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.
The Stoxx Europe 600 Index slipped on Friday, heading for the worst week since March, as angst simmered over emerging market and trade tensions. The Thursday deadline for public comment on proposed U.S. tariff hikes on an additional $200 billion on Chinese imports came and went without any announcement from Washington. The MSCI Emerging Market Index jumped 0.4% on Friday, the first advance in more than a week. The MSCI Asia Pacific Index dipped 0.2%, reaching the lowest level in a year on its seventh consecutive decline. Unfavorable comments by President Trump on trade with Japan, likely influenced the trading day.
Wall Street’s major indexes fell on Friday as U.S. President Trump raised the possibility of additional tariffs on Chinese imports and Apple Inc. indicated that some of its products could be subjected to such measures. The company provided details that some Apple products, including the Apple Watch and Airpods would be slapped with duties. The company provided details in response to the White House’s proposed tariffs on $200 billion worth of Chinese imports. A comment period ended Thursday night. Trump said he had tariffs ready to impose on an additional $267 billion worth of Chinese imports, on top of the proposed $200 billion. The Dow Jones fell 0.3% and ended the week down 0.2%. The S&P fell 0.2% and ended the week 1.0%. The S&P and Dow Jones opened lower after a decent employment report that indicated a strong economy, but raised concerns among investors regarding inflation and the Federal Reserve’s plans for raising rates.
Recent data indicates a solid third quarter. Employers added 201,000 new jobs in August but the prior two months were revised down by a combined 50,000. Employment gains in August were generally broad-based, with most industries adding jobs. Manufacturing activity appeared unscathed by trade tensions in August. The ISM manufacturing index hit 61.3, the highest reading in 14 years. Both current production and new orders posted large increases for the month. Tariffs were mentioned by several respondents who noted suppliers were able to pass on price increases. Meantime capacity constraints tightened as supplier delivery times and order backlogs increased. The non-manufacturing economy also posted a positive assessment. The ISM non-manufacturing index jumped 2.8 points to a 58.5 reading in August. The current activity, new orders and backlogs each edged higher, indicating the pickup in activity was broad-based.
Meanwhile, the surge in exports in the second quarter as some businesses rushed to get merchandise out the door ahead of retaliatory tariffs will likely be reversed in the third quarter. Total exports fell 1.0% in July bringing the deficit to $50.1 billion. In the meantime, the strong economy and dollar are boosting imports, which increased 0.9% in July. Net exports will be a drag on third quarter growth and even if trade tensions were somehow miraculously settled, trade is likely no to be a significant driver of growth for the next few years.
The economic calendar for the upcoming week will be back-loaded. The key releases will be consumer prices, retail sales, business inventories and industrial production. The CPI will be scrutinized as the recent employment report showed wage growth accelerated from July to August. Data aside trade policy will be a focus. Trade tensions have ebbed and flowed. Trump’s disagreement with China is likely to enter a new dangerous phase. However, tensions with Canada seem to be making progress. So far, the net impact of the trade tensions has been minimal. The tensions have yielded tentative deals and suggest at face value, the tariffs were a bargaining chip. The details suggest that most tariffs were symbolic than substantive and won’t have a big effect on trade flows or manufacturing. There is still a danger for the global economy. If China and global trade slow too much, several emerging economies, already entering a bear market, will come under pressure. There are clear downside risks to global growth that would involve the U.S.
The U.S. Economy:
Construction spending fell short of expectations in July, but did advance 0.1%. That followed a 0.8% decline in June and a 0.7% advance in May. Residential construction spending advanced 0.6% in July, following a 0.9% decline in June. Nonresidential construction spending declined 1.0% in July. Public construction spending increased 0.7% in July and was up 8.3% y/y. Residential construction advanced although both single-family and multi-family spending fell in July. The sector advanced because of the home-improvement sector. The decline in nonresidential spending kept the headline number from shining in July. Outlays declined in most sectors. The forecast assumes a modest positive trend through the remainder of the year.
