Uncertainty is Increasing Among Businesses and Consumers

By | September 3, 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

Word stocks rose to a one-week high on Friday on cautious hopes for a rapprochement on trade between Beijing and Washington. China’s Commerce Secretary, Geo Feng said the country would not immediately respond to the latest tariffs. Trump said that trade talks would commence in September, but the scheduled increase in tariffs would go forward starting September 1. Meantime, Italy’s parliament gave Prime Minister Giuseppe Conte a mandate to form a new government. The MSCI All-Country Index climbed 0.3% but remained on track for a near 3% decline for August. The bond market continued to flirt with record lows, with yields on 30-year U.S. Treasuries and 10-year German bonds hitting record lows. Inversion remains a prominent theme across the U.S. yield curve, where long-term yields are below short-dated ones, an unsettling sign as yield curve’s inversions have been a reliable leading indicator of future U.S. recessions. The fall in global bond yield reflect growing concern that growth is slowing down on U.S.-China trade tensions and worries over subsequent global supply chain disruptions.

The Dow Jones Industrial Average rose 41.03 pints, or 0.2% on Friday to close at 26,403.28, while the S&P gained 1.88 points, or 0.1% to finish at 2,926.46. Major indexes had their first losing month since May and the second of 2019. The Dow dropped 1.7% for August and the S&P declined 1.8%. Despite trade tensions, the economy is marching forward at a decent but slower pace than in 2018. The second estimate of Q2 GDP showed the economy growing at a 2.0% rate, down from 2.1% in the first estimate. We already knew from the first release that the consumer carried the ball for the second quarter. Personal consumption increased an even stronger 4.7% than the 4.3% first estimate. Monthly consumption data show the consumer is off to a strong start to Q3, with personal spending climbing 0.4% in July. Redbook sales were also strong in August. Outside of the consumer, other parts of the economy struggled in the second quarter. Residential construction declined for a sixth consecutive quarter and in the face of trade uncertainty, business investment declined for the first time since 2016.

Uncertainty is increasing among businesses and consumers. The next round of tariffs will hit the consumer. We expect the impact will be minimal on consumption. The manufacturing sector, however, is weakening under trade uncertainty. Industrial production declined in July and manufacturing is on a trend to decline further. The Markit manufacturing index went into negative territory for the first time since September 2009. Meantime, capital spending plans continue to edge lower, as global growth slows and trade uncertainty lingers. We expect the FMOC to closely monitor data. The Fed’s favorite measure of inflation remained unchanged at 1.6% y/y in July, giving the Fed a green light to cut rates by another 25 basis points in September.

Next week will be filled with data. We get a look at the ISM manufacturing and non-manufacturing indexes, construction spending, motor vehicle sales, factory orders and employment reports.

Latest Data

The U.S. Economy:

The pace of U.S. economic activity slowed markedly in July. The Chicago Fed National Activity Index dropped to -0.36 in July, down from 0.03 in the previous month. The three-month moving average did improve slightly to -0.14 from -0.30 in June. All four of the broad categories that make up the index decreased during the month. Production-related indicators contributed -0.25 to the index in July, a reversal of June’s 0.09 addition. The sales, orders and inventories contributed -0.05, compared to June’s -0.01 contribution. Employment-related indicators added -0.01 compared to a neutral read in June. The personal consumption and housing indicator contributed -0.06 compared to -0.05 in June. The July reading indicates that economic growth was below average in July.

New orders for durable manufactured goods rose 2.1% in July, following a 1.8% advance in June. The increase was largely driven by aircraft orders. Excluding transportation orders fell 0.4% for the month. Core capital goods orders rose 0.4%, following a revised 0.9% advance in June. New orders for motor vehicles and parts rose 0.5% after a 2.7% rise in June. Among manufacturing industries, orders were mixed. Orders for electrical equipment rose 1.1% and orders for computers and electrical equipment increased 0.2%. Orders for primary metals were down 1%. Shipments of core capital goods fell 0.7%, the second consecutive decline. Recent weakness in the manufacturing sector reflects an inventory correction, slower global growth and uncertainty concerning trade policy. With trade tensions increasing, it does not look likely a trade deal with China will be reached in Trump’s first term. Tariffs and more will make companies very uneasy.  Businesses are struggling with 25% tariffs and more may force companies to pull back investment in equipment and people. The probability of a global recession that pulls the U.S. into negative territory has increased significantly. Measures of core capital goods and capital spending plans should be watched carefully.

Wholesale inventories grew at a steady clip in July, rising 0.2% after remaining unchanged in June. Durable good’s inventories fell 0.2%, but nondurable goods saw a 0.8% increase during the month. Retailers had a solid month, with stocks rising 0.8%, following a 0.3% decline in June. Excluding the auto sector, retail inventories rose 0.3%. Stockpiles are growing at a modest pace largely because wholesalers are accumulating inventories ahead of threatened tariffs. Escalating trade tensions suggest this trend will continue. Tariffs increase costs for wholesalers and retailers and eat into bottom lines. Continued uncertainty will keep inventories elevated for targeted categories.

