The Longer the Shutdown Continues, the More Negative the Impact Will Be on the Economy

By | January 21, 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.


Coffee and Economic Review

Global stocks rose to their highest level in more than a month on Friday after a report suggested progress toward resolving the trade dispute between the United States and China. European stocks rose to the highest level since early-December, with the pan-European STOXX 600 index up nearly 1%. The Wall Street Journal reported that U.S. Treasury Secretary Steven Mnuchin discussed lifting some, or all tariffs and suggested a tariff roll-back during trade discussions scheduled for Jan. 30. U.S. stocks rallied on the report but pared some gains after the Treasury denied Mnuchin made such accommodations. Still, the market interpreted the story as a sign a U.S. trade deal with China is moving closer. In Europe, British Prime Minister Theresa survived a vote of confidence, removing some political uncertainty for now. Longer term prospects for Britain and its markets remain unclear.

U.S. stocks rallied on Friday, helping Wall Street’s major indexes advance for a fourth week, as increased hoes the United States and China would resolve their trade disputes. The S&P is on track for the best monthly gain since March 2016 and is now just 8.9% below its Sept. 20 record close after dropping 19.8% below that level. For the week, the Dow Jones Industrial Average rose 336.25 points, up 2.96%. Analysts have lowered their fourth quarter earnings for S&P 500 companies to 14.2% from 20.1% estimated on Oct.1. The government shutdown has delayed the release of several economic reports and the market is flying partly blind. Two major reports on retail sales and housing starts were delayed in the recent week.

The housing market has been an area of concern in recent months. Higher mortgage rates and costs have caused a further deterioration in affordability. Although the NAHB sentiment index remains below year ago levels, it has edged up 2 points in January, suggesting some stability in the market. Mortgage rates did backtrack in January and applications have jumped 10% in each of the last two weeks.  The postponed retail sales report was widely missed but private retail sales report showed a strong December. The shutdown of the government may be leading to a more cautious consumer. The University of Michigan’s consumer sentiment index fell 7.6 points in January. Overall, industrial production rose 0.3% in December and manufacturing rose 1.1% on strong auto sector performance. However, evidence is surfacing that business confidence is starting to falter, the longer the shutdown continues. The Empire and Philly Fed surveys for January were mixed on the headlines, but details pointed to slower activity in the factory sector for January.

The longer the shutdown continues, the more negative the impact will be on the economy. estimates that for every week the government is shut down, the economy losses between 0.1% and 0.2% of growth. Confidence by both businesses and consumers is starting to erode. Most economists have lowered their projections for first quarter GDP growth and some are suggesting the first quarter may now come in negative. Of course, an early resolution would negate that negative effect. The recent Duke CFO Global Business survey showed nearly half of U.S. CFOs believe the U.S. will be in recession by the end of 2019 and 82% believe a recession will start by the end of 2020. As the government shutdown continues, we are starting to walk on ever thinner ice.

Latest Data

The U.S. Economy:

The ISM non-manufacturing index fell to 57.6 in December from 60.7 in November. Business activity slipped from 65.2 to 59.9 but new orders advanced from 62.5 to 62.7. Thirteen industries reported an advance in new orders, while only one a decline. Supplier deliveries sipped from 56.5 to 51.5. There was a mention of an increase in available truck capacity. Backlogs of orders fell 5 points to 50.5 in December. Inventories fell from 57.5 to 51.5, with eight industries reporting higher inventories. Prices paid slid from 64.3 to 57.6. Among commodities down in price were cheese, computers, diesel fuel, gasoline and lumber. Those listed in short supply were construction sub-contractors and labor, temporary help and medical supplies. Despite the decline in December, the index remains elevated, consistent with an economy growing at a 3.2% annual rate. Anecdotal evidence suggest that residential construction has slowed significantly, but the delay in tariffs has slowed expected increases in material costs. Retail trade seems strong and managers are suggesting clients make purchases early in the year before tariffs are imposed. That could mean some front-loading of purchases in the last quarter would see a negative offset in the first quarter of this year.

Consumer prices fell 0.1% in December, slowed by a 3.5% drop in energy prices. Food prices rose an above trend 0.4% in December. The core CPI rose 0.2% for the third consecutive month. On a year ago basis, the headline CPI was up 1.9% and the core was up 2.2%. Weakness in oil and other commodity prices will limit inflationary forces in coming months. Without a quick decline in the unemployment rate, the Fed will be less worried about inflation and allow them to be patient in the path of rate increases for 2019.

The producer price index fell 0.2% in December, driven down by a 5.4% decline in the energy sector. Goods prices fell 0,4%, while services declined 0.1%. The decline in the services sector was driven by a decline in trade services, which measures changes in margins between wholesalers and retailers.  Core goods rose 0.1% for the month. On a year ago basis, total final demand PPI was up 2.4% and goods prices were up 1.7%. Lower oil prices are placing downward pressure on goods prices, coupled with slowing demand in China. Inflation is subdued, but oil prices are unlikely to slide down much further. The Fed is now likely to sit tight until June and await further data developments.

