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.
Oil prices rose over $2 a barrel and gold and other safe-haven assets jumped on Friday, as the U.S. killing of a top Iranian commander in an air strike in Iraq ratcheted up tensions in the Middle East. Investors were clearly spooked. The death of Iranian Major General Qassem Soleimani, head of the elite Quds Force, prompted Iranian Supreme Leader Ayatollah Ali Khamenei to seek revenge. Europe’s stock market fell 0.5% in rarely trading. Brent futures jumped nearly $3 to $69.16 a barrel, the highest since September, before easing to $68.42. In September, U.S. officials blamed Iran for a missile attack on an oil installation of Saudi Aramco, the state energy giant and world’s largest oil exporter.
Oil prices surged and global stocks fell as fears of increased strife in the Middle East sent investors to safe-haven assets after the killing of an Iranian General. Brent oil moved up 4.5% to $69.20 a barrel on Friday, the highest price since Saudi crude oil facilities were attacked in September. MSCI’s broadest range of stocks declined 0.52% and the emerging market index lost 0.40%. Europe’s broad STOX 600 fell as much as 1% on Friday, but pared losses to 0.33% by day’s end. The Dow Jones Industrial Average fell 233.92 points, or 0.81% to 28,634.88. The S&P lost 23 points, or 0.71% to 3,234.85. Tensions will remain high until more information surfaces on Iran’s response.
There was little economic data on last week’s holiday shortened schedule. Markets fell on the news of the airstrike on a senior defense official in the Iranian government. Markets were also pressured from the ISM manufacturing report, with the index falling to the lowest level since 2009. Markets have been on a roll lately since the completion of the Phase 1 trade deal, which should be signed in mid-January. While the deal provides some lift to confidence, approximately 70% of imports from China are still exposed to tariffs. This makes a resurgence of business activity unlikely. Phase 1 is a step in the right direction but to manufacturers still exposed to tariffs and those looking for an end to trade tensions, the situation remains problematic.
The fall in the manufacturing ISM index suggests the downward momentum in the manufacturing sector has not abated. A continued de-escalation in trade tensions will be a help. The suspension of production of the 737 MAX is another headwind for production. Despite manufacturing’s woes, the consumer sector looks stronger. Consumer confidence dipped in December but that survey by the Conference Board likely did not capture the announcement of the trade deal. Low inflation and a healthy job market should bolster spending in the new year. Trade tensions have seemingly receded. However, surging oil prices and geopolitical risks do represent a risk for the economy, if the oil price surge is sustained. Moody’s projects a 5% surge in oil prices reduces GDP growth by 0.1% this year and a 25% increase would reduce growth by 0.4%. However, the impact of higher prices does not have the same impact as in the past, given the increase in domestic production.
Next week, we get a peek at international trade, the ISM non-manufacturing index, factory orders and employment statistics.
The U.S. Economy:
Wholesale inventories were unchanged in November and there was a downward revision to October. Wholesale inventories were unchanged in both November and October. This suggests a lighter trend in inventory accumulation than many analysts projected for the fourth quarter. Although inventories will be a drag on fourth quarter growth, it set up for a better early 2020. There is a glitch as Boeing has suspended production of the 737 MAX, which will reduce inventories. Inventory build may boost output, but it may take more time to get there. Industrial production may take a hit in January because of the Boeing decision. Production of aircraft and parts will drop 20% in January.
The goods deficit narrowed in November, suggesting net exports will be positive for fourth quarter growth. The goods deficit came in at $63.2 billion in November, down from $66.8 billion in October. Nominal goods exports rose 0.7% in November, after falling 0.5% in October. Imports dropped 1.3% in November, after a 2.2% decline in October. Exports should add to fourth quarter growth. The UAW strike caused a big swing in automotive imports and exports. After the strike was ended, both imports and exports of autos jumped. Boeing’s troubles with then 737 MAX has caused big changes in the nondefense aircraft sector. Nondefense aircraft orders are below levels of the last couple of years. Orders jumped 287% in the third quarter at an annualized rate, but fell 90.7% in the second quarter. Shipments dropped 37.9% in the third quarter, the third consecutive decline. Stopping production in January will affect inventory build and exports.
