Tariffs are Not an Immediate Economic Threat, but an Intensifying of Tensions Could Be

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.


Coffee and Economic Review

Stocks rallied for a positive end after a tumultuous week in which political developments in Europe and escalating trade tensions roiled markets. The Stoxx Europe 600 gauge headed for the biggest gain in a month as populist parties surged to power, bringing to an end of a three-month political deadlock though opening the way to friction with Europe. The risk-on mood prevailed Friday even as the U.S. President pushed ahead with tariffs on key trading partners. Investors seem to feel that threats of tariffs will not materialize into an all-out trade war and were more circumspect.


Canada and Mexico retaliated on Thursday after Washington imposed tariffs on steel and aluminum, while the European Union had its reprisals ready to go, reviving fears of a global trade war. Tariffs of 25% on steel imports and 10% on aluminum were imposed on Friday. Canada is going to match the tariffs and the EU is going to impose tariffs on jewelry, bourbon, automotive glass, telecom equipment, personal items and blue jeans. The measures drew condemnation from Republican lawmakers and the country’s largest business lobbying group. The immediate economic consequences are not enormous but trade tensions are intensifying and there will be consequences if the U.S. doesn’t back off. Moody’s estimates, that if the trade war continues, real GDP will fall 1% by the end of 2019. Since a hard trade position is likely to change under negotiations, such as NAFTA, most economists are not changing their baseline forecasts, yet. Still, the trade issue looks increasingly dark and the end of the long recovery may be coming in view.


Wall Street stocks rose on Friday after the latest jobs report pointed to strength in the U.S. economy. Government data showed that payrolls increased by 223,000 and average hourly earnings increased 0.3%, both topping projections. Markets got a reprieve as Italy installed a coalition government, removing the risk of a repeat vote dominated on whether the country would quit the euro. The Dow rose 219.37 points on Friday, but lost 0.48% for the week. The S&P 500 gained 29.35 points on Friday and gained 0.48% for the week


Payrolls increased by 223,000 in May and average hourly earnings rose by 0.3%, both topping expectations. Other data released for the week was positive, but somewhat mixed.  The ISM manufacturing index increased from 57.3 in April to 58.7. The details were mostly positive, as new orders production and employment all improved. Trade details were weak and prices rose to a high level. Manufacturing is doing well, but there could be bumps ahead. Supply constraints are building and trade tensions could become problematic. Construction spending advanced 1.8% in April, but that followed a 1.7% decline in March. Auto sales fell to an annual pace of 16.9 million in May, following the 17.2 million unit’s pace in April. Auto sales are likely to track near 17 million this year, not a bad number, but not growth.


The Beige Book report suggests that economic growth is continuing at a modest pace in the second quarter. Economic activity is expanding moderately across districts, with few changes in the pace of growth. Manufacturing has kicked into higher gear since the previous report, thanks to fabricated metals, heavy industrial machinery and electronics equipment. Consequently, nearly one-third of districts noted strong industry growth. On the other hand, consumer spending has weakened as non-auto and retail sales have softened and auto sales are unchanged. Home building has increased modestly on net and nonresidential construction has expanded moderately. Despite some concern about trade policy, the near term outlook is generally optimistic. Trade policy aside, overall prospects for the U.S. economy are generally favorable.


Things quiet down on the economic front next week. We have the non-manufacturing ISM index, which accounts for 88% of GDP. We look for index to bounce back slightly. The trade deficit will have Implications for second quarter GDP and there will be historical revisions. Trade will be a focus over the next few weeks. The current tariffs and counter-measures are not an immediate economic threat, but an intensifying of tensions could be. Optimists suggest that Trump is just negotiating. Pessimists point out that Trump is a protectionist and we are entering a trade war with both allies and China. If we follow that path, recession probabilities start to increase significantly for 2019.