Industrial production advanced 0.3% in December, the seventh consecutive monthly gain. The December advance followed a 0.4% advance n November and a 0.2% increase in October. Gains were mixed across industries. Mining led the December advance, rising 1.5%. Utility output decreased 6.3%. Manufacturing rose 1.1%, led by a large 4.7% advance in the output of autos and parts. The advance in the manufacturing sector was the best reading in 10 months. Manufacturing excluding the auto sector, rose a more modest 0.8%. Business equipment output increased 0.5%. The advance in total IP and manufacturing was good news but there are still downside risks for the factory sector. Trade remains a wild card and we don’t look for a speedy resolution to the dispute. A tight labor supply is also a problem for factories, threatening capacity. In all though, we do expect the industrial sector to remain positive in 2019.

Consumer sentiment fell sharply in January. The University of Michigan’s index of consumer sentiment fell 7.6 points to 90.7, the lowest level in more than two years. The longest government shutdown in history had a definite impact on consumer attitudes, as well as trade uncertainties and the steep declines in the equity markets. Current economic expectations lost 6.1 points, falling to 110.0, the lowest since November 2016. Consumer expectations fell 8.7 points, falling to 78.3, the lowest since 2016. The report suggests that the longer the government shutdown continues, the greater the risk to the economy. The disruption to the government employees and contractors is starting to outrun what is an otherwise good economic picture. The shutdown is also affecting small businesses, a vital part of the country’s economic engine.


The German economy grew at 1.5% in 2018, the weakest rate in five years, a sign that Europe’s largest economy is being hit by trade tensions. German companies are struggling with a cooling of the global economy and tariff disputes triggered by U.S. President Donald Trump’s “American First” policies. The risk that Britain might leave the European Union without a deal in March is another uncertainty. The preliminary GDP estimate in in line with market expectations and compares with a growth rate of 2.2% in 2017. German investments in machinery and equipment were strong in 2018, rising 4.5% for the year. Exports fell by roughly half to 2.4% growth from 4.6% in 2017. The head if the DIW economic institute, Marcel Fratzsher, pointed to continued strong domestic activity and a static budget surplus, which are important to drive growth in 2019. “The strong employment market and healthy wage gains will maintain consumption as the main pillar of economic growth in 2019,” he said. “Trade disputes and uncertainty of a recession in the U.S. in the next two years are probably the biggest risk for the economy.” German exports to China grew nearly 10% year-on-year from January to November. Meantime, exports to Britain fell by 3.6% in the same period. A string of weak data from other European countries are pointing to a cooling of the euro-zone economy, making it difficult for the European Central Bank to raise interest rates anytime soon.

Chinese exports fell the most in two years in December, while imports also contracted, pointing to further weakness in 2019 and deteriorating global demand. Also, China posted the biggest trade surplus with the United States in 2018, which may hurt discussions of any trade deal between the two nations. China’s exports fell 4.4% from a year earlier, with demand in most of the country’s market weakening. Imports fell a sharp 7.6%, the biggest decline since July 2016. Analysts said the decline spelled the end to Chinese front-loading of exports to the U.S. to escape the threatened tariffs scheduled for Jan. 1, 2019. The decline in imports suggests a weakening of the domestic economy along with weakening growth in the manufacturing sector. China’s trade surplus with the U.S. widened by 17.2% in 2018 to $323.32 billion last year. China’s exports did rise 9.9% last year to the entire globe, the strongest performance in seven years. However, December’s gloomy report does coincide with several months of weak factory orders. Analysts project a trade recession may follow in 2019, similar to the export contraction in the 2015-16 period.

Important Data Releases This Week

December existing home sales is scheduled to be released on Tuesday, January 22 at 10:00 AM EST. We project a step back for existing home sale in December, following the second consecutive increase in November. Sales are projected to equal an annual pace of 5.240 million in December, down from November’s 5.320 million. The year-n-year rate for November was -70%, was the lowest in seven and a half years.

December durable goods orders are scheduled to be released on Friday, January 25 at 8:30 AM EST. Extending strength is the expectation for December durable goods orders. We project a 1.8% gain versus November’s increase of 0.8%. Ex-transportation orders are projected to rise 0.1%, a better reading than the 0.3% decline recorded for November. This report is likely to be delayed because of the government shutdown.

December new home sales are scheduled to be released on Friday, January 25 at 10:00 AM EST.  If delayed as expected, this report will be the first report to be delayed twice. The last comparison was 544,000 in October. New home sales are projected to have been 560,00 in November and 565,000 for December.

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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.