U.S. vehicle sales came in at an annual rate of 16.7 million vehicles, down slightly from July’s 16.8 million pace. Year-ago growth of 0.8% is partly an illusion because last year was affected by Hurricane Harvey. Compared with July, passenger-car sales fell by 180,000 units in August to an annual pace of 5.1 million. Light-truck sales rose by 130,000 to 11.6 million. Passenger car sales fell to a new market share of 31% of all new sales in August. The third quarter looks like it will be the first sub-17 million quarter of 2018, unless sales jump to 17.5 million in September, which is unlikely. The increase in interest rates is slowing sales. Uncertainty in Washington, surrounding the 25% tariff on imported cars poses the biggest risk to vehicle sales. All manufacturers are affected because none use 100% U.S. content. This will hurt some manufacturers more than others. The market is still on track to sell 17 million cars this year. Sales may track lower to the 16.5 million in 2020 and start moving upwards modestly.
The ISM manufacturing was surprisingly strong in August, rising from 58.1 to 61.3. Detail improves in August, as production, employment and new orders all improved. New orders rose from 60.2 to 65.1. Thirteen out of eighteen industries reported growth in new orders in August, including textile mills, computer/electronics, paper products and nonmetallic mineral products. The only industry showing a decrease in orders was primary metals. The inventory index improved from 53.3 to 55.4. Fourteen industries reported higher industries. Supplier deliveries increased from 62.1 to 64.5. According to the ISM, lead times continue to extend, supply chain issues restrict performance and transportation issues are limiting supplier execution. Production rose from 58.5 to 63.3, with sixteen industries reporting higher production. New export orders fell from 55.3 to 55.2. New import orders fell from 54.7 to 53.9. Prices paid slipped from 73.2 to 72.1.
Growth in manufacturing broadened in August, suggesting trade tensions haven’t been a significant drag. Anecdotes were mixed and there were mentions of tariffs. A respondent in computer/electronics noted that suppliers do not seem to know how to handle tariffs. Most waited until September to evaluate price increases. A respondent in fabricated metals added they are beginning price negotiations for next year and will treat tariffs as if they were going to be in place for the whole year. The outlook for manufacturing is good as the domestic economy is strong and businesses need to add inventory. Trade tensions are creating uncertainty, but the economic costs so far, have been small.
The U.S. trade deficit widened to $50.1 billion in July, up from $46.3 billion in June. Total nominal exports declined 1% from June, with agricultural exports falling 6.3%. Imports increased 0.9%, as higher imports of capital goods and industrial supplies, offset a decline in consumer goods imports. Soybean exports fell 16.2%. If Mr. Trump’s tariffs were designed to improve the trade deficit, they went the other direction. The goods deficit with China rose to $36.8 billion, as imports rose 5.6% and exports fell 7.7%. The deficit with the E.U. rose to $17.59 billion, as imports increased 2.5% and exports fell 15.7%. The dollar has increased roughly 8% since March, a headwind for exports. Imports are reflecting the strong U.S. economy and the strength of the dollar favors imports, despite tariffs. The outlook for trade is risky, unless negotiations reach some meaningful conclusion.
The ISM non-manufacturing index rebounded in August, rising from 55.7 to 58.5. Details were generally better than in July. Business activity rose from 56.5 to 60.7. Fourteen industries reported growth in business activity, up from 12 in July. New orders increased from 57 to 60.4. Sixteen industries reported growth in new orders, compared with 12 in July. Supplier deliveries increased 53 to 56. Comments from respondents include: “Labor shortage issues on the supplier side” and “Delays in traffic; less drivers.” The report suggests that growth broadened in August in the non-manufacturing sector. One respondent noted that tariff-related cost increases are beginning to accelerate, whether tariffs are in place, or not. Respondents in mining and information said tariffs are increasing costs. Tariffs do seem to be disrupting the supply chain. The outlook for the non-manufacturing sector does appear to be upbeat.
