The Economy to Receive Additional Fuel from the Tax Breaks and Fiscal Stimulus

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.


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Stock declined deepened globally, with the European equities sliding to the lowest in more than a year and gauges across Asia sunk lower on trade war fears. U.S. stocks tumbles, sending the S&P to its biggest weekly loss in more than two years on fears that a trade war with China and higher interest rates could throttle global growth. The S&P dropped 2.1% on Friday and 5.9% for the week. The Dow Jones Industrial average fell more than 1,400 points for the week, down 5.7%. Global markets were caught in a risk mode after China announced retaliation against President Donald Trump’s proposed tariffs. China’s ambassador to the U.S. wouldn’t rule out the possibility of the nation scaling back purchases of Treasuries in response to the tariffs.


It was a bad week for equities as the trade war edged close, the tech sector was roiled by Facebook’s privacy scandal and traders bracing for a possible slowdown as the Federal Reserve reiterated its commitment to further interest rate increases after Wednesday’s hike. In five years, there have been only two other stretches with losses of this magnitude. The tariffs announced by the U.S. and China could be the start of a trade war that could threaten the global economy. In the U.S, the fear is that the actions will add to inflationary pressures, already going to be supercharged by the fiscal and tax relief actions. The Fed may be caught between an economy that charges ahead for a couple of quarters and fuels inflationary pressures and then slows abruptly, as the stimulus wears off and trade restrictions slow the industrial sector. A slow economy with high inflation, high interest rate and high debt burdens is vulnerable to recessionary forces.


It may be too early to cry wolf. Trade issues will hamper, but not necessarily stop the U.S. economy. For example the steel and aluminum tariffs initially announced by the Trump administration were to impose a 25% and 10% tariff on imports, applied across all countries. However, the Trump administration has pivoted and granted temporary exemptions and a number of trading partners. Among them are Canada, Mexico, The EU, Argentina, Brazil, South Korea and Australia, which account for 67% of total steel imports. Japan was not mentioned, but they might be included in coming weeks.


Turning to China, the U.S. intends to impose a 25% tariff on a set of Chinese imports, but some key details have yet to be determined, including what set of imports and the duration of the tariff. Also, there will be restrictions on Chinese investment in U.S. technologies. Before the tariffs begin, there will be a 30-day comment period to give U.S. businesses time to respond. China disclosed its own plans to impose tariffs up to $3 billion of U.S. imports as retaliation against U.S. tariffs on steel and aluminum. Other products are likely to be in Chinese cross hairs, including pork, machinery and soybeans. It could be the response in equity markets could influence the Trump administration, it’s happened before. For now, we will watch the situation carefully. This could be the beginning of a global recession, or just a bump in the road. Trade wars are bad though and nobody really wins in one.


The Federal Open Market Committee is turning more hawkish, not surprising considering the strength of the economy and the fiscal stimulus in the pipeline. The strength of the economy justifies higher rates and the Fed is planning on delivering. The FMOC raised the target range for the federal funds rate by 25 basis points from 1.5% to 1.75%, which was widely expected. The Fed also raised its forecast for GDP this year from 2.5% to 2.7% and anticipates growth in 2019 of 2.4%, up from the previous 2.1%. The Fed still expects that rates will be raised three times this year, but nearly half of the members of the committee expected four rate hikes. While generally upbeat about the economy’s prospects, Powell said that the Trump administration’s trade policy has become a concern for businesses.


It was a relatively slow week for economic data. Existing home sales bounced back from January’s 3.2% drop, with a 3.0% gain in February. The rise was largely driven by warmer weather in the Midwest and South. New home sales fell 0.6% in February, but remained up 0.5% on a year ago basis. Durable goods orders rose 3.1% in February and core capital goods orders were particularly strong, rising 1.8%. The gap between survey industrial data and output data has narrowed. Still, industrial activity has softened a little in Q1, but still remains on a positive upward trend. Next week, we will see pending home sales, the advance goods deficit report, final estimate for 2017-Q4 GDP data, personal spending and incomes for February and the GDP deflator report.


