TheTrade War is Hurting Manufacturing and the Global Economy Continues to Slow

By | July 29, 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.

Overview

Coffee and Economic Review

European stocks staged a tentative recovery on Friday as solid earnings at several U.S. companies overcome the disappointment of the European Central Bank’s failure to deliver immediate policy easing. The pan-European stock benchmark index added 0.2% on Friday. In Asia, uncertainties on whether Washington and Beijing will be able to settle gaping differences over trade, technology and geopolitical ambition, kept may investors on guard. Negotiators from the two countries meet in Shanghai next week. MSCI’s broadest index of Asian-Pacific shares outside of Japan dropped 0.6% on Friday.

The S&P and the Nasdaq closed at record levels and the dollar reached a two-month high on Friday as decent economic data brought buyers to the market. The Dow Jones Industrial Average rose 51.47 points, or 0.19% on Friday to 27,192.45. The S&P gained 22.19 points, or 0.74% to 3,025.86 and the Nasdaq added 91.67 points, or 1.11% to 8,330.21. Real GDP for the second quarter came in at a 2.1% annual rate in the second quarter, which was neither too high, or too low for investors, who are counting on an expected quarter point rate reduction at the end of July. Market participants are also looking forward to this coming week when negotiators from China and the U.S resume talks at ending the trade war.

U.S. GDP growth slowed in the second quarter, rising at a 2.1% annual rate. Consumer spending was very strong, rising at an annual rate of 4.3%. Consumer spending on durable goods soared to a five-year high of 13% and spending on nondurables rose 6.0%.  The consumer sector looks solid. However, other details of the report were a little concerning. Real exports fell 5.2%, as trade dragged 0.7% of a percentage point off the headline growth. The uncertainty from trade also dragged down business fixed investment, which fell 0.6%. Government spending rose 5.0% and this wees political deals are likely to increase government spending and raised the debt ceiling, suggesting we won’t have to see another government shutdown. Inventories flip-flopped from the first quarter. Residential spending fell for a sixth consecutive quarter.

With the biggest driver of the economy showing strength and some parts sputtering, or showing down right weakness, the Federal Reserve will likely move at the end of July and cut interest rates by a quarter of a percent. The consumer is resilient, but the trade war is hurting business investment. The manufacturing sector is sputtering. Manufacturing advanced for two consecutive months, but the sector was negative for a second quarter. The trade war is hurting manufacturing and the global economy continues to slow. Uncertainty is holding back businesses and a quick resolution to the China trade problem looks unlikely. Against this backdrop, the economy is slowing, as the effects of the tax reductions and fiscal stimulus fade. Since the second quarter strength in consumer spending is not likely to be repeated, the economy’s underlying pace could slow to under 2%, if uncertainty keeps businesses on the sideline. There is enough negative data that the Federal Reserve is correct is providing some insurance.

Latest Data

The U.S. Economy:

The Chicago Fed National Activity Index ticked up to -0.02 in June from -0.03 I the previous month. One of the major four categories increased and two made positive contributions to the headline index. The 3-month moving average increased from -0.27 to -0.26. Production-related indicators normally introduce a lot of volatility in that sector, but barely moved in June, making a neutral contribution from 0.08 the previous month. The sales, orders and inventories category contributed -0.03 compared with last month’s 0.02 contribution. The personal consumption and housing category contributed -0.05, unchanged from the previous month.  Employment-related indicators contributed 0.06, compared with -0.08 the previous month. The pace of economic activity is moving in the right direction, but the negative reading still means economic growth is below average.

Existing home sales slid 1.7% n June to an annual pace of 5.27 million. Sales were down 2.2% from a year earlier. Single-family home sales totaled 4.69 million, down 1.5% from May and down 1.7% from June 2018. Condo/co-op sales totaled 580,000, down 3.3% from May and off 6.5% y/y. The market loosened slightly for both single-family and condo/co-op homes. Listings of single-family homes totaled 1.71 million, up 1.2% from May, but down 0.6% from June 2018. The inventory-to-sales ratio was 4.4 months of sales, up 0.1 month from both May and a year earlier. The seasonal adjusted median selling price of existing single-family homes was $269,740, down 0.5% from May but up 4.5% from June 2018.