Latest Data

The U.S. Economy:

The advance trade deficit narrowed in April, but the decline was small and details largely negative. Nominal goods exports backtracked 0.5% from an all-time high in March, falling to $139.6 billion. Capital goods and auto exports drove the decline, falling 3% and 3.3%, respectively. Nominal goods imports also fell 0.5%, driven down by consumer goods which fell 5.3%. On a year-ago basis, goods exports were up 10.3% and imports 7.6%. The report shows a slight decline in April, following a sizable jump in March. The longer-term outlook for trade is murky. The Trump administration has reversed itself on trade with China and also pans tariffs with the EU. Auto imports are another active front. While the U.S .does run a deficit on automotive vehicles and parts, the deficit has been stable since 2015 and exports have registered strong growth in the past year. If our allies decide to retaliate against U.S. tariffs, the likely loser would be the American consumer, whom will see higher inflation and lower GDP.


Wholesalers took a breather, but retail inventories are bouncing back, according to the advance estimate. Wholesale inventories were unchanged in April, following a 0.5% increase in March. Retailers saw their stocks climb by 0.6% and stocks increase 0.5% excluding the auto industry. Although inventories took a breather in April, the outlook for the second quarter remains more upbeat. That’s largely due to increased sales in April and March and some pay back for stronger inventory build in January and February. Sales will clear inventory accumulation and set the stage for stronger production.


Personal income rose by 0.3% in April, following a 0.2% rise in March. Near term prospects for income are strong. The economy is at full employment and growth in wage rates are accelerating by most measures. Personal spending increased 0.4% in April, following a 0.5% increase in March. Spending fell 0.2% in January and 0.1% in February. Growth in spending was consistent, with service and nondurable goods spending up 0.4% and spending on durable goods rose 0.3%. The savings rate fell to 2.8%. Spending has recovered from its weak start to the year. The labor market continues to add jobs and spending will remain healthy. There are weights, wage growth is still slow and supports from the federal tax and spending will aid other parts of the economy more than consumers. However, growth will be positive although modest.


The PCE deflator rose 0.2% in April after remaining unchanged in March. Excluding food and energy, the deflator was also up 0.2% in April, matching the gains seen in each of the prior two months. On a year-ago basis, the deflator was up 2.0% and the core deflator was up 1.8%. Inflation continues to hover around the Fed’s target and this will allow the Fed to raise rates in June. The tariffs promise more input inflation, but also lower economic growth, putting the Fed in a bind. We project they will signal another rate increase in December, bringing the yearly count to four. If there is a large financial market reaction to the tariffs, or if inflation gathers speed, the Fed could either pause, or speed up rate increases.


Job growth rose by a stronger than expected 223,000 in May, following a revised 159,000 in April. Average hourly earnings came in hotter than expected, rising 0.3%, up 2.7% on a yearly basis. The unemployment rate slipped to 3.8% and will likely slide down even further in coming months. Private employment grew by 218,000 in May, following a 162,000 increase in April. Professional and business services added 31,000, weaker then we’ve seen recently. Education/healthcare added 39,000. The participation rate declined by 0.1% to 62.7%. There still seems to be an adequate number of people in the labor pool to absorb jobs but labor rates are likely to accelerate fairly soon. This suggests the Fed will proceed with its tightening schedule. The good news is that the number of people who are not in the labor force but want a job remains above 5.1 million. When the labor market was tight in the early 2000s, the number of people not in the labor force but wanting a job was south of 4.5 million. That suggests the economy can still attract more labor without accelerating wages. At some point, wages will have to rise to attract workers back to the labor force.


U.S. manufacturing is doing well. The ISM manufacturing index increased from 57.3 in April to 58.7 in May. Details were positive. Production increased from 57.2 to 61.5, more than reversing the drop in April. New orders rose from 61.2 to 63.7. Fifteen out of 18 industries reported growth in new orders among them were nonmetallic mineral products, computer/electronic products, fabricated metals and electrical equipment. The only product down in orders was apparel/leather. Inventories fell from 52.9 to 50.2, with eight industries noting higher inventories and six reporting lower inventories. Supplier deliveries edged higher to 62, the highest since the hurricane disruptions in 2017. Employment increased 2.1 points to 56.3. Thirteen out of 18 industries reported growth in employment. Trade numbers were weak. New export orders dropped 2.1 points to 55.6 and new import orders fell from 57.8 to 54.1. Prices paid increased from 79.3 in April to 79.5. No commodities were down in price. The outlook for manufacturing looks bright but there could be problems. Supply constraints are building. Anecdotes noted a shortage of skilled and unskilled workers. Trade problems could be problematic for domestic manufacturing.


