U.S. Tariffs Could Provoke a Trade War

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 hit a one-week high on Friday before easing a touch, before caution ahead of jobs data in the U.S. outweighed a potential breakthrough in nuclear tensions over the Korean peninsula. The U.S. pressing ahead on steel and aluminum imports on Thursday did not seem to rattle investors as much as last week. The MSCI All-Country World Index, which tracks shares in 47 countries, was up 0.1% on Friday and set for a weekly gain of almost 2%. Gains came largely from Asia, which recorded sharp rallies after U.S. President Trump said he was prepared to meet North Korea’s Kim Jong Un, potentially making a major breakthrough in nuclear tensions between the two countries.


The dollar weakened as investors considered the implications of personal turmoil continuing in the Trump administration. European stocks fluctuated and Asian shares drifted lower and U.S. stocks traded without much conviction. The Stoxx Europe 600 fell less than 0.5% on Friday. The MSVI World Index of developed countries decreased less than 0.5% to the lowest level in a week. Investors continue to be wary by concerns that U.S. tariffs could provoke a trade war. The news that U.S. Special Counsel Robert Mueller had issued a subpoena for documents, including some concerning Russia, related to President Donald Trump’s businesses made investors wary. The developments, together with a report earlier this week that Trump wants to impose tariffs of $60 billion on Chinese imports, cemented investor’s worries that the administration is turning towards protectionism.


On trade, there was some news this week. The German magazine Der Spiegel reported that the U.S. has set conditions for scrapping its planned punitive tariffs and steel and aluminum, including capping U.S.-bound exports of the metals at 2017 levels. The European Union has been pushing for talks to avert a trade war. U.S. Commerce Secretary Wilber Ross and European officials will meet in the upcoming week for talks to resolve the deepening dispute over trade.

Latest Data

The U.S. Economy:

The ISM non-manufacturing index slipped from 59.9 in January to 59.5 in February. Despite the decline, the index remains elevated and above the fourth quarter average of 57.7. Details were mixed, as new orders increased from 62.7 to 64.8 and business activity rose from 59.8 to 62.8. Employment fell from 61.6 to 55.0 and supplier deliveries were unchanged at 55.5. Inventories rose from 49 to 53.3, but inventory sentiment remained at 61, a reading that suggests inventories are too high. A respondent from construction noted that lumber related costs continue to increase and supply is starting to be a problem. The tariff on steel will hurt construction later this year.


The NFIB small business optimism index increased from 106.9 in January to 1076 in February. The index is at its highest level since the 1980s. Detail were upbeat. The expectations for the economy to improve rose from 41% to 43%. Expectations were likely supported by the tax legislation and increased government spending laws. A net 18% plan to increase employment, down from 20% in January. 32% said now is a good time to expand business, unchanged from January. The net percentage of respondents that plan on raising worker pay three to six months from now is at a cyclical high. The uncertainty index increased from 78 to 81. Uncertainty over trade and tariffs and growing international trade tensions is raising the level of uncertainty.


Growth in consumer prices moderated in February. The CPI rose 0.2%, following an energy driven 0.5% rise in January. Food prices were unchanged, while energy prices only increased 0.1%. Excluding food and energy, the core CPI increased 0.2%, down from the 0.3% increase in January. On a year-ago basis, the headline CPI was up 2.3%, while the core was up 1.9%. February’s increase in the CPI should calm financial market’s concerns that they may have over-estimated inflation, but price pressures do remain alive. The report should keep the Fed on track for three interest rate increases this year. If inflation does gain strength, another increase could be easily justified.


Producer prices for final demand rose 0.2% in February, following a 0.4% increase in January. Goods prices slid 0.1%, due to a 0.4% decline in foods prices and a 0.5% drop in final demand energy prices. Excluding food and energy, final demand goods PPI rose 0.2% for the third consecutive month. The Fed will move in March, but is is still unknown whether they will move three, or four times this year. One reason the Fed may be more proactive is because of the fiscal stimulus this year. Fed Governor Lael  Brainard estimated the recently passed federal budget will add 0.4 of a percentage point to real GDP, putting the Feds forecast close to 3%, well above the 1.8% potential growth estimate. Stronger GDP growth will lower the unemployment rate. Brainard pointed out that we could see a mild, temporary overshoot of the inflation target in the near term. The temporary nature of slightly higher inflation may not be a big obstacle to the Fed.


Stockpile growth is gathering steam. Business inventories increased 0.6% in both January and December. Wholesales took the lead in January, with inventories rising 0.8%, followed by retail climbing 0.7% and manufacturers’ stocks increasing 0.3%. Motor vehicles and parts stocks bounced back with a 1.7% increase. Excluding the auto sector, retail stocks logged only a 0.1% gain. Business sales retreated 0.2%, the first decline since May. The I/S ration increased from 1.33 to 1.34. Inventory build should proceed at a decent pace as the economy strengthens. The weaker pace of retail sales in general does raise some concerns, but with the fiscal stimulus, plus increasing wages and tax cuts, the consumer should bounce back fairly soon.


Retail sales disappointed in February, but delayed tax refunds may have offset lower taxes. Retail sales slipped 0.1% and that was the third consecutive month, sales slipped at that level. Excluding autos, sales rose 0.2% and excluding autos and gasoline, sales rose 0.3%. Sales at gasoline stations fell 1.2% and motor vehicles and parts sales fell 0.9%. Favorable weather boosted sales at building supply stores by 1.9%. Non-store retailers saw a 1.0% advance. Sales in February were up 4.0% year-over-year. If we assume the same tax pattern, March should see some $12-15 billion in extra spending. The hit from delayed tax refunds likely trumped the lower tax rates. Sales in the first quarter still has problems with seasonality. With a lot of fiscal stimulus in the pipeline, the consumer should bounce back starting in the second quarter.


