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.
Equities around the world rose on Friday as expectations grew that the U.S. and China would open new trade talks, while an interest rate hike in Turkey supported the lira and raised global risk appetite. The MSCI All-Country Index, which tracks shares in 47 countries, was up nearly half a percent at the start of the trading day in Europe. MSCI’s broadest index of Asia-Pacific shares outside of Japan was up 1.2% on Friday.
The S&P 500 and the Dow finished Friday in the green after slumping midday when reported were released that President Trump instructed aides to proceed with tariffs on about $200 billion more on Chinese products. Financial markets were whipsawed this week by conflicting reports on the status of trade relations between the world’s two largest economies. The push for tariffs continued despite the U.S. Treasury secretary’s attempt to restart trade talks with Beijing to resolve the trade war. Economic releases this week showed cooling inflation and retail sales edged up slightly after a big jump in July. Data still shows a strong job market and higher wages.
The inflation data came in a little cooler than expected, while the NFIB optimism index rose to an all-time high, while retail sales rose a less than expected 0.1% in August. The prior month was revised upwards and consumer spending remains on track for a decent third quarter. Industrial production was positive and the capital spending details were decent. Real equipment spending and inventory build point to another strong quarter. Hurricane Florence made landfall. It is too early to estimate total output loss and damage to capital stock. The total lost economic output will depend on the severity and duration of power outages and flooding. From the U.S economy’s perspective, the hurricane is unlikely to have much impact on third quarter growth.
Next week, the focus will be on housing, with starts and existing home sales will be released. We also will get a look at the leading economic indicators. The third quarter looks solid. The GDP-Now estimates by the Atlanta and St. Louis Fed is at the high end with a 4.4% projection. The New York Fed is the low-boy with a 2.2% projection and Moody’s is projecting a 3.9% advance for the third quarter. Downside near term probabilities are low, but a lot depends on how trade plays out. So far, Trump has levied $50 billion of tariffs on Chinese goods. If you add the $200 billion on proposed tariffs and another $267 billion, you exceed the total $505 billion in goods the U.S. imported from China last year. This time the product list will hit the consumer, with sharply higher costs, which likely means lower demand. Common sense dictates that one would step back before stepping over the precipice, but common sense has never been a known attribute in Washington.
The U.S. Economy:
The NFIB small business optimism index increased from 107.9 in July to 108.8 in August, the highest reading in the 45-year history of the index. Details were solid, with hiring plans hitting a new record and the share of respondents saying now is a good time to expand matched its May 2018 record. Inventory investment plans were the strongest since 2005, suggesting inventory build will make a contribution to growth in the third quarter. Also, capital spending plans improved. It is good to see the improvement in confidence as some other measures have weakened recently because of trade tensions.
Producer prices fell 0.1% in August, after remaining unchanged in July. Final demand goods were unchanged, while services fell 0.1% for the month. On a year ago basis, the PPI for final demand was up 2.8%, after being a touch above 3% in each of the prior three months. Core goods prices were up 2.6% on a year ago basis in August. Meantime, consumer prices rose 0.2% in August, the same rise as in July. The CPI was up 2.1% annualized over the prior three months in August, The CPI was up 1.8% annualized over the prior six months, compared to 1.6% in July, suggesting inflation may be slow but it is creeping up. It may be surprising that inflation isn’t stronger with the low unemployment rate and more solid wage gains. It takes time for nominal wage growth to feed through to inflation. In the last five years, productivity growth has averaged around 1% annualized, while inflation has averaged 1.6%, implying wage growth of 1.6%. Compensation per hour is up 2.5% annualized over the past five years, not a big gap. Even though the PPI has been weak the last few months, the CPI has been more solid, suggesting the Federal Reserve will keep on track for its interest rate increases.
Retail sales rose just 0.1% in August, but that followed a 0.7% advance in July. August sales growth was led by miscellaneous sore retailers and gasoline stations. Sales declined at apparel stores, department stores and motor vehicle dealers and motor vehicle dealers. In August, sales were an impressive 6.6% above year earlier levels, a bit below July’s 6.7% rate but among the best since 2011. Sales excluding autos increased 0.3% and excluding both autos and gas increased 0.2%. Motor vehicles and parts sales fell 0.8%. The outlook for sales is solid but there are risks. Trade is one risk. If tariffs rise globally, that will push up consumer prices. The strong job market is the biggest support for future spending. Rising interest rates will be a drag and oil prices are a wild card when Iranian production gets cut later this year.
Business inventories increased 0.6% in July, following a 0.1% advance. All three categories posted increased stockpiles during the month. Manufacturers led the pack with a 0.8% gain, merchant wholesaler stocks rose 0.6% and retailers rose 0.5%. Business sales moderated from a 0.3% advance in June to a 0.2% increase in July. The business inventory-to-sales ratio rose from 1.33 to 1.34. For reference, the I/S ratio in July 2017 was 1.39. The cycle law was 1.25 and recession high was 1.49. Inventory build is shifting to a higher gear. Producers are taking some cues from the broader economy, which is strong. Inventory build is likely to be strong for several quarters. There are downside risks, especially trade. Only 4% of U.S. imports are taxed more, but risks are rising that a significant number of products may see sharply higher prices. Manufacturers will see demand fall and producers will pare back activity.
Industrial production rose 0.4% in August, following increases of 0.4% in July and 0.6% in June. Autos output helped the manufacturing component rise 0.2%. Excluding the auto sector, manufacturing was unchanged. Utility output rose 1.2% in August, while mining advanced 0.7% in August. Within the manufacturing sector, autos helped durable goods output to rise 1%. Nondurable goods production fell 0.5%, offsetting a good part of the 0.7% increase in July. U.S. manufacturing is doing well and should continue to do well. There are some downside risks. Shortages in transportation are, particularly in freight trucking and tariffs are disrupting the supply chains. This is visible in the ISM manufacturing suppler delivery index. This would become more binding if the U.S and China raise tariff levels. The dollar’s strength will affect exports. Trade is the biggest wild card. The recent hurricane will affect output, with the usual impact of lower output at first and a rebound as rebuilding starts. Tariff uncertainty could cause lower production and lower capital expenditures, but it difficult to gauge the impact of uncertainty on business decisions. Equipment investment has held its own so far this year, but is still somewhat disappointing considering the large corporate tax cuts and expensing provisions in the legislation passed at the end of last year. Measures of capital expenditure plans, core capital goods orders and industrial production should be watched closely in coming months as the trade pressure heats up.
Important Data Releases This Week
August housing starts will be released on Wednesday, September 19 at 10:00 AM EDT. Housing starts and permits are expected to have bounced back in August. Starts are projected to come in at an annual rate of 1.240 million, compared to 1.168 million in July. Permits are forecast to come in at 1.320 million, compared to July’s 1.303 million.
August existing home sales will be released on Thursday, September 20 at 10:00 AM EDT. Expected to end four months of slowing, existing home sales are projected to rise modestly to 5.360 million units annualized rate, compared to July’s 5.340 million pace.
The Conference Board’s index of leading indicators for August will be released on Thursday, September 20 at 10:00 AM EDT. We project the index will rise 0.5% in August, driven by the surge in the ISM and declines in unemployment claims.