Factory orders fell 0.8% in July, following a 0.6% gain in June. Most of the monthly decline was attributed to the volatile aircraft industry. Transportation orders fell 5.2%, but were up 12% on a year ago basis. Factory shipments were unchanged in July. The change in core capital goods was positive, with orders rising 1.6% in July. This segment is up 8.8% on a year ago basis. Inventories were up 0.8%, the 21st consecutive month with an increase. Manufacturing is holding up, even as the expansion ages. Manufacturing fundamentals remain healthy despite increasing supply constraints and rising interest rates. Credit is readily available and the global economy is in good shape. Trade is the biggest risk but the relaxation of business regulations is viewed favorably by the business community and supports further expansion.
Payrolls increased by 201,000 in August but revisions to the preceding two months reduced jobs by a combined 50,000. Nevertheless, the 3-month moving average of 185,000 jobs, is roughly in line with trend growth over the last twelve months. Goods producers lost some of their momentum, adding just 26,000 jobs, with manufacturing weighing on stronger growth. Construction companies added 23,000 jobs in August, following 18,000 in July. Manufacturing jobs fell by 3,000, following a 18,000 increase in July. Manufacturing employment was weighted down by losses in machinery, computer and electronic products and motor vehicles and parts. Global outplacement firm Challenger, Gray and Christmas said before the employment report was released that 521 tariff-related jobs were cut in August, but these were largely offset by the hiring of 359 workers in the steel industry. The household survey was less impressive. The unemployment rate remained at 3.9%, while the labor force declined to 62.7%, from 62.9%. Average hourly earnings showed a mild acceleration, up 2.9% from a year earlier. Strong job gains should persist through the remainder of the year, averaging roughly 200,000.
German exports and industrial output fell unexpectedly in July, hurt by President Trump’s protectionist policies and bottlenecks in the auto sector caused by new environmental standards. The Federal Statistics Office said that seasonal adjusted exports fell by 0.9% in July and imports surged by 2.8%, the strongest rise in almost four years. Separate data showed industrial output dropped by 1.1%. Trump has triggered trade disputes with China, Europe and many other nations by imposing steep tariffs in his pledge to protect American jobs. The Economy Minister said that German output would likely regain momentum soon after a muted start to the third quarter, which was depressed by “temporary bottlenecks in passenger car registrations under a new environmental standard. These bottlenecks emanate from a new pollution standard, the Worldwide Harmonized Light Vehicle Test Procedure (WLTP), for which some German car models have not yet gained regulatory clearance. This suggests German industrial production will bounce back in a few months.
Important Data Releases This Week
August NFIB will be released on Tuesday, September 11 at 6:00 AM EDT. The survey is expected to come in at 108.2 in August, up slightly from July’s 107.9, which was the second highest reading in 45 years of data. Strength in July was centered in job openings and outlook for the economy.
August CPI index will be released on Thursday, September 13 at 8:30 AM EDT. Businesses are complaining about high costs, but inflation at the consumer level has been stable. The CPI is projected to rise 0.3% in August, following the 0.1% increase in July. The core is forecast to rise 0.2% for August. Year-over-year rates are 2.8% for the headline CPI and 2.9% for the core.
August import prices will be released on Friday, September 14 at 8:30 AM EDT. Import prices were on a tariff-boosted rise before easing back in June and July. Export prices are projected to rise 0.2% versus July’s 0.5% decline.
August retail sales will be released on Friday, September 14 at 8:30 AM EDT. We expect another solid month for retail sales. Sales are projected to rise 0.4% versus the 0.5% rise in July. Excluding autos, we project a 0.5% increase with ex-auto and gas up 0.4%.
August industrial production will be released on Friday, September 14 at 8:30 AM EDT. A bounce back is expected for total industrial production with a projected 0.4% rise, following the soft 0.1% increase in July. The July report showed weakness in mining, which has been very strong. The manufacturing component is not expected to show much strength, with a projected 0.2% rise. Pressures on capacity are expected to strengthen to 78.3 percent.
July business inventories will be released on Friday, September 14 at 10:00 AM EDT. Business inventory growth has been solid in recent months. Stocks are expected to rise 0.5% rise in July, a constructive jump that is expected to lower the gap with sales, which have been strong.*