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.
Asian shares extended their recovery on Friday, as investors shifted their focus to Wall Street earnings as trade tensions appeared to ease after China refrained from detailing retaliation plans against the Trump administration’s threatened tariffs. Keeping trade squarely in view was Chinese trade data, which showed its trade surplus with the U.S. swelled to a record in June, ahead of the expected tariffs. China’s trade surplus widened to a record high of $28.97 billion, up from $24.58 billion in May, but analysts say this was a one-off affair to beat the tariff deadline. MSCI’s broadest index of Asia-Pacific shares outside of Japan rose 0.6% on both Thursday and Friday.
Last week the focus was on inflation. Fueled by tighter labor markets and backlogged supply chains, inflation continued its upward climb in June. U.S. producers are feeling the burden of tighter supply chains through rising input costs. This suggests that businesses will pass some of that pricing burden onto consumers. Producer prices for final demand rose 0.3% in June, pushing the year-over-year rate to 3.4%, a six-year high. Higher fuel costs were a factor, but non-energy material costs were up 6.5% y/y. The price of steel and aluminum are up significantly because of the tariffs and that is a factor in pushing up input costs. Consumer prices only advanced 0.1% in June, but the core continues its trend-like 0.2% advance. On a year-ago basis, the CPI was up 2.8% in June and the core 2.2%. Inflation is continuing to firm and the Fed will stay on track with higher rates. Higher tariffs represent much stronger inflation, coupled with slower economic growth, a potential problem for the Fed to face.
The Chairman is mirroring his thought that many business executives are also experiencing. Moody’s projects that if about $100 billion of tariffs on imports and exports were imposed, that GDP growth would fall just 0.1% and you have to remember that stimulus adds about 0.4% to growth in 2018 and 2019. However, tariffs of 10% or $400 billion and $275 billion on vehicle imports would reduce GDP by 0.5% and result in 700,000 lost jobs. A true trade conflagration would follow if Trump imposes a 25% tariff would cut GDP growth by 1.9% at the nadir of economic growth in early 2020 and the nation will see 2.6 million jobs lost. Even if NATA falls apart and the three nations impose a 25% tariff across borders, each country will likely see recession. Even though the prevailing wisdom is that Mr. Trump is a businessman and this chest thumping over trade is a negotiating ploy, the recent round of tit-for-tat increases and the deterioration of the relationship with Trump and our traditional allies, does mean other scenarios must be considered. The possibility of a full-blown trade war and recession cannot be dismissed.
Next week will have a full slate of key economic data. Retail sales, business inventories, industrial production, housing confidence and starts, the Beige Book and the Conference Board’s leading economic indicators will be featured. Fed Chairman Jerome Powell will testify before Congress. He will get grilled on trade policy but Fed chairs normally try and not provide fiscal and policy suggestions. He may note that if inflation picks up, the Fed will look into it.
The U.S. Economy:
The NFIB small business optimism index fell from 107.8 in May to 107.2 in June. Despite the June retreat, the index remains at an elevated level. The index has averaged 105.4 since December 2016 and is close to the all-time record of 108 set in July 1983. A net 33% expect the economy to improve in the next six months, compared to 37% in May. In June, 29% of respondents thought that now is a good time to expand business, down from 34% in May. A net 20% of firms plan on expanding employment, up from 18% in May. 36% of respondents have at least one job that is hard to fill, compared to 33% in May. Small businesses remain confident, but finding qualified labor is the number one problem. Wage growth for some industries is impressive. Financial services report wage growth at 4.6% year-over-year, but growth for manufacturing continues to decelerate and mining is sub-par. The job market is not overheating yet, but will continue to tighten.
Wholesale inventories increased 0.6% in May, after a weak 0.1% advance in April. Durable goods stocks rose 0.5% and nondurable goods swelled 0.7%. Inventory build was broad based in the durable goods category, with the exception of autos that slipped 1.2%. Sales were strong in May rising 2.5%. The Inventory-to-Sales ratio plunged from 1.27 to 1.24 months. The strong sales trend bodes well for future production.
Producer prices increased 0.3% in June, following a 0.5% jump in May. Goods prices 0.1% in June, while services prices advanced 0.4%. On a year-over-year basis, the PPI for final demand is up 3.3% and goods prices up 4.3%. Core goods prices are up 2.7%. The report suggests that pipeline inflationary pressures are continuing to build. Final demand energy prices rose a strong 0.8% in June. Excluding food and energy, the PPI rose a trend like 0.3%.
The data came after President Trump said he would slap an extra 10% tariff on an extra $200 billion worth of Chinese imports, including numerous consumer items. The dispute has jolted financial markets, raising worries that a full scale trade war could derail the world economy. However, there were signs that the increase in the surplus was a one-off affair, as exporters rushed goods ahead of the tariff deadline. Analysts expect the trade surplus to be less favorable for China in coming months as the tariffs begin to bite. Chinese exports rose 13.6% in the first half of the year from a year earlier, versus a 11.8% gain in U.S. exports to China. Analysts expect Chinese exports to slow in coming months as global growth softens because of trade tensions.
Important Data Releases This Week
June retail sales will be released on Monday, July 16 at 8:30 AM EDT. Retail sales posted a sizable 0.8% advance in May and are projected to increase a still decent 0.6% in June. Ex-auto sales are projected to increase a slightly weaker 0.4%. The consumer is bouncing back after a slow start to the year.
June industrial production will be released on Tuesday, July 17 at 8:30 AM EDT. Industrial production slipped 0.1% in May and manufacturing fell 0.7%. Some of the fall in output was attributable to an auto plant in a Michigan auto parts supply factory that disrupted the supply chain. We expect auto production to have bounced back. We look for total IP to have increased by 0.6% in June and the manufacturing component to have increased 0.7%.
Housing starts will be released on Wednesday, July 18 at 8:30 AM EDT. A step back for housing starts and a move higher are the expectations for June. Starts are projected to come in at 1.320 million in June, compared to 1.350 million in May. Permits are projected to come in at 1.333 million versus May’s 1.301 million.
The Conference Board’s index of leading indicators for June will be released on Thursday, July 19 at 10:00 AM EDT. We project the index will rise 0.2% in June.