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 share markets roared higher on Friday as hopes that the United States and China were starting to repair their badly damaged trade relations. The signals triggered a global surge in risk appetite that lifted metals and some trade-sensitive currencies and bond markets. The Stoxx Europe 600 headed for its best week in two years. Stocks from Hong Kong to Tokyo surged on Friday, taking gains on the MSCI Pacific Index to 5% for the week. That index had fallen 10.2% in October, its worst monthly performance since August 2015. The boost in sentiment came after a report surfaced that President Trump is interested in reaching an agreement with Chinese President Xi on trade. Some analysts cautioned that optimism may be misplaced, and suspect Trump may be trying to juice the markets before the midterm elections. Talks between the U.S and China may not be straightforward as issues such as intellectual property are still a significant stumbling block. The real test will come in late-November when Trump and Xi meet at a summit of world leaders in Argentina.
U.S. stocks snapped a three-day rally on Friday as Apple shares dropped after a disappointing forecast from Apple and the White House dampened optimism over U.S. trade talks. Remarks by White House economist Larry Kudlow dampened the mood by saying although President Trump will meet with President Xi, but he has not asked U.S. officials to draw up a proposed trade agreement. The Dow Jones fell 0.43%, the S&P lost 0.63% and the Nasdaq lost 1.04% on Friday. Both the Dow and the S&P rose 2.4% for the week. Economic data for the week was mostly positive but concerns over tariffs are placing a large shadow on the market.
The week was busy for economic data. Personal spending rose a solid 0.4% in September, driven by a big increase in durables that was, in part, driven by replacement demand after Hurricane Florence. The Fed’s favorite inflation gauge, the PCE deflator came in right on to of the Fed’s target of 2%. This will keep the Fed on track for a December rate increase. Consumer confidence hit 137.9 in October, just 7 points down from the all-time high reached in January 2000 at the peak of the tech bubble. Consumers remain upbeat about the economy. One area of weakness was in manufacturing, where the ISM manufacturing Index fell 2.1 points to 57.7. New orders and production backtracked during the month and prices paid increased. Factory orders rose 0.7% in September, but the core capital goods orders component was weak for a second month. Auto sales were strong for a second month, coming in at a 17.5 million annual rate. Finally, payrolls were strong in October, rebounding from a weak September, rising by 250,000. Average hourly earnings also increased during the month ad rose above 3% for the first time since 2009.
Global stocks were badly battered in October on signs of weaker global growth, rising U.S. interest rates and trade tensions between the U.S. and China. The risk of a synchronized slowdown has increased as Europe wobbles and China is sputtering. Adding to the gloomy picture, emerging markets are also under pressure. The trade war is staring to hurt China, where manufacturing output is on the verge of contraction and export orders are at a two-and-half year low. Taiwan and Korea are also faltering. The chill is hurting Europe, where the pace of growth halved in the third quarter, even as inflation accelerated. With Italy stagnated and Germany about to do the same, only Spain remains a bright spot. This leaves only the U.S. to drive global growth.
To finance the tax cuts and spending hikes, the Trump administration plans on increasing debt sales to above levels last seen in the Great Recession. Meantime, economists expect the U.S. economy to moderate as the fiscal stimulus fades. Trump is betting on a continued 3% growth rate, but many analysts project the economy will return to trend, nearer to 2% and be in a higher interest rate environment and much higher debt position about a year from now. This does increase downside risks as 2019 passes. However, a trade deal with China would help spur global growth and keep the U.S. on a more stable keel.
Next week will be light on economic data. The ISM non-manufacturing index, wholesale trade, the PPI for final demand will be released. The main-focus will be on the Fed meeting, where no actin will be taken, but statements on inflation, economic growth and forecasts will be scrutinized. The economy continues to turn in good data, but the future is looking darker as trade, rising rates and the possibility of a slower U.S. and much weaker global economy are adding more uncertainty.
The U.S. Economy:
Personal income rose by 0.2% in September, following a 0.4% increase in August. Meantime, personal spending increased 0.3% in September, following a 0.4% increase in August. Spending growth remains healthy and fundamentals are supportive. The tax cuts are a plus. Income growth is somewhat volatile but is inching upwards as the labor market tightens. Inflation remains under control but is steadily advancing. The PCE deflator rose 0.1% in September, the forth consecutive increase at that level. Excluding food and energy, the core PCE deflator rose 0.2%. On a year ago basis, both the headline PCE deflator and the core index are up 0.2%. inflation is where the Fed wants it and will continue, on its course to raise rates. The Fed is moving slowly and is not reckless and will likely stop in a slightly restrictive territory. Engineering a soft landing for the U.S. economy is a difficult task and there is a high, probability the Fed will go too far. Fears of the Fed and trade tensions are behind the recent volatility in financial markets.