The economy continues to do well as we wrap up the first quarter. The economy is strong and is going to receive additional fuel from the tax breaks and fiscal stimulus. Trade issues have been raised on the list of downside risks. Higher interest rates are also a downside force, if inflationary pressures start to speed up helped by the tax and fiscal policies. There is a danger of overheating and also the threat of a more hawkish Fed. For the most part, the storm clouds are in the medium to longer term. The Fed and Mr. Trump can wreck the economy, but it will take at least a few months.

Latest Data

The U.S. Economy:

Existing home sales in February regained some of the ground lost in December and January. Sales increased 3% for the month equaling 5.54 million annual pace and were up 1.1% from February 2017. The increase was led by single-family sales, whereas condo/co-op sales fell substantially. Although seasonal issues change the month-to-month numbers, the market on trend is tight and supply-constrained. The upward price trend may prove unsustainable in the light of increases in mortgage rates and the reduced deductibility of home ownership, which was a key element in the tax overhaul. Over the past six months, the fixed 30-year mortgage has surged from 3.8% to over 4.3%, well above the previous peak in 2016. With rates going up further, ownership may be unsustainable in the medium term. Low supplies are also hurting the starter home market. Wage growth will be a plus, but the rise of interest rates may be more than many potential customers can bear.


New home sales came in below expectations, falling 0.6% from January, but 0.5% higher than February 2017. Sales came in at 618,000 in February, down from 622,000 in January. Inventory maintained its upward trend in February, increasing 2% year-over-year. The market is slightly less tight than a year ago. Completions are starting to outpace demand.  If the inventory-to-sales ratio now at 5.9 months can increase to 6.0 months, or higher, that will place more downward pressure on new-home prices and spur demand. Despite less than stellar numbers over the past three months, the outlook for residential construction is still good. Wages are expected to pick up speed and the economy is at full employment. However, interest rates are going up, which will take some wind out of the sails.

After a slow start to the year, U.S. factories returned to earlier gains in February. The advance report for durable goods showed that new orders advanced 3.1% in February, not quite outrunning the 3.5% decline in January. Orders rose 1.7% in November and 2.7% in December leaving the upward trend intact. Nondefense capital goods orders excluding aircraft increased a strong 1.8%, outrunning the losses the previous two months. Shipments gained 0.9% and have remained in positive territory for more than a year. Nondefense aircraft orders, a source of volatility, did rise 25.5%, but gains were broader than in the pre-January data. Shipments of core capital goods rose 1.4% and have also been up consistently over the last year. Recently announced tariffs are likely to hurt manufacturing. Steel-consuming industries such as construction, autos and machinery, which account for 80% of domestic steel consumption, will pay more for steel. Tariffs will make U.S. carmakers less competitive. The odds of a trade war have increased significantly. Not only will input prices will increase, but exports will suffer.


Important Data Releases This Week

February NFIB will be released on Tuesday, March 13 at 6:00 AM EDT. The survey increased from 104.9 in December to 106.9 in January. The survey is tracking at a fairly elevated level. Views of the economy will likely lift confidence to 107.5 in February.


February advance goods deficit will be released on Wednesday, March 28 at 8:30 AM EDT. The deficit came in at $74.4 billion in January and we expect only a slight improvement to $74.2 billion.


GDP (2017-Q4-advance) will be released on Wednesday, March 28 at 8:30 AM EDT. We expect the fourth quarter to be revised up by 0.3% of a percentage point at an annualized rate of 2.8%.


February personal income and spending will be released on Thursday, March 29 at 8:30 AM EDT. We expect personal income to rise 0.4% in February, the same as in January. Nominal spending will rise 0.1%. The core GDP deflator is also expected to rise 0.2%. Inflation is awakening, but still remains at subdued levels.

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