The Economy Will Slow in 2020, with a Dangerous Probability that It May Fall into Recession

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

A plummeting Turkish lira sent ripples through global equities and emerging markets on Friday, as fears of a wider fallout sent investors heading for the cover of safe assets such as the yen and U.S. government bonds. The lira fell as much as 13% against the dollar, the worst day since Turley’s financial crisis of 2001. The currency is down more than 35% this year, its losses accelerating as the dollar jumped to 13-month highs. This spread fear on a impact on other economies and markets. The European Central Bank was quoted in saying it was concerned about European banks’ exposure to Turkey. The European Stoxx 600 fell 0.7% on Friday. The MSCI All-Country World Index was down 0.6% for the day.

  Wall Street fell slightly for the day in a week of good earnings but turbulent international news. Geopolitical tensions between the U.S. and other countries set the tone for the markets this week. Part of the lira’s fall was triggered by a diplomatic row with Washington. Earlier in the week, China responded to the Trump administration’s latest trade war volley with additional tariffs of its own. The ruble hit a two-year low after the U.S announced new sanctions over a nerve agent attack in the U.K. Global markets did get a little boost as Japan and the U.K. revealed a little better economic growth than expected. Japan’s GDP grew at a 1.9% annualized pace in the second quarter, more than offsetting the 0.9% decline in the first quarter. Britain’s GDP grew 1.5% annualized better than the 0.9% rise in Q1. Consumption rebounded in Britain, but business investment remains weak and is being affected by the uncertainty of Brexit.

 

Last week was light on economic data and was focused on inflation. Prices continue to gradually rise and evidence of a strong labor market continue to mount. Producer prices fell short of expectations and were unchanged in July, but the details still show prices trending higher. The trade services index fell 0.8%, food declined 0.1% and energy retreated 0.5%, but these sectors are volatile and are up on a year-over-year basis. The CPI increased 0.2% and kept the monthly index up 2.9% over the past year. Energy prices were a drag on the headline number, dropping 0.5% for the month. The indexes mean little change for monetary policy. The Fed is on track for two more increases this year, likely in September and December.

 

Next week will be busy on the economic calendar. Small business optimism, import and export prices, retail sales, industrial production, business inventories and housing market sentiment and starts will be featured. The economy appears to be on solid footing through 2019. The benchmark revisions showed the consumer in a much improved position, with a strong savings rate. Growth will be fueled by the massive fiscal stimulus and lower taxes and lower inventories for the next few quarters. Gradually though, the fiscal sugar will wear off. 2020 looks like a pivotal year. The stimulus will wear off and the impacts of higher rates and Trump’s trade policies will play havoc with the economy’s momentum. The economy will slow in 2020, with a dangerous probability that it may fall into recession.

Latest Data

The U.S. Economy:

Producer prices were unchanged in July after rising 0.3% in June and 0.5% in May. Final demand goods prices rose 0.1%, matching the gain in June. Final demand services edged down 0.1%, the first decline since December. On a year-ago basis, the PPI was up 3.2%, the third consecutive increase north of 3%. The PPI for goods was up 4.4% on a year ago basis, compared to 3.1% in May and 1.9% in June 2017.

 

The CPI rose 0.2% in July, following a 0.1% rise in June and a 0.2% increase in May. The trend in food prices remains tame, rising 0.1% and the energy index fell 0.5%. The core index also increased 0.2%. On a year ago basis, the CPI was up 2.9% and the core 2.3%. Inflation is gradually rising and the Fed has signaled a “green-light” for September. Fundamentals are supportive for inflation and the tariffs so far-including washing machines, solar panels, steel-aluminum and the $34 billion on Chinese goods-are expected to boost both the core CPI and PCE deflators by 1 basis point. However, the inflationary trend will increase if the administration follows through with the proposed $400 billion in tariffs with China along with the tariffs on automobiles, estimated to boost core inflation by 10 to 20 basis points. The Fed will keep on track with two more rate increases this year and stay on board for two next year. The challenge will come in 2020 when the economy slows and the Fed will see if the track they have been following too steep.

Important Data Releases This Week

A plummeting Turkish lira sent ripples through global equities and emerging markets on Friday, as fears of a wider fallout sent investors heading for the cover of safe assets such as the yen and U.S. government bonds. The lira fell as much as 13% against the dollar, the worst day since Turley’s financial crisis of 2001. The currency is down more than 35% this year, its losses accelerating as the dollar jumped to 13-month highs. This spread fear on a impact on other economies and markets. The European Central Bank was quoted in saying it was concerned about European banks’ exposure to Turkey. The European Stoxx 600 fell 0.7% on Friday. The MSCI All-Country World Index was down 0.6% for the day.

 

Wall Street fell slightly for the day in a week of good earnings but turbulent international news. Geopolitical tensions between the U.S. and other countries set the tone for the markets this week. Part of the lira’s fall was triggered by a diplomatic row with Washington. Earlier in the week, China responded to the Trump administration’s latest trade war volley with additional tariffs of its own. The ruble hit a two-year low after the U.S announced new sanctions over a nerve agent attack in the U.K. Global markets did get a little boost as Japan and the U.K. revealed a little better economic growth than expected. Japan’s GDP grew at a 1.9% annualized pace in the second quarter, more than offsetting the 0.9% decline in the first quarter. Britain’s GDP grew 1.5% annualized better than the 0.9% rise in Q1. Consumption rebounded in Britain, but business investment remains weak and is being affected by the uncertainty of Brexit.

 

Last week was light on economic data and was focused on inflation. Prices continue to gradually rise and evidence of a strong labor market continue to mount. Producer prices fell short of expectations and were unchanged in July, but the details still show prices trending higher. The trade services index fell 0.8%, food declined 0.1% and energy retreated 0.5%, but these sectors are volatile and are up on a year-over-year basis. The CPI increased 0.2% and kept the monthly index up 2.9% over the past year. Energy prices were a drag on the headline number, dropping 0.5% for the month. The indexes mean little change for monetary policy. The Fed is on track for two more increases this year, likely in September and December.

 

Next week will be busy on the economic calendar. Small business optimism, import and export prices, retail sales, industrial production, business inventories and housing market sentiment and starts will be featured. The economy appears to be on solid footing through 2019. The benchmark revisions showed the consumer in a much improved position, with a strong savings rate. Growth will be fueled by the massive fiscal stimulus and lower taxes and lower inventories for the next few quarters. Gradually though, the fiscal sugar will wear off. 2020 looks like a pivotal year. The stimulus will wear off and the impacts of higher rates and Trump’s trade policies will play havoc with the economy’s momentum. The economy will slow in 2020, with a dangerous probability that it may fall into recession.


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