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.
World stocks fell on Friday after weak economic data from China and Europe fanned fears of a global economic slowdown and lingering fears over the wider implications of the still unresolved China-U.S. trade dispute. The MSCI All-Country Index, which tracks share across 47 countries, was down half a percent on Friday. The euro-zone composite PMI slumped to 51.3, the weakest reading since November 2014, as new order growth dried up, hurt by trade tensions and violent protests in France. The data out of Europe added to weak readings in China, where November retail sales grew at the weakest pace since 2003 and industrial output rose the least in three years, underlying risks to the economy as Beijing works to dispute trade disputes with the United States. There were additional concerns as the European Central Bank announced an end to’ its QE program, a move that investors thought untimely as signs accumulate that the euro-economy is slowing.
Wall Street’s three major indexes tumbled on Friday after the Dow confirmed a correction and weak data from Europe and China stoked fears of a global slowdown, while Johnson & Johnson shares fell sharply after a story was released by Reuters that the company knew for decades its Baby Powder contained asbestos. The Dow Jones fell 2.02% on Friday and 1.2% for the week. The S&P lost 1.9% on Friday and 1.2% for the week. Solid fundamental data at the core of the U.S. economy is being overshadowed by a global slowdown splashing up on the U.S. shore. Investors were also concerned about a Reuters poll of economists, which found the risk of recession in the next two years rose to 40% and found a significant shift in expectations toward fewer 2019 Federal Reserve interest rate increases.
Consumers got a break on inflation just in time for holiday shopping. Lower prices at the pump held the PPI to rise just 0.1% and the CPI to remain unchanged in November. The core CPI rose 0.2%, suggesting that overall inflation is still alive, keeping the Fed alert as it debates the proper policy response for 2019. With oil prices falling further in the first two weeks of December and unlikely to hit $76 a barrel soon, downward pressure on inflation gives some room for the Fed to pause if the committee deems it proper policy. Low oil prices also support consumer spending. Retail sales rose a modest 0.2% in November, but lower oil prices were a factor in the total headline number. Excluding gas and autos, sales rose a decent 0.5%, suggesting a healthy consumer. While consumer spending looks quite healthy, the industrial sector is hinting at a modest cooling. Total industrial production rose 0.6%, but the boost was provided by mining and utility output. Manufacturing was unchanged in November and fell slightly in October. We are likely to see further moderation in coming months in some segments because of low oil prices and slowing global growth.
Next week housing will be on center stage. After a shocking 8-point plunge in November, we will see if the NAHB’s optimism index sinks or swims. Housing starts and existing home sales will be featured as well as durable goods. Here is also a Q3 GDP revision and personal income data. Many eyes will be on the Federal Reserve Open Market Committee meeting statement on Wednesday. Although a December increase in the fed funds rate is likely, investors will be looking for clues to 2019 rate hikes. Any reduction in the three rate hikes currently penciled in will be met with optimism in the equity markets. Conversely, no change in policy will have a negative impact on markets.
The economy still has good momentum as we get ready to enter 2019. Consumer spending and fundamentals are solid. The only real weak segment of the economy is housing. However, the economy will lose significant momentum in the new year, slowing to a 2% rate by year’s end from the current 3% rate. Soft landings are rarely soft. Concerns about the global economy are spooking financial markets. Failure to reach a deal with China will have a significant impact on global growth and may tip the global economy into recession. On the other hand, a trade deal with China may boost confidence and spirits and may provide a path towards greater economic growth. 2019 will be a year of transition. Whether it is a transition to a good, or bad result remains to be seen.
The U.S. Economy:
The NFIB small business optimism index fell to 104.8 in November from 107.4 in October. Hiring plans were unchanged, while the share of firms with at least one job that is hard to fill, fell from 38% to 34%. Most indicators were close to last month’s reading except views concerning the economy. A net 22% of respondents expect the economy to improve over the next six months, down from 33% in each of the last two month and the lowest since before the 2016 presidential election. Some of the decline can be blamed on the weakening housing sector, but declines in the stock market, looming trade deadlines and the result of the midterm election may have helped lower expectations. Confidence remains high, but the absence of a larger improvement in capital expenditure plans is somewhat disappointing considering the size of the tax reduction legislation.
The PPI for final demand advanced just 0.1% in November, following a 0.6% jump October. The goods PPI fell 0.4%, reversing much of the 0.6% advance in October. The PPI for final demand energy fell 5% in November. The core PPI for services increased 0.3%, following the 0.7% gain in October. On a year ago basis, the headline PPI was up 2.6% and core goods 2.5%. Lower oil prices will help keep a lid on goods inflation, but the core index is expected to remain on an upward trend. On the consumer side, the CPI was unchanged in November, following a 0.3% increase in October. Energy prices fell 2.2% for the month. The core CPI rose 0.2%, following a similar increase in October. The headline and the core indexes were up 2.2% from a year earlier.