New orders for durable goods rose 2% in June, following declined of 2.3% in May and 2.8% in April. New orders in transportation increased 3.8%. Orders in the nondefense aircraft segment soared 75.5%. Boeing orders were 9 in June, after two straight months without orders. New orders for motor vehicles and parts increased 3.1%. The removal of steel and aluminum tariffs from Canada and Mexico will be supportive for the auto industry. Core capital goods orders rose 1.9%, following a 0.3% rise in May. The manufacturing sector looked a little better in June. While transportation orders gave the headline number the biggest push, orders excluding transportation, increased a solid 1.2%. Orders for core capital goods orders were impressive in June although trend growth has decelerated sharply since late-2017. Production has been bumpy this year, with tariffs and the global economy slowing down does present a large headwind. Downside risks are large as tariff walls rise and global economic growth slowing down.

U.S. stockpiles advanced at a modest pace in June, with wholesale stocks rising 0.2%. On a year ago basis, wholesale stocks are up 7.9%. Retail stocks fell by 0.1% but were up 4.4% y/y. Durable goods inventories advanced 0.4% but nondurable goods saw a 0.1% decline. Wholesalers began to add inventories at a large clip ahead of White House tariff deadlines. Sales have picked up lately, helping lower inventory levels.

The nominal goods deficit narrowed slightly to $74.2 billion in June from $75.0 billion in May. Nominal goods exports fell 2.7%, after gaining 2.9% in May. Performance was mixed across export categories. Foods, feeds and beverages gained 0.55 and industrial supplies added 0.2%. Consumer goods exports fell sharply, down 10.9%, after a 4.7% rise in May. Vehicle exports fell 4%. Nominal imports decreased 2.2%, following a 3.9% gain in May.  Goods imports were up 0.2% from a year earlier. Industrial supplies imports dropped 7.4% and vehicle imports dropped 1.8%. The advance June trade data was not as strong as it looks. Although the trade gap narrowed in June, it remains near a post-recession high. Of the five major export categories, four are lower than a year earlier. Imports have held up better but are up only 0.2% from a year earlier. Industrial supplies imports are down mainly due to lower energy prices. Consumer demand remains robust, as evidenced in continued year-ago gains in imported vehicle and consumer goods.

Important Data Releases This Week

European stocks staged a tentative recovery on Friday as solid earnings at several U.S. companies overcome the disappointment of the European Central Bank’s failure to deliver immediate policy easing. The pan-European stock benchmark index added 0.2% on Friday. In Asia, uncertainties on whether Washington and Beijing will be able to settle gaping differences over trade, technology and geopolitical ambition, kept may investors on guard. Negotiators from the two countries meet in Shanghai next week. MSCI’s broadest index of Asian-Pacific shares outside of Japan dropped 0.6% on Friday.

The S&P and the Nasdaq closed at record levels and the dollar reached a two-month high on Friday as decent economic data brought buyers to the market. The Dow Jones Industrial Average rose 51.47 points, or 0.19% on Friday to 27,192.45. The S&P gained 22.19 points, or 0.74% to 3,025.86 and the Nasdaq added 91.67 points, or 1.11% to 8,330.21. Real GDP for the second quarter came in at a 2.1% annual rate in the second quarter, which was neither too high, or too low for investors, who are counting on an expected quarter point rate reduction at the end of July. Market participants are also looking forward to this coming week when negotiators from China and the U.S resume talks at ending the trade war.

U.S. GDP growth slowed in the second quarter, rising at a 2.1% annual rate. Consumer spending was very strong, rising at an annual rate of 4.3%. Consumer spending on durable goods soared to a five-year high of 13% and spending on nondurables rose 6.0%.  The consumer sector looks solid. However, other details of the report were a little concerning. Real exports fell 5.2%, as trade dragged 0.7% of a percentage point off the headline growth. The uncertainty from trade also dragged down business fixed investment, which fell 0.6%. Government spending rose 5.0% and this wees political deals are likely to increase government spending and raised the debt ceiling, suggesting we won’t have to see another government shutdown. Inventories flip-flopped from the first quarter. Residential spending fell for a sixth consecutive quarter.

With the biggest driver of the economy showing strength and some parts sputtering, or showing down right weakness, the Federal Reserve will likely move at the end of July and cut interest rates by a quarter of a percent. The consumer is resilient, but the trade war is hurting business investment. The manufacturing sector is sputtering. Manufacturing advanced for two consecutive months, but the sector was negative for a second quarter. The trade war is hurting manufacturing and the global economy continues to slow. Uncertainty is holding back businesses and a quick resolution to the China trade problem looks unlikely. Against this backdrop, the economy is slowing, as the effects of the tax reductions and fiscal stimulus fade. Since the second quarter strength in consumer spending is not likely to be repeated, the economy’s underlying pace could slow to under 2%, if uncertainty keeps businesses on the sideline. There is enough negative data that the Federal Reserve is correct is providing some insurance.


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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.