The nominal goods trade deficit narrowed from $74.2 billion in June to $72.3 billion in July. Nominal goods exports were up 0.7%, boosted by an increase in consumer goods. Nominal goods imports slipped 0.4%, but the details were not overly friendly for business investment as capital goods imports were down 2.6%. All told, early signs indicate that net exports will be a drag on third quarter growth. The July advance in nominal goods exports reflected a 9.7% advance in consumer goods, driven by an advance of 4.1% for automotive exports, while other good exports rose 2.9%. Capital goods imports dropped 2.6% and other goods imports were down 8.2%. The Trump administration is clearly bothered by the size of the trade deficit with China. However, the current tariffs have only shifted the mix of imports from China to other parts of the world. Manufacturing employment has increased in the past year due to the strength of the domestic economy. There has been little evidence of a re-shoring of businesses to help import goods, despite the Trump administration’s tariff policy.

Personal income increased 0.1% in July, following a 0.5% surge in June. The slowdown did not affect spending. Real personal spending rose 0.4% in July, following a 0.2% advance in June. Consumers contributed powerfully to economic growth in the second quarter. Consumption accounted for more than all the growth on GDP as the rest of the economy contracted. July’s advance in spending suggests that consumer will hold up in the third quarter, although July’s growth is not sustainable. Growth in wages is slowly accelerating, but job growth is slowing. If tariffs are enacted September 1, the consumer will see higher prices. How they react will be the key to the economy’s progress.

Inflation remains weak, but did speed up a little in July. The PCE deflator advanced 0.2% in July, after advancing 0.1% the previous two months. The core PCE deflator also advanced 0.2%. On a year ago basis, the headline PCE deflator advanced 1.4% and the core index was up 1.6%. Although the upcoming tariffs will boost prices, it is still unknown how much of a boost it will give to consumer prices. Inflation remains restrained, giving the Fed move to lowering rates, if needed.

International:

A surge in exports drove Canada’s economy higher in the second quarter, but the surge masks the poor performance of the rest of the economy. Real GDP expanded at an annualized rate of 3.7% in the second quarter. Exports surged 13.4% higher from the previous quarter. Nonmetallic mineral shipments jumped 19% and aircraft and parts jumped 10% higher. Also helping the trade balance was a 1% drop in imports. While the trade picture improved, domestic demand contracted 0.7%. Falling nonresidential investment, down 6.4% annualized dragged on the domestic economy. Spending on equipment and machinery slumped sharply, off 4.3%. The drop mainly came from a decline from a large aircraft order that came in the first quarter. The 1.1% drop in spending on nonresidential structures did not help the investment category. Residential investment advanced 5.5%, snapping a streak of five quarterly losses. Household consumption increased a weak 0.5%. The quarter was strong, but weak consumption and investment does give cause for concern. The strength should keep the Bank of Canada from cutting rates at the next meeting. The trade war is causing damage to both the U.S. and Canadian economies. As export growth cools, the Canadian economy will also slow in coming quarters. If the U.S. economy slows dramatically, it will have a negative effect on the Canadian economy.

China’s factory sector shrank for a fourth consecutive month in August as trade tensions ramped up and domestic demand remains sluggish. The manufacturing PMI fell to 49.5 in August, down from 49.7 in July. Exports remain under pressure as orders fell for a 15th straight month, but the index did pick up to 47.2 from July’s 46.9 level. Factories continue to shed jobs, with the employment index dropping to 46.9, compared with 47.1 in July. Total new orders continue to fall, indicating domestic demand is soft, despite a series of growth measures over the year. The front-loading of exports to the U.S. ahead of higher tariffs supported trade and overall activity, but this effect will likely fade in coming months. The additional tariffs by Trump effectively covers all of Chinas exports to the U.S.

Important Data Releases This Week

The August ISM manufacturing index will be released on Tuesday, September 3 at 10:00 AM EDT. The index has been losing ground over the past few months, but still remain at a positive 51.2 reading for July. Trade uncertainty and a slowing global economy is weighing on manufacturing. W project the index to retreat further to 50.9 for August.

July construction spending will be released on Tuesday, September 3 at 10:00 AM EDT. Construction spending fell a sharp 1.3% in July, with all major categories losing ground, especially residential. We look for a 0.3% gain for August.

August motor vehicle sales will be released on Wednesday, September 4 at 4:00 PM EDT. We expect motor improvement for vehicle sales in August, rising from a 16.8 million units annualized pace to 16.9 million.

The August ISM non-manufacturing index will be released on Thursday, September 5, at 10:00 AM EDT. We see a slight improvement for the August non-manufacturing sector, rising from 53.7 to 54.

July factory orders will be released on Thursday, September 5, at 10:00 AM EDT. The advance durables side of the July factory orders report rose 2.1% with ex-transportation orders decreasing 0.4% and core capital goods orders increasing 0.4%. We see total factory orders rising 1.0% for the month.

August employment will be released on Friday, September 6 at 8:30 AM EDT. Solid and steady are the expectations for August employment, with payrolls rising 158,000, following the 164,000 increase in July. The unemployment rate will remain unchanged at 3.7%. Average hourly earning are projected to rise 0.3%, bringing the y/y change to 3.1%.


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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.

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