Business inventories rose 0.6% in October, following a 0.5% rise in September. Manufacturing stocks rose 0.1% and retail and wholesale stocks both increased 0.8%. In the retail category, motor vehicle stockpiles increased 1.1% and furniture inventories rose 2.6%. Business sales were modest, only rising 0.1%. This drove the inventory-to-sales ratio to edge higher, to 1.35 months from 1.34. Stockpiles are growing at a decent clip, starting the fourth quarter. However, manufacturing and wholesale sales fell. Retail sales was positive for the month. China front loaded imports ahead of the proposed deadline of January 1, that was postponed for three months, depending on how the trade negotiations pan out. This will change the normal trend of inventories to sales accumulation of inventories. The I/S ratio has been flat for most of the past year and further adjustment will follow the path of sales.
Retail sales increased 0.2% in November, following a 1.1% jump in October. Sales excluding gasoline increased 0.2% and sales excluding gas and autos rose a solid 0.5%. Lower gasoline prices were a drag, with sales at gasoline stations fell 2.3%. Motor vehicle and parts sales increased 0.2%. Total sales were up 4.2% from a year earlier, down from the 4.8% rate in October. Non-store sales were up 2.3% in November, the strongest gain for every segment. Looking ahead, consumer spending should remain healthy in 2019. Jobs and wage gains will be the biggest support. Low oil prices are a boost right now for non-oil sending. As the year develops, rising interest rates will present a headwind. Trade remains a wild card because renewed tariffs on Chinese gods will include a wide range of consumer goods, that will go up sharply in price. As the economy slows in 2019, spending will also lose velocity.
Industrial production increased 0.6% in November, following a 0.2% decline in October. November’s strength in total IP came from a 1.7% increase in mining and a 3.3% advance in utility output. Manufacturing was unchanged in November, following a 0.1% decline in October. Durable goods output increased 0.2% in November, but that was offset by a 0.2% decline n nondurable goods production. Manufacturing was up 2% from a year earlier. Business equipment production fell 0.2% in November but remained up 4.1% y/y. Business capital investment appears to be softening, dampening expectation of a stronger rebound after the big tax reduction legislation. Trade remains a risk for the factory sector, if no trade agreement is reached before March 2. The strong dollar and weakening global economy are additional headwinds. Still, production should remain decent in 2019, due to the strength of the domestic economy.
Trade conflicts, emerging market turmoil and geopolitical are weighing on the global economy and have increased uncertainty about economic developments. Despite these headwinds, the German economy remains on track due to strong domestic demand. Growth is being hampered by temporary effect sin the automobile sector and the difficult trade environment, the Economic Ministry for Germany said recently. “The postponement of the British parliament’s vote on the Brexit agreement has not averted the risk of a disorderly exit of the United Kingdom from the European Union,” the ministry added. On the other hand, the government agreed to lower the income tax and increased benefits for families with children will give the economy an additional boost at the beginning of the year. The ministry projected growth of 1.5to 1.6% this year, down from a 1.8% earlier estimate.
China’s economy slowed in November as retail sales and industrial production China’s economy slowed in November as retail sales and industrial production China’s economy slowed in November as retail sales and industrial production China’s economy slowed in November as retail sales and industrial production weakened over the month. Industrial production rose 5.4% from a year earlier. Retail sales rose 8.1% y/y the weakest performance since May 2003. However, fixed investment firmed, expanding 5.9% in the first 11 months of the year and the jobless rate dropped to 4.8%, suggesting the stimulus to cushion the slowdown is take effect. The data suggests a continuation of 2018’s targeted approach to support growth.
The eurozone’s business slowed in the last month of the year. The composite PMI fell from 52.7 to 51.3, the weakest reading since November 2014. The factory PMI fell to 51.4 from 51.8 in November, the lowest reading since February 2016. The index measuring output did nudge up to 51.0 from 50.7, The November reading was the lowest since mid-2013. Trade tensions, slowing global growth and protests in France have undermined confidence for the area.
Important Data Releases This Week
The December NAHB’s confidence index will be released on Monday, December 17 at 10:00 AM EDT. After the stunning 8-point drop in the index in November, we project a 1-point increase for December. In November, all components of the index dropped sharply, especially expectations for future sales.
November housing starts will be released on Tuesday, December 18 at 10:00 AM EST. Housing starts and permits have been struggling this year and no improvement is expected for November. We project starts to fell from the current 1.228 million annual pace to 1.222 million. Permits are expected to fall from 1.263 million to 1.258 million.
November existing home sales will be released on Wednesday, December 19 at 10:00 AM EDT. October existing homes sales posted their first gain since March, but none are expected for November. Sales are projected to hit 5.190 million units for November. After being unchanged in October, core capital goods orders are projected to increase 0.3%.
Q3 GDP (third estimate) is scheduled to be released on Friday, December 21 at 8:30 AM EST. The third estimate for Q3 is projected to come in at 3.5% annualized rate unchanged from the first and second estimate. Inventories were a central positive in the early estimates.
November personal income and outlays for November will be released on Friday, December 21 at 10:00 AM EDT. Personal income is seen increasing 0.3% in November after the 0.5% jump in October. Spending is projected to rise 0.3% for the month. The PCE deflator is projected to rise 0.1% and the core 0.2% for November. The PE deflator is projected to have increased 0.6% over the past year and the core index 1.9%.