Trade talks this week with China went nowhere and attitudes are hardening

By | August 27, 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.

Overview

Coffee and Economic Review

The dollar fell on Friday, set for the biggest weekly decline since March, as markets braced for a speech by Federal Reserve chair Jerome Powell for hints on monetary policy, while a gauge of global stocks barely budged. The MSCI All-Country Word Index, which tracks shares in 47 countries, barely managed to keep in the black, as markets in Europe opened mixed. The U.S. currency took a hit last week after U.S. President Donald Trump said “he was not thrilled” with the Federal Reserve under his appointee, Chairman Jerome Powell, for raising interest rates. Analysts say that growing U.S. political uncertainty, reinforced by the criminal convictions of two of Trump’s ex-advisors this week, was keeping the dollar under pressure, despite the Federal Reserve embarking on greater monetary tightening than elsewhere.

The benchmark S&P 500 climbed to its longest bull market run on Friday, closing above its previous January high, as Federal Reserve Chairman, Jerome Powell, affirmed the U.S. central bank’s current pace of rate hikes. Speaking at a research symposium in Jackson Hole, Wyoming, Powell said the Fed’s gradual interest rate hikes were the best way to protect the economic recovery, maintain strong job growth and keep inflation under control. His comments did little to change expectations of a rate hike in September and perhaps again in December.

This week was fully loaded with data that underscored the divide between a sluggish housing market and an overall improving economy. Both new and existing home sales came in below expectations in July. Existing homes declined 0.7% to a 5.34 million unit pace in July, Single-family sales fared slightly better with a 0.2% drop and condo/co-op sales fell 4.8%. New home sales came in below consensus, with a 1.7% drop in July. New home sales have now fallen in three out of the last four months. Several factors seem to be limiting home sales. Higher mortgage rates, tight inventories and high prices seem to be the biggest factors in suppressing housing activity. Meantime, durable goods fell 1.7% in July,, but most of the weakness was in the volatile transportation sector. Excluding that sector, there was fairly broad-based strength, as orders increased 0.2% and core capital goods orders increased 1.4%. With orders in other categories still positive and unfilled orders of nondefense aircraft elevated, equipment spending looks healthy in Q3.

The upcoming week will be interesting for economic data. We get a look at the broader economy with the release of the Chicago Fed National Activity Index, the advance international trade in goods, wholesale inventories, pending home sales and personal income and outlays. In addition, the second estimate for Q2 growth will be released. The economy continues to turn in a solid performance, with real GDP growing north of 3.5% in the third quarter. In the midst of strength, there are pockets of weakness. Housing is not doing well and auto sales topped out a while ago. In addition, the trade war is becoming more serious. Trade talks this week with China went nowhere and attitudes are hardening. The next step in the tariff wars is more serious. Some protected industries may benefit from higher tariffs from foreign competition, but businesses that rely on foreign imports such as retailers and finished goods manufacturers will face higher input costs.  The U.S. consumer will face higher prices. With the latest wave of tariffs, extra duties have been imposed on $100 billion worth of goods imports, or about 4% of total imports, based on 2017 figures. The next step the consumer will see with sharply higher prices for a wide range of consumer items. This will translate into higher inflation and eventually lower demand. This tit-for-tat process will continue until likely, financial markets crack. How this plays out is unknown, but none of the results look favorable for the economy.

Latest Data

The U.S. Economy:

Existing home sales slipped again in July amid rising mortgage rates and a shortage of listings. Total sales fell 0.7% in July to an annualized pace of 5.34 million units. Sales were down 1.5% from a year earlier levels. Three out of four census regions had falling sales in July. Existing condo/co-op sales totaled 590,000 in July, down 4.8% from June and also down 3.3% from July 2017. Existing single-family sales totaled 4.75 million, down 0.2% from June and 1.2% from July 2017. July listings were roughly level, interrupting the recovery in inventory. Single-family homes for sale at the end of July totaled 1.71 million, down 0.6% from July, but still up 1.2% from July 2017. July marked the fourth straight month of declines in sales but the overall level has not moved much in two years. Interest rates on 30-year mortgages reached a bottom of 3.5% in late-2016 but are up by over 100 basis points.  Rising rates will drag on housing demand, despite rising wages. Demand could fall more quickly than the Fed anticipates over the next two years.

New home sales slid again in July, coming in at 1.7% below revised June totals. Sales equaled an annual pace of 627,000 in July, down from 636,000 in June, but remained up 12.8% from July 2017. Although still on a rising long-term trend, new home sales have leveled off since the end of 2017. The decline is not because of supply constraints, given that inventory is still increasing and the market is loosening. The leveling off is caused by the surge in mortgage rates and the still high prices of new homes. The median new price premium for new homes is currently near 30% and the historical level where new home sales move forward is close to 17%. Prices must come down for sales to move forward. Going forward, mortgage rates are likely to peak in 2020 and the gap between long and short term rates will be at the lowest level, which will reduce credit for longer-term loans. At that point, the market will be in danger of seeing a decrease in sales.

New orders for durable goods declined in July for the third time in four months, falling 1.7%. The topline figure was led mainly by weakness in transportation, both civilian and defense aircraft. June orders were revised down to a 0.7% advance. There were bright spots. Core capital goods orders increased 0.9%, the fourth consecutive monthly increase. Among manufacturing industries, the news was mostly positive. Orders for electrical equipment fell 0.2%, but orders for computers and electronic equipment rose 1.1%. Orders for primary metals were up 0.3%. Total shipments fell 0.2% in July but shipments of core capital goods rose 0.9%. Manufacturing is holding up. Despite the weak top-line print durable goods production excluding autos and the volatile aircraft sector, increased for the sixth straight month. The outlook looks good, but concerns over trade are increasing. Measures of capital expenditure plans, industrial production and core capital goods orders bear close watching for signs that uncertainty over trade will start to impact business capital investment.

Important Data Releases This Week

July Chicago Fed National Activity index will be released on Monday August 27 at 8:30 AM EDT. July looks like another fine month for the national activity index. Nonfarm payrolls rose by 157,000 in July. Industrial production rose just 0.1% but the manufacturing component was stronger and so were building permits. We look for index to equal 0.38 in July after a very strong 0.43 in June.

July advance international trade in goods will be released on Tuesday, August 28 at 8:30 AM EDT.  The goods deficit is expected to widen to $69.1 billion in July from $67.9 billion in June.

July wholesale inventories will be released on Tuesday, August 28 at 8:30 AM EDT. Wholesale inventories are expected to rise 0.1% in July following the same increase in June. Inventories have been low relative to sales.

Second quarter GDP (second estimate) will be released on Wednesday, August 29 at 8:30 AM EDT. The second estimate for GDP growth to come in at 4%, instead of the 4.1% rate in the first estimate. Consumer spending is projected to have increased 3.9%, instead of the first estimate of 4.0%.

July pending home sales will be released on Wednesday, August 29 at 10:00 AM EDT. Pending home sales are expected to remain unchanged in July, after a 0.9% rise in June. This index has been accurately forecasting final resales on trend in the existing home sales report.

July personal income and spending will be released on Thursday, August 31 at 8:30 AM EDT. We expect personal income to rise 0.4% in July, the same as in the previous month. Nominal spending will also rise 0.4%. The core GDP deflator is expected to rise 0.2%, bringing year-over-year growth to 2.0%.


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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.