The Deficit-Fueled Stimulus by the Trump Administration is Just Starting to Work Through the 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.


Coffee and Economic Review

World stocks steadied and the dollar resumed its rise on Friday after a wobble caused by U.S. President Donald Trump’s decision to cancel a summit with North Korea. Political risk did put Italian markets for a heavy weekly loss. Markets were soothed somewhat by a measured response by North Korea to Trump’s announcement. The market’s appetite for risk was kept in check over Italy’s plan to appoint a politically inexperienced euro-skeptic as economy minister. The MSCI’s All-Country Index was flat on Friday after three days of losses and was on track for a second week in the red. European shares opened firmer on Friday, but looked set for the first loss since March. Italy’s shares fell 0.3% on Friday and were set for a third week of losses. In Europe, signs were growing that the recovery was slowing.


Saudi Arabia and Russia are discussing raising OPEC and non-OPEC output by around 1 million barrels a day, easing 17 months of supply curbs amid concerns the price rally has gone too far. The Organization of Petroleum Exporting Companies and non-OPEC producers led by Russia have agreed to curb output by about 1.8 million barrels a day until the end of 2018, but the inventory overhang is now near OPEC’s target. Falling output from Venezuela and Trump’s actions to withhold Iranian oil have raised concerns about supplies. The price of Brent crude broke the $80 a barrel recently, up nearly 20% in 2018 but fell on Friday.


Trade tensions eased this week between the U.S. and China as the U.S. agreed to not raise tariffs on up to $150 billion worth of Chinese goods and China agreed to ramp up purchases of U.S. agriculture and energy products. Although it appeared that a trade war was averted, subsequent statements by President Trump on imports of cars and trucks have renewed the level of uncertainty on trade policy. The threatened tariffs on the automobile industry have raised fears in China, as well as key U.S. allies such as Mexico, Canada, Japan and Germany. Other statements by Trump have heightened fears that the tariffs with China might still be in play. U.S. Commerce Secretary Wilbur Ross will visit China early next month for another round of discussions on the ongoing trade frictions between the two countries.


The S&P and the Dow eased on Friday after a steep drop in oil prices pressured energy stocks in a week where news from North Korea and U.S.-China trade talks dominated headlines. The Dow fell 58.67 points, or 0.2% to 24,753.09, but did finish the week up 0.2%. The S&P lost 6.43 points, or 0.24 percent, but gained 0.3% for the week. Stocks haven’t moved much this year. The S&P has traded within a 2% band since last year’s closing for 52 days this year, or 55% of the time. Over the last two decades, such a small range has persisted only twice before, in 2014 and 2015. Growing expectations of increased oil supply hit crude prices on Friday. Brent crude fell by $2.35, or 3% to settle in at $76.44 a barrel after Saudi Arabia and Russia said they were ready to ease supply curbs that have pushed oil prices to the highest since 2014.


Following Mr. Trump’s announcement that a meeting with North Korea might take place a day after he cancelled the historic summit, investors are increasingly dismissing Washington. Headlines from Washington either don’t affect markets and Washington has a hard time following through with what they say. This is moving investors to increasingly ignore Washington. In the big picture, earnings have been great, economic data has been solid but not spectacular enough to speed the Fed up and optimism is rising, even if it has not been reflected in stock market gains.


Last week, new and existing home sales each declined in April. New home sales are up 8.4% year-to-date, as demand remains solid. Rising home prices and higher mortgage rates will test resolve, however. Durable goods orders fell, a greater than expected 1.7%, on weakness in aircraft orders. Core capital goods orders rose 1%. Investment in equipment has been modest, slowing in the first quarter after double-digit growth in the second half of 2017. Investment in equipment has been somewhat disappointing after the passage of the Trump administration’s $1.5 trillion tax package. The uncertainty of Trump’s trade policy has brought many businesses future investment plans to a standstill because of the tariffs, or proposed tariffs. Investment is proceeding modestly, but not at nearly the rate expected by the big tax cuts.


The economic calendar is full next week. The focus will be on employment, but there will be data on personal income and spending, the GDP deflator, pending home sales, construction spending, the ISM manufacturing index, vehicle sales and consumer confidence. Also, the second estimate of GDP for the first quarter will be released. The economy is doing fine. Growth in the second quarter will top the first, coming in near 3%. The deficit-fueled stimulus by the Trump administration is just starting to work through the economy. Growth looks fairly strong through 2019. Eventually, the stimulus will fade and the economy will revert back to its long-term growth trend of between 1.5% and 1.75%. At that point we will see if the Fed went too far. Right now, the sailing is clear, but on the horizon, dark clouds are starting to gather.

Latest Data

The U.S. Economy:

The pace of the economy inched upward in April. The Chicago Fed National Activity Index ticked up to 0.34 in April from 0.32 in March. Two of the broad categories that make up the index increased from the prior month and three made positive contributions to the index. The three-month moving average rose to 0.46 from 0.23 in March. The production-related indicators rose to 0.27 in April from 0.19 the previous month. Manufacturing rose 0.5% in April after moving sideways in March. Employment-related indicators edged up to 0.1 from 0.04 in March. The personal-consumption and housing indicator fell to 0.005, compared to 0.02 the previous month. The April reading marked the fifth positive reading in six months. The month-to-month index can be volatile, but the trend, captured by the three-month index, remains in positive territory, a good sign for the U.S. economy.


