Many Economic Indicators are Likely to be Flashing Red Warning Signs

By | October 28, 2019

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

Geopolitical tensions, muted economic data and mixed earnings weighed on global stocks Friday. The European stock markets opened broadly softer with the STOXX 600, slipping 0.3%. Lackluster data did little to quell concern about the global economy. Germany’s Ifo index came in broadly unchanged while the mood among consumers in the region’s biggest economy fell to the lowest level in three years. Many investors are waiting for the Fed meeting next week. A Reuters poll of economists think a steeper decline in global growth is likely than a synchronized recovery, despite central bank easing. Boris Johnson said on Thursday for the first time he would not meet his “do or die” deadline to leave the European Union next week.

U.S. stocks rose on Friday after Washington said it was close to finalizing parts of a trade deal with Beijing and a strong quarterly report from Intel that boosted investor confidence. During the session, the S&P surpassed its closing record of 3,025.86 on July 26 and ended at 3,022.55. U.S. stocks rose after the U.S. Trade Representative said deputy talks would continue and President Trump said that China wanted “to make a deal badly.” The Dow Jones Industrial Average rose 152.53 points, or 0.57% to 26,959.06. For the week, the S&P rose 1.2% and the Dow gained 0.7%. Washington and Beijing are working on the text for a “Phase 1” trade agreement. China’s Commerce Department said that both sides have confirmed that the United States will import Chinese-made cooked poultry and catfish products, while China will lift a ban on U.S. poultry. The report is good news as it dials back trade tensions, but large differences remain on other issues such as intellectual property and ad trade enforcement.

Sales of existing homes fell 2.5% to 5.38 million in September, but sales and prices were still up enough in the quarter to solidify GDP growth. Sales of new homes fell 0.7% to a 701,000 annual pace in September from a revised 706,000 pace in August. With mortgage rates down more than half a percent from last year, housing is becoming a more positive force. Overall, durable goods orders fell 1.1% in September, reflecting weaker demand for aircraft and automobiles. The strike by the UAW had a lot to do with the 1.6% drop in orders for autos and parts. Core capital goods orders fell 0.5%, following a 0.6% fall in August. The weakness in business investment is a concern. Even with a partial trade deal, there is not likely to be a quick turnaround of the global economy. Most economists polled by Reuters project the global economy will get worse over the next few months, despite central banks actions.

The next few weeks will be challenging for the U.S. economy. Many economic indicators are likely to be flashing red warning signs, reflecting the overall slower growth of the economy and the hit to production by the UAW strike and Boeing’s problems with the 737 MAX. Data for Q3 GDP growth will be reported next week. Recent data suggest a weak business investment sector that is not expected to improve in Q4. We think that GDP growth for the third quarter was weak at 1.7% and down from the 2.0% increase in the second quarter. Consumption is still in the driver’s seat, though to rise 2.6%, but down from the 4.6% increase in Q2. The big question for the economy is will the consumer stay solid, despite a slowing economy and weaker job growth? Further moderation in consumer spending is likely in 2020 and with an economy projected to grow below potential, that could spell real trouble.

Next week will be busy on the economic calendar. We get a look at international trade in goods, pending home sales, the first release of Q3 GDP data, personal income and outlays, employment, the ISM manufacturing index, construction spending and a FMOC meeting. Data will likely be mixed but we will have a clearer vision n how 2019 will end and where we are heading for in 2020.

Latest Data

The U.S. Economy:

Existing home sales ticked lower in September, detracting from the upward trend exhibited earlier in the year. Sales fell 2.2% to an annual pace of 5.38 million. The decline was broad based across census regions and the Midwest had the biggest losses. Listings held steady in September, indicative of a tight market and pushed up year-over-year price appreciation. September sales were split, with single family home sales declining 2.6% to a 4.78 million pace. Condo/co-op sales totaled 600,000, up 1.7% from August and up 3.4% year-over-year. Listings were the same as in August, with an inventory-to-sales ratio of 4.3 month down 0.3 from a year ago. The shortage of listings suggest that existing home sales probably won’t gain much ground the next few months. The labor market is getting tighter supporting the market.

