It will be difficult to derail the U.S. economy

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 ReviewWorld stocks enjoyed a decent bounce on Friday as a recovery in Asian markets spread to European shares after a turbulent week as investors’ fears of higher barriers to trade came closer to reality. MSCI’s index of world stocks rose 0.5% on Friday, but the second quarter was still set to end in the red as investors priced I tariffs that are set to be implemented next week. The Trump administration is due to activate tariffs on Chinese goods worth $34 billion on July 6, which is expected to prompt a tit-for-tat response from China. Trade wars have already mauled assets from the Chinese yuan to European automakers stocks, wiping out assets worth $1.75 trillion off of world market capitalization since June 12.

 

The economy moderated in the first quarter. The third estimate of GDP growth by the BEA revealed that the economy grew by 2.0%, down from 2.9% in the fourth quarter and the weakest rise in a year. Although modest, growth was widespread, including investment, consumer spending and government. There were negatives from imports, spending on motor vehicles and residential investment. The economy is growing strongly and growth prospects through the end of 2019 are favorable. Growth should track near 3% until 2020, fueled by the massive fiscal stimulus and tax reductions. With this much strength, it would be difficult to derail the U.S. economy. However, rising trade tensions are a significant downside risk. So far, the impact of the tariffs is relatively small, but as more protectionist barriers are erected, the impact on the real economy will be greater. Financial markets are being shaken by the rising trade tensions. Two major auto trade groups warned recently that imposing a 25% tariff on imported vehicles would cost hundreds of thousands of jobs and dramatically hike prices on vehicles. Businesses will see a significant price increase on key inputs. The impact of the tariffs, plus rising interest rates does threaten the long expansion.

 

U.S. durable goods fell 0.6% in May, less than expected. Details were disappointing and suggest capital spending remains modest. The tax reductions were hoped to boost capital spending, but trade tensions are making businesses more uncertain. New home sales rose 6.7% in May to 689,000 annualized. April was revised down. Taking out the month-to-month noise, sales are continuing modest trend. Nominal personal incomes rose 0.4% in May, but consumer spending was unchanged. Spending is modest, but it not retreating and is on track to rise 2.7% in Q2.

 

Next week is busy on the economic calendar. We have vehicle sales, the manufacturing and non-manufacturing indexes, construction spending, factory orders, FMOC minutes, international trade and the important employment report. The economy is doing well but trade tensions are a threat. The financial markets have lost the year’s gains and businesses are showing signs of greater uncertainty. Capital spending remains modest despite the tax reductions. As tariffs move from just a select few products to bigger industries like autos, the dangers multiply. It won’t be just motorcycles moving production overseas, it will be auto plants. The price of a multiple of consumer items will jump. Trade policy is already undoing the good of the tax cuts and the wealth effect of the financial markets. This may not lead to recession, but it is leading to a weaker economy.

Latest Data

The U.S. Economy:

The pace of economic growth decelerated in May. The Chicago Fed National Activity Index declined to -0.15 from 0.42 the previous month. Two of the four categories that made up the index decreased from the prior month and two made negative contributions to the index. Production-related indexes fell to -0.29, compared with 0.33 the previous month. Manufacturing fell 0.7% in May, after a 0.6% rise in April. The sales, inventories and orders index posted a 0.05 reading after no change in April. Employment-related indicators edged up to 0.13, compared with 0.12 the previous month. The personal consumption and housing category returned a reading of -0.04, compared to a reading of -0.03 in April. Housing permits fell to 1.3 million units in May from 1.36 million in April. The 3-month moving average fell to 0.18 in May from 0.48 in April, indicating economic growth was below average. The economy is still doing okay, with fiscal and tax relief stimulus still to come. Headwinds will come from a tighter labor market and tariffs, which will hurt production and add fuel to inflation. The direct impact of tariffs on the economy, are slower to develop but negative. How financial markets adjust may have a quicker and deeper impact on the future of the economy.

 

New home single-family sales increased 6.7% in May from the revised April total, equaling a seasonal adjusted annual pace of 689,000 units. Sales were up 14.1% from a year earlier. Despite the tightening market, the median new-home price for May was down 3.3% from a year earlier. The market remains tight. New-home sales for sale at the end of the month totaled 299,000, up 1% from April and 10.3% from May 2017. The inventory-to-sales ratio in May was 5.2 months, down 0.3% from April and down 0.25 from a year earlier. The market titled towards lower tier homes. The share of new homes priced under $300,000 was 46% in May, up from 44% in April and up from 42% in May 2017. Overall, May put new home sales back on the long-term trend they have been on since 2011. This was still below the level reached in the late 90s before the housing bubble that burst and was a leading cause of the last recession. There is demand for new homes, but rising rates will dampen the market.

 

Consumer confidence dipped 2.4 points in June as consumer expectations fell to the lowest level since last December. Expectations dropped to 103.2 in June from 107.2 in May. The present conditions index slid slightly to 161.1 from 161.2. Income expectations dropped sharply, falling 2.6 points, with only 18.8% of respondents expected incomes to improve in the next six months. Consumer confidence does remain elevated and the economy is growing strongly. Rising interest rates will weigh on household balance sheets and wealth effects may track lower and the financial markets are shaken by Trump’s trade policies.