May new vehicle sales were more modest. U.S. sales of cars and light trucks fell from a annualized pace of 17.2 million in April to 16.9 million in May. Sales were up 0.7% from a year earlier. The result ended a eight-month streak of selling above 17 million vehicles. Light truck sales did mark the third consecutive month they accounted for at least two-thirds of the total. Fleet sales were a small plus for sales. Higher interest rates and tighter credit will remain a headwind flor sales going forward. However, job and wages gains will keep sales at decent levels. We project sales to end the year near 17 million vehicles.


Construction spending increased 1.8% in April, but that followed a 1.7% decline in March. Private residential construction rose a strong 4.5% increase, erasing the 4.1% drop the month before. On the whole, private construction posted a 2.8% rise in April, offsetting the 2.6% decline in March. Public construction fell 1.3% in April. Nonresidential construction advanced 0.8% in April, following the 0.6% decline in March. The quick recovery in construction in April indicates the March numbers were suppressed by weather, rather than any underlying weakness. April’s gain drove construction spending to an all-time high of $1.3 trillion, up 7.6% from a year ago. Public construction took a nose dive in April, but was up year-over-year. However, that sector has been basically flat since the beginning of the year. Construction is expected to advance at a modest rate through the year.


Factory growth in major manufacturing hubs showed signs of cooling last month as companies braced for potential damage from rising global trade tensions. The May manufacturing PMI slipped for a fifth month to a 15-month low of 55.5, down from April’s 56.2. German factory growth was also at a 15-month low. China’s manufacturing activity has grown steadily so far this year. The Caixin/Markit manufacturing PMI was unchanged at 51.1 in May, although exports fell for a second straight month. Japan’s PMI fell to a seven-month low of 52.8, with domestic business growth slowing and only a modest pickup in export orders. Corporate capital expenditures rose at a slower pace in the first quarter, compared with the previous one. South Korea reported strong shipments in May, but the factory activity index fell for a third month as new orders continue to decline. Higher oil prices and a rising dollar have hammered currencies of late, with trade friction and heightened geopolitical uncertainties with North Korea, Iran and Italy adding to pressures. India reported the quickest pace of economic growth in nearly two years in the first quarter, but the Reserve Bank of India is expected to raise rates in August.

Important Data Releases This Week

April factory orders will be released on Monday, June 4 at 10:00 AM EDT. The durable goods report for April showed headline weakness that reflected a give back for strength in civilian aircraft orders in March and masked strength in capital goods. We project total orders to fell 0.4% for April, but core capital goods will see a slight positive reading.


May ISM non-manufacturing index will be released on Tuesday, June 5 at 10:00 AM EDT. The ISM non-manufacturing index is expected to show strength, coming in at 58.0, versus 56.8 for April, which was held back by a shortening of delivery times. New orders were very strong in April and point to strength in May.


April international trade will be released on Wednesday, June 6 at 8:30 AM EDT. The international trade deficit is expected to hold steady at $49.0 billion with little change in the advance report. The advance report showed a 0.5% decline for both imports and exports. Tariff effects on metals are a wildcard.


Q1 productivity and costs (second estimate) will be released on Wednesday, June 6 at 8:30 AM EDT. There was little change in the second estimate for GDP and there is expected to be little change in the second estimate of productivity. We estimate that productivity will have advanced 0.7% with unit labor costs at 2.8%, versus the first estimate at 2.7%. Output slowed in the first quarter but so did hours worked and wages rose.

FTR is the leader in economic analysis and forecasting for the commercial freight and transportation equipment markets. For more information: Click here

image_pdfOpen as PDFimage_printPrint Commentary