New home sales came in slightly below expectations in April. Sales fell 1.5% to an annual rate of 662, 000, up 11.6% from a year earlier level. The number of new homes for sale fell to 300,000, but is still 12.4% higher than a year ago. The inventory-to-sales ratio was 5.4 months in April, up from 5.3 months in March and the same as in March 2017. Growth rates of new homes are volatile on a month-to-month basis because of the smaller number of sales in the existing home market. The I/S ratio has been above the 5.0 months of sales for five months, a healthy rate and not as tight as existing home sales. Despite rising interest rates and the new tax legislation that makes buying a home more difficult to finance, full employment and rising wages will keep demand steady in the short-term. Overall, the sales outlook for single-family homes and new home construction remains positive.


Existing home sales declined in April, but remained near their cycle high reached in November. Sales decreased 2.5% to an annual pace of 5.46 million units, down 1.4% from April 2017. The monthly swing was almost entirely due to a 3% drop in single-family sales. Co-op sales actually rose 1.6% in April. Inventory is keeping up with sales despite keeping historically tight. Listings totaled 1.59 million in April, up 10.4% from March, but still down 6.5% from a year earlier. The inventory-to-sales ratio rose to 3.9 months, up 0.4 from March and the highest level since October 2017. Even so, the market remains tight and the median home price is still up 5.3% y/y. The market is showing some up-side, as listings are no longer declining. Sales should track higher in coming months because of a tighter labor market and rising incomes. Still, rising mortgage rates and changes in the tax code will present headwinds to market activity.


New orders for durable goods lost ground in April, falling 1.7%. Details were brighter than the headline number. The change in April was largely driven by a downturn in orders for civilian aircraft. Excluding transportation, orders rose 0.95 and are up 7.9% from a year earlier. Capital goods orders decreased 5.7%, but were up 13.9% on a year-ago basis. Motor vehicle and parts orders gained 1.8%. Core capital goods orders increased 1.0%, up 5.9% from a year earlier. Shipments did fall 0.1%, but the trend remains healthy. Manufacturing is doing well and the fall I n the topline number covers up the fact that business investment in equipment is trending upwards. Factory optimism is decent but trade is making many executives uneasy. Interest rates are rising and borrowing is becoming more expensive. Trade aside, the domestic and global economies are accelerating and demand is picking up steam.


The euro-zone’s economic growth slowed more sharply than expected in May, according to the latest PMI report. The Euro-Zone Composite Flash PMI fell to an 18-month low of 54.1 in May, down from April’s 55.1 reading. While still suggesting expansion, growth slowed to a 20-month low in Germany and the lowest reading in a year-and-a-half in France. French unemployment also rose in the first three months of 2018, confounding projections of a decline by many analysts. Having outpaced its peers in 2017, expanding at a record pace at the start of the year, euro-zone growth has steadily weakened. Forward-looking indicators in the PMI have also weakened, suggesting no imminent bounce-back. The PMI reading points to Q2 growth of 0.4%, weaker than the 0.6% prediction by the April Reuter’s poll. It was also a slow month for manufacturing. The euro-zone’s manufacturing PMI fell to 55.5 from 56.2 in March, a 15-month low.

Important Data Releases This Week

GDP (first quarter-2018-second estimate) will be released on Wednesday, May 30 at 8:30 AM EDT. We project that real GDP will be revised slightly lower from 2.3% to 2.2%. The contribution from inventory growth may be pulled back and consumer spending is likely to see a modest upgrade.


April International trade in goods will be released on Wednesday, May 30 at 8:30 AM EDT. We look for the goods deficit to widen to $71.0 billion from March’s $68.3 billion. April’s report will offer the first indications on second quarter net exports and possible effects on the tariffs and the deficit with China.


April personal income and spending will be released on Thursday, May 31 at 8:30 AM EDT. We expect personal income to rise 0.3% in April, the same as in the previous two months. Nominal spending will rise 0.4%, with little contribution from vehicle sales. The core GDP deflator is expected to rise 0.1%, bringing year-over-year growth to 1.8%.


April pending home sales will be released on Wednesday, May 30 at 10:00 AM EDT. Pending home sales are expected to rise 0.7% in April after the 0.4% rise in March. The resale market is showing strength though the longer-term trend has been flat.


May payroll employment will be released on Friday, June 1 at 8:300 AM EST. Following a solid April with 164,000 jobs were created, an even brighter addition of 185,000 can be expected for May. We expect wages to grow 0.2% bringing the year-over-year total to 2.7%. Average hours will be unchanged.


May ISM manufacturing index will be released on Friday, June 1 at 10:00 AM EST. The ISM manufacturing index is staying elevated and increasing slightly from 57.3 in April to 58.4 in May. We expect another month for strong orders, higher input costs and delivery delays are up consistent with capacity stress.


April construction spending will be released on Friday, June 1 at 10:00 AM EST. Construction spending is expected to post a solid 0.8% increase in April after the weak 1.7% decrease in March. Spending on single-family homes will drive the increase and the nonresidential sector will be steady.


May vehicle sales will be released on Friday, June 1 at 4:00 PM EST. April vehicle sales are likely to see a slight reduction to 17.1 million from April’s 17.2 million pace.

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