Residential construction disappointed in February. Housing starts fell 7% below the revised January totals are were 4% below February 2017 levels. Starts equaled a seasonal adjusted annual pace pf 1.236 million units in February. The decline was led by the volatile multi-family sector, which fell 26.1% to 334,000 units. Single-family starts rose 2.9% to 902,000 units. Permits fell 5.7% to 1.298 million units. Single-family permits fell 0.6% and the multifamily sector fell 14.8%. Completions increased as the industry is working off its backlogs Total completions were up 7.8% m/m and up 13.6% y/y. Although the February starts number was disappointing after a fairly good January, the decline was in the multi-family sector, which suggests that starts fell because of supply constraints rather than falling demand. The multi-family sector has been backlogged for some time now with total units under construction exceeding 20 months of completions, much higher than the historical average. The single-family sector seems to be gaining ground steadily. We expect housing to continue to slowly gain ground. The job market and rising wages will support activity, but interest rates are rising and that will dampen demand.


Industrial production surprised on the upside, rising 1.1% in February. January was revised downwards, suggesting that there was more weather-related constraints on production than previously projected. Utility output fell 4.7%, but mining staged a 4.3% bounce back. Manufacturing rose 1.2%, erasing the 0.3% decline in January and was up 2.5% y/y. Non-auto production was up 1% in February and was up 2.5% y/y. Production of machinery rose 0.5% and output of business equipment advanced 1%. The increase in output in February lowered the gap between actual output and the survey results. The outlook for sentiment has been high. The tax overhaul is good for companies, though the extent in which they will use the additional funds to invest in equipment is unclear. Companies are facing some capacity constraints, which should spur investment towards machinery. The outlook for the industrial economy is positive and global demand bodes well for U.S. production. However, trade barriers are a threat to exports and we may be importing inflations as the price of imports increases.


The OECD composite leading indicator held steady at 100.1 in January, but improved from the 99.9 average from last year. The gauge for the euro-area held at 100.6 for the fourth consecutive month. Germany shed 0.1 of a point from a month earlier, but that is not a cause for alarm. The U.S. was stable at 99.9. The index for Russia printed a solid 101.5, up from 101.3 the previous month. The index suggests that a downturn is unlikely for the global economy. Global stability and more entrenched GDP growth is supporting the upbeat reading of the index. The U.S. tax cuts are adding to the euphoria. Growth is being sustained in the euro-zone. The fact that all the major global economies are expanding in unison for the first time in a decade is a positive force for global growth.


The global economy will see its strongest growth in seven years in 2018 thanks to a rebound in trade and investment. The Organization also warned that a trade war could threaten the improved outlook. Updating its outlook for the G20 countries, the OECD raised its global forecast for both 2018 and 2019 to 3.9%, the highest since 2011. The raised forecast was due in part to expectations that the U.S. tax cut would boost the world’s biggest economy. Rebounding global growth would keep global trade growth at about 5% this year. The OECD forecast for the U.S. is 2.9% this year and 2.8% for 2019, with the tax cuts adding between 0.5 to 0.75 percentage points to the outlook in both years. Stronger growth in France and Germany boosted the outlook for the euro-zone to 2.3% this year and 2.1% next year.

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 CPI index will be released on Tuesday, March 13 at 8:30 AM EDT. Inflation gained ground in January, with the headline CPI rising by a more than expected 0.5% rate. Core inflation also rose stronger than trend, at a 0.3% rate. We expect the headline reading to rise 0.3% and the core 0.2% in February, enough to allow the Fed to proceed with plans to raise rates this month.


February retail sales will be released on Wednesday, March 14 at 8:30 AM EDT. Retail sales fell 0.3% in January, but were unchanged excluding autos. Sales are projected to advance in February and it will be interesting to see if the new withholding schedules had any impact on spending. Auto sales retreated only slightly in February, but utilities might be a drag as the weather was less severe.


January business inventories will be released Wednesday, March 14 on at 10:00 AM EDT. Business inventory growth has been solid, rising 0.4% the last two months. The return to slightly lower trend will continue in January, with stocks rising a projected 0.2%. The I/S ratio remained at 1.33 and is likely to remain unchanged in January.


February PPI index will be released on Wednesday, March 14 at 8:30 AM EDT. The PPI rose 0.4% in January, pushed up by a 0.7% rise in goods prices, mainly driven by energy. We expect a more trend like 0.3% rise in February.


February industrial production will be released on Friday, March 15 at 8:30 AM EDT. Industrial production rose 0.9% in January, but most of the lift came from a 5.6% jump in utility output and a 1.6% rise in mining production. Manufacturing only rose 0.1%. We expect total IP to only rise 0.2% in February, as the weather was less severe. There has been a noted difference between the survey data and actual production, with the survey data more optimistic. We still expect the industrial sector to be positive, with the manufacturing segment up 0.2% in February.


February housing starts will be released on Friday, March 15 at 10:00 AM EDT. Housing starts jumped 9.7% in January to an annual rate of 1.326 million. Most of the strength was in the multi-family sector. Permits did rise 7.4%. The single-family sector was permit activity fell but remained at a decent level. The outlook for housing is mixed, The economy is improving, but so are mortgage rates. After the big January jump, some fall-off in activity can be expected, but the trend is still moving slowly upwards.

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