New single-family home sales inched down in September, reversing the previous month’s gain. Although sales fell 0.7% month-to-month, they were up 15.5% from a year earlier. The regional scores were uneven as all regions declined except the Midwest. Sales equaled an annualized rate of 701,000 in September. Inventories failed to keep up with sales. New homes for sale at the end of September totaled 321,000, down 0.6% from the revised August total. The inventory-to-sales ratio held steady at 5.5 months of sales but down from the 2018 total of 6.4 months. The median sales price was $299,400, down 7.9% from the August figure and 8.8% from a year earlier. New home sales are volatile and large month-to-month sales changes are common. The sales pace and the retreat of the I/S ratio over the past year suggests a healthy industry. Lower mortgage rates are a plus and with a tight labor market ad rising incomes, sales should be healthy in the short-term.

U.S. manufacturing continues to struggle. Durable goods orders fell 1.1% in September, following a 0.3% increase in August. Transportation was behind a great deal of the September weakness. Excluding transportation, orders fell 0.3%. Vehicle and parts orders dropped 1.6%, largely because of a strike against GM by the United Auto Workers. New orders in the core capital goods area fell 0.5%, following a 0.6% decline in August. Fundamentals for business investment continue to decline, as the global economy slows down and trade policy creates great uncertainty. The strike against GM will hurt third quarter production but should rebound once the strike is settled. Business investment is a concern. Capital spending dropped for two consecutive quarters in 2015 and 2016 but that was because of oil. The situation is different now, with business leaders concerned about the slowing domestic and global economies, and trade. The outlook calls for a continued struggle for industrial sector for the next few quarters but not a collapse.

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 December international trade in goods will be released on Monday, October 28 at 8:30 AM. We see a slight widening of the trade deficit from $72.8 billion to $73.5 billion. Exports and imports were flat in August on both a monthly and yearly basis.

The September pending home index will be released on Tuesday, October 29 at 10:00 AM. The pending home index moved up 1.6% in August and is projected to decline 0.2% in September.

The first release of the third quarter GDP data will be released on Wednesday, October 30 at 8:30 AM. Getting a possible small boost from housing and the still solid consumer sector, real GDP is projected to have increased 1.7% in the third quarter, down from 2.0% in Q2. Consumer spending is seen slowing from the strong 4.6% increase in Q2 to 2.6%.

FMOC meeting announcement will be released on Wednesday, October 30 at 2:00 PM. A 25 basis-point rate cut is expected but far from unanimous call for the October policy meeting. They cited global slowing and trade tensions and the associated risks to manufacturing by cutting rates in August and may do so again. However, they stepped back from signaling further rate cuts and may just wait until more data flows by December.

The September personal income and outlays report will be released on Thursday, October 31 at 8:30 AM. Personal income rose 0.4% in August and we expect a 0.3% rise in September. Spending only increased 0.1% in August, but we do expect a slightly better 0.2% rise for September. The PCE deflator will keep on its weak trend by rising 0.1%.

The October employment report will be released on Friday, November 1 at 8:30 AM. August payrolls were weak at 136,000 and further slowing is expected in September. A projected rise of 93,000 is expected. Manufacturing payrolls will fall be 50,000, largely because of the strike. The unemployment rate will rise to 3.6%. Average hourly earnings will rise 0.2%, offsetting the unchanged reading from August. This will bring the yearly increase to 3.9%.

The October ISM manufacturing index will be released on November 1 at 10:00 AM. We expect the index to rise from the 47.8 reading in August to 49. The August report saw a sharp decline in new export orders.

The September construction spending report will be released on Friday, November 1 at 10:00 AM. Construction spending is expected to rise 0.2% in September after a 0.2% rise in August.


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About Steve Graham

Steve is one of the premier analysts in the transportation equipment industry. On a monthly basis Steve tracks and analyzes in detail the trailer and heavy-duty truck industry. Aside from following these two sectors he is also instrumental in helping our customers analyze the economy and its impact on transportation and transportation equipment.