 

The advance wholesale and retail inventories estimate showed wholesale inventories increased 0.5% in May, following a meager 0.1% rise in April. Retailers were not far behind, with a 0.4% gain, following a 0.5% rise in April. Autos and parts led the retail inventory gain, while retailers excluding autos advanced 0.1%. Both wholesale categories made headway. Nondurable goods made up for the 0.1% loss in April, with a 0.6% gain in May. Durable goods stocks rose 0.% in May, after a 0.3% increase in April. Inventory build came back to life in May. The return of nondurable goods is particularly welcome as that sector has been weak since March. Durable goods stocks have increased for seven months. With still strong demand, inventory build should continue at decent levels. Downside risk are rising as tariffs will restrain production.

 

The advance international trade in goods narrowed by $2.5 billion in May to $64.8 billion. This was the smallest trade deficit in a year. Nominal exports rose 2.1% from the prior month, while imports gained 0.2%. Capital goods and fods, feeds and beverages provided the biggest boost to the growth in exports. Stronger imports of capital goods bumped up imports. Trade has not yet shown the impact of the tariffs and increased tensions yet. That being said, trade will come under increased stress in coming months. Tariffs will ultimately result in higher prices for consumer goods and will raise the price of many businesses’ inputs. Exporters will be placed at a competitive disadvantage. The Trump administration’s policies will reduce trade flows more substantially that shift the trade balance over long term.

 

New orders for durable manufactured goods declined 0.6% in May, following a 1.0% decline in April. The change was large driven by transportation, both autos and civilian aircraft. Excluding transportation, orders still fall 0.3%. Core capital goods order fell 0.2% in May , following a strong 2.3% rise in April. Total shipments fell 0.1% and the trend looks softer now. Durable goods manufacturers have a lot to process. The coming wave of tariffs will cool manufacturing and it appears that capital goods orders and shipments are coming in weaker. Most manufacturers are worried about a full blown trade war. The recent streak of losses in the equity markets, are due to trade tensions. Aside from trade, fundamentals are still decent. However, rising interest rates and a tightening labor market are likely to slow production.

 

Personal income increased 0.4% in May, following a 0.2% rise in April, a solid support for consumer spending. However, personal spending was unchanged in May, following a 0.3% rise in April. The May weakness in spending is not too worrisome. It followed two strong months ad the weakness was driven by utility spending. Excluding utilities, spending was modest but broad-based. Both durable and nondurable goods spending rose 0.3%. The future of income gains has become cloudy. Gas prices are up and the stock market, a source of wealth has been hammered by trade tensions. Spending fundamentals are still solid as wages are still advancing. Consumer confidence has retreated slightly but remains at an elevated level.

 

The May PCE deflator rose 0.2% in both May and April. Also the core PCE rose 0.2%. On a yearly basis, the PVE was up 2.3% and the core has advanced 2.0%. The gains put the year-over-gains in line with the Fed’s objective for a period of time. Inflation has been running slow, so some overshoot won’t particularly bother the Fed. The central bank will likely stay on course for two more interest rates increases for the reminder of this year. Goods prices are a wildcard going forward. Tariffs threaten to raise the prices of key economic inputs. Energy prices have retreated slightly but are staying in a higher range. For the time being, inflation remains restrained and the Fed will stick with its game plan.

International:

Growth in China’s manufacturing sector slowed in June after a stronger-than-expected reading in May. The official PMI fell to 51.5 in June down from 51.9 in May. Significantly, new export orders contracted for the first time since February, dropping to 53.6 in June from 54.1 in May. The PMI for large firms fell to 52.9 in June from 53.1 in May, while the PMI for small firms rose to 49.8 from 49.6. Domestic demand is weakening and external demand faces pressure from the escalating trade war between China and the U.S. The central bank cut the RRR by 50 basis points to help ward off a sharper economic slowdown. In May, industrial production, retail sales and fixed asset investment missed projections because of weaker auto sales. China’s stock and currency markets have suffered one of their worst months in June. The non-manufacturing index rose to 55.0 in June from 54.9 in May.

Important Data Releases This Week

June ISM manufacturing index will be released on Monday, July 2 at 10:00 AM EDT. The ISM manufacturing index is expected to rise from 58.7 in May to 58.8 in June. We look for the inventory index to bounce back after falling in May. Supplier deliveries will remain elevated because of supplier constraints.

 

May construction spending will be released on Monday, July 2 at 10:00 AM EDT. Construction spending was driven 1.8% higher in April to fully reverse the 1.7% decline in March on the strength of the multi-family sector. We project construction spending to increase 0.6%. in May, contributing to second quarter GDP.

 

May factory orders will be released on Tuesday, July 3 at 10:00 AM EDT. Durable gods for May slipped back due both to transportation equipment and non-transportation equipment. Forecasters see orders slipping 0.1% for the month.

 

June vehicle sales will be released on Tuesday, July 3 at 4:00 PM EDT. Vehicle sales fell to an annual rate of 16.9 million units in May, but are expected to rise slightly to 17.0 million for June.

 

June ISM non- manufacturing index will be released on Thursday, July 5 at 10:00 AM EDT. The ISM non-manufacturing index is expected to slip slightly from 58.6 in May to 58.3 in June on supplier delivery times and trade worries.

 

June payroll employment will be released on Friday, July 6 at 8:30 AM EDT. Payroll growth soared in May, rising by 223,000 jobs. We don’t look for repeat in June, with payrolls rising by 190,000. The unemployment rate will stay steady at 3.8%. Average hourly earnings will increase by 0.2 for a y/y increase of 2.8%.

 

May international trade will be released on Friday, July 6 at 8:30 AM EDT. The trade deficit is expected to narrow in May to $43.5 billion. The advance report showed 2.1% rise for exports against a 0.2% increase for imports. Tariff effects will be limited in this report.


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