributed to the surge in economic activity in the second quarter and whole growth seems to be moderating in the third quarter, it remains strong. Spending is being supported by the tax cuts that lifted paychecks earlier in the year. Inflation appears to be calm, as the PCE deflator only rose 0.1% in July, the same rise as in June. The CPE deflator was up 2.3% in July and the core 2.0%. Although quiet now, inflationary pressures should intensify in coming months. The unemployment rate is low, GDP growth above trend, wage growth is accelerating and tariffs will raise input costs. This will be passed on to the consumer. The Fed is correct in raising rates. On net, the prospects for the consumer are good, but trade does pose some downside risks, Tariffs drive up costs, raise prices for consumers and eventually lower demand.


The Chinese manufacturing PMI came in at 51.3 in August, up from 51.2 in July. The index had been expected to fall. The improvement was driven by a pickup in production. Details were less rosy. Inventories rose, suggesting demand was not keeping up with output. Also, new export orders fell. Looking ahead, we expect some front loading of exports before the U.S. decision to impose tariffs of Chinese goods. China’s services PMI rose to 54.2 for August, up from 54 in July. However, new orders in that sector were also weaker. Trade tensions have pointed to a weaker China. In July, both the official and the private PMI fell, with the private manufacturing index dropping to an eight-month low due to a decline in export orders.

Important Data Releases This Week

August ISM manufacturing index will be released on Tuesday, September 4 at 10:00 AM EST. The ISM manufacturing index is staying elevated but some moderation is expected for August. He index is projected to decline to 57.6 in August, down from 58.1 in July. This will provide some breathing room for delivery delays and input costs and the need to build backlogs have been unusually severe this year.

July construction spending will be released on Tuesday, September 4 at 10:00 AM EST. Construction spending has been volatile this year. We project a 0.4% bounce back in July after a 1.1% drop in June and a 1.3% spike in May. Both single-family and multi-family residential spending fell in June. Shortages of labor and high costs for materials are common problems in the construction industry.

August vehicle sales will be released on Wednesday, September 5 at 4:00 PM EST. Not contributing much to consumer spending this year, vehicle sales have been flat. August calls for a 16.9 million rate, versus 16.8 million in July.

July International trade in goods will be released on Wednesday, September 5 at 8:30 AM EDT. We look for the trade deficit to widen to $50.2 billion from June’s $46.3 billion. The goods side of this report has been released and showed a sizable widening as exports fell and import The July forecast was based on the advance goods forecast, which showed a big drop in exports together with a large rise in imports. The report will mark a key early entry for Q3 GDP.

July factory orders will be released on Thursday, September 6 at 10:00 AM EDT. The advance report for durables showed a sharp drop in aircraft orders but a good showing for core capital goods. Orders are expected to slip 0.7%.

August ISM non-manufacturing index will be released on Thursday, September 6 at 10:00 AM EST. The ISM non-manufacturing index is staying elevated. The index is expected to increase to 56.8, up from July’s 55.7 reading.

July payroll employment will be released on Friday, September at 8:300 AM EST. We expect a strong August report, with 198,000 jobs added and the unemployment rate will fall to 3.8%. Average hourly earnings will rise 0.3%, bringing the year-over-year number to 2.8%.

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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.