Construction spending rose 0.6% in November, following a 0.1% increase in October. The increase was largely driven by residential construction, which rose 1.9%, following a 0.7% advance in October. Of the components of residential construction spending, single-family construction spending rose 1.2% m/m, but was down 0.3% y/y. The multi-family sector was unchanged in November and was down 3.9% year-over-year. Nonresidential construction spending declined 1.2% in November, seeing only one increase over the last six months. Public construction increased 0.9% in November and rose 0.1% in October. Construction spending ended the year on a decent note, with private residential leading the way. Private nonresidential construction spending was the lone soft spot as manufacturing, lodging and educational structure spending declined in November. Public construction spending has been strong in all areas except healthcare. Construction spending will be decent in 2020 but an infrastructure package is unlikely in an election year.
The ISM manufacturing index fell further in December to 47.2 from 38.1 in November. Details were generally weaker than in November. Production dropped from 49.1 to 43.2, the weakest since 2009. New orders slipped from 47.2 to 46.8. Of 18 industries, only three reported growth. Inventories rose from 45.5 to 46.5. Four industries reported growth in stocks, while 11 reported a decline. The employment index dropped from 46.6 to 45.1. Only two out f 18 industries reported growth in employment and 11 reported a decline. The supplier delivery index came in at 54.6, up from 52 in November. The prices paid index increased from 46.7 to 51.7. New export orders fell from 47.9 to 47.3. New import orders increased from 48.3 to 48.8. The manufacturing index is at the lowest level since 2009. There is no evidence the trade agreement has not boosted sentiment. Hard data on production shows a better pattern of stabilization on production. The aerospace sector has been hit by the shutdown by Boeing of production of the 737 Max. Manufacturing looks weak going into 2020.
The state of manufacturing continued to improve in December as the Caixin manufacturing index slipped to 51.5 in December, down from 51.8 in November, but still a sign of stabilization. New order growth did ease to a three-month low. Analysts said that new domestic orders saw improvement but export orders only rose slightly. Production picked up in December and helped stabilize the employment market. Input deliveries, order backlogs and inventories ass saw positive changes.
Having reached a three-month high in November, the manufacturing PMI fell from 46.9 in November to 46.3, the eleventh month the index has been below the 50 mark. Germany was again the weakest-performing country. Growth was solid in Greece and France saw a marginal improvement. Both production and new orders continued to deteriorate markedly in December. Output fell at a rate that matched September’s 81-month record. There was the weakest reduction in new export sales since the start of the year. Backlogs fell for a sixteenth consecutive month. Job losses were the sharpest since the survey started in 2013. Job shedding was centered in Germany. Greece saw strong employment growth. France was the only other country to see employment losses.
Important Data Releases This Week
September retail sales will be released on Wednesday, October 16 at 8:30 AM EDT. After posting a soft August except for auto sales, we are looking for a 0.3% in sales for September. Sales excluding autos and gasoline are also projected to rise 0.3%.
The November international trade report will be released on Tuesday, January 11 at 8:30 AM. The deficit is expected to narrow to $43.6 billion in November, down from October’s $47.2 billion. The outlook for trade remains weak because the global economy is still ailing. A marginal improvement is expected over the year.
The December ISM non-manufacturing index will be released on Tuesday, January 11 at 10:00 AM. We expect the index to advance to 54.6 in December, up from November’s 53.9 reading. The service sector is doing fine but there are questions abut a slower consumer spending trend in 2020.
Factory orders will be released on Tuesday, January 11 at 10:00 AM. Following the 0.3% advance in October, we project factory orders to decline 0.8% for November.
Payroll employment will be released on Friday, January 10 at 8:30 AM. Payrolls should track near 155,00 for December, down from the strong 266,000 addition for November. The unemployment rate will be unchanged at 3.5%.