U.S. vehicle sales surprised on the upside in October, coming in at an annual pace of 17.5 million units, following a 17.4 million pace in September. Sales were still down year-over-year because of the impacts last year of Hurricanes Harvey, and Irma. Car sales increased to 5.7 million units, but truck sales fell to 11.8 million. The new vehicle market is off to a strong fourth quarter as dealers upped incentives to push out older models and make room for the new. The strength of the last two months is somewhat of a surprise as the market was though to be entering a period of weakness after its post-recession boom. Market strength has mostly been concentrated in light duty trucks. Cars have been falling on a year-over-year basis. The only exception to this is Tesla, which had a remarkable third quarter, after selling over 55,000 Model 3 units. We still expect sales to track near 17 million through the first half of 2019. Higher interest rates will be a headwind, but the strong economy is a positive driver.
Construction spending was unchanged in September, following a 0.8% increase in August. Nonresidential construction spending was weak, only rising 0.1%. Residential construction rebounded rising 0.6% and did rise 0.8% excluding home improvement. Public construction sending fell 0.9%, after a 2.2% jump in August. Multi-family construction spending rose 8.7% m/m and was up 75% y/y. Single-family construction spending peaked in May and has been declining since but was still up 3.5% year-over-year. Despite a string of weak months, construction spending is up firmly year-over-year. No category is shining in 2018 and no specific type is underperforming. With interest rates rising, only slow progress can be expected in coming quarters.
The ISM manufacturing index fell from 59.8 in September to 57.7 in October. Details were less favorable than last month, but the index does remain at an elevated level. Production declined from 63.9 to 59.9. The new orders index fell from 61.8 to 57.4. 11 out of 18 industries reported growth in new orders. Inventories fell from 53.3 to 50.7. Suppler deliveries rose from 61.1 to 63.8 in October. According to the ISM, lead times continue to extend, supply chain labor issues continue to restrict performance and transportation issues are limiting suppler execution. Employment fell from 58.8 to 56.8. New export orders dropped from 56 to 52.2. Exports were a drag on the third quarter. Prices paid index increased from 66.9 to 71.6. Among the commodities higher in price were castings, chemical, copper, diesel, electronic components and freight. Down in price was aluminum, caustic soda and steel. Commodities in short supply include capacitors, electronic components, labor, nylon, resistors and steel-based products. Manufacturing remains solid, but supply chain problems are becoming more obvious. Trade tensions remain an issue. Trade issues are showing up in the stock market and may influence Trump to come to some deal with China. The domestic economy is strong, but the global economy is wavering.
The international trade deficit rose from $53.3 billion in August to $54.0 billion in September. Total nominal exports and imports both rose 1.5% in September. The goods deficit widened by $592 million, while services surplus narrowed by $119 million Nominal goods exports increased 2.1%, on a monthly basis. Performance was mixed among exports. Industrial supplies increased 6.3% and capital goods exports rose 2.3%. Food, feed and beverage exports fell for a fourth month because of the trade war with China. The 8% monthly decline came mostly from soybeans. Goods exports fell a little over 7% in the third quarter. Agricultural exports are down 22% since May. Nominal goods imports rose 1.6% and services increased 0.8% in September. The trade war with China is the biggest threat to the international trade outlook. So far, the tariffs have not reduced America’s appetite for imports, which were at an all time high in the third quarter. The trade deficit is at the highest level since 2008. Net exports will likely remain a drag on the economy.
China’s official manufacturing Purchasing Managers’ Index (PMI) for October was 50.2, down from 50.8 in September and the lowest reading since July 2016. Production and new orders fell during the month and the sub-index for new export orders contracted for a fifth straight month. October was the first full month after the latest U.S. tariffs went into effect. The official services PMI also fell from 54.9 in September to 53.9 in October. Analysts said that economic data has held up better than expected so far this year, although GDP slipped to 6.5% year-over-year in the third quarter. Many exports are rushing to ship products before the tariff on goods was enacted. Weakness in Chinese economic activity will likely continue this winter, with industrial activity suffering a seasonal slowdown and the long Lunar New Year holidays in February. Even before trade tensions with the U.S., China was trying to manage a slowdown in the economy after three decades of strong growth. The trade war with the U.S. is now complicating those efforts, with analysts expecting Beijing to boost policy measures to manage the threats from the bilateral dispute that could derail growth.
Important Data Releases This Week
The October ISM non-manufacturing will be released on Monday, November 5 at 8:30 AM EDT. Projections are for a modest slowing at an elevated level for the projected October reading of 59.4 versus the 61.6 reading in September. Employment and business activity were strong in September, but it included shortages and cost pressures.
The PPI for October will be released on Friday, November 9 at 8:30 AM EDT. A jump in transportation and shipping costs were the only wrinkle in an otherwise subdued PPI in September. We look for the same 0.2% rise in October that we saw in September.
Wholesale trade for September will be released on Friday, November 9 at 10:00 AM EDT. Wholesale inventories, which have been lean relative to sales, are expected to rise a sharp 0.3% in September, compared to the 0.9% build in August.