2020 is an Election Year and Creates Additional Uncertainty

By | January 20, 2020

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 ReviewWall Street climbed to record highs on Friday, with major indexes turning in their strongest weekly gains since August, after strong U.S. housing data and signs of resilience in the Chinese economy raised hopes of a rebound in the global economy. Market sentiment brightened earlier in the week after the U.S. and China sealed a Phase One trade deal, pausing an 18-month tariff dispute that weighed on financial markets globally. Earlier in the week, Chinese GDP growth was unchanged at 6.0% year-over-year growth. Industrial output rose 6.9% y/y topping expectations and retail sales was steady at 8% y/y. Meantime, U.S. homebuilding surged to a 13-year high. Analysts expect earnings to drop 0.5% in the fourth quarter, but rise 5.8% in the first quarter, according to Refinitiv IBES data.
It was a good week for the economy. Housing starts surged 16.9% to a 1.61 million pace, the highest level since December 2006. Big jumps like this are not unusual for December. The seasonal adjustment factors are big and the weather was warm. Single-family starts jumped 11.2% to a 1.06 million pace, the highest since July 2007. Multi-family starts rose 29.8% to 553,000 units, a 33-year high. Permits were more subdued, falling 3.9% to a 1.416 million pace. Elsewhere, the NFIB small business survey dipped slightly to 102.7 in December, but small business owners are generally optimistic. The trade deal may boost sentiment going forward. We got some positive signs form the manufacturing sector. Total IP fell 0.3%, but that was entirely due to a drop in utility output because of warm weather. Manufacturing rose 0.2%, the second consecutive monthly rise. The factory sector is expected to stabilize as uncertainty is expected to recede because of the trade deal. A sort-term fall in output can be expected due to Boeing cancelling the 737 MAX.
The economy remains on track to increase near its potential 2% growth rate in 2020. The trade war reduced growth by about half a percent in 2019. Downside risks have receded but have not vanished because of the trade deal. 2020 is an election year and that alone creates additional uncertainty. The trade deal did not follow through on many issues and a reelection of Donald Trump could mean more tariffs and renewed trade protectionism. Electing a Democrat for President also creates risk of new taxes and a greater regulatory atmosphere. Still, the economy should continue to grow in 2020 and Fed policy will be on hold. There is a clear risk that the financial markets are oversold and a retreat could be disorderly Still, the expansion should still stay on its 2% track. Next week will be light on the economic calendar. We get a look at the Chicago Fed National index, existing home sales, leading economic indicators and Markit’s manufacturing and services index.

Latest Data

The U.S. Economy:

The NFIB small business index has bounced around a little but remains elevated for this cycle. The index fell from 104.7 in November to 102.7 in December. Seven components fell, while two improved and one was unchanged. The net percent of respondents planning to increase employment fell from 21% to 19%. Plans to raise compensation slipped but remain higher than the most of the second half of 2019. Plans to make capital expenditures fell from 30% to 28%. Expectations for the economy to improve the next six months increased from 13% to 16%. Finding qualified workers is still the biggest problem, with 23% noting this issue in December, identical to November. The index has dropped three out of the last five months, but the remains elevated. A key question is business investment. Uncertainty does reduce capital investment and better trade policy may help reduce uncertainty. However, few analysts expect business investment to come roaring back.
The producer price index rose 0.1% in December, after being unchanged in November Food prices fell 0.2% and energy prices increased 1.5%. Excluding food and energy, final demand goods prices rose 0.1% in December. Services have barely budged since last August. On a year ago basis, final demand PPI is up 1.3% and goods prices were up 1.1%. Core goods is up 0.7%. The CPI increased 0.2% in December, following a 0.3% rise in November. The core CPI rose 0.1% in December, following a 0.2% increase in November. On a year ago basis, the headline CPI is up 2.3% and the core is up 2.2%. Inflation remains low, even as the labor market is tightening. The weak global economy is keeping input prices subdued. In this environment, Fed policy remains on hold for 2020, although some analysts think another rate cut may be forthcoming.
Retail sales were strong in December n stark contrast to December 2018. Sales rose 0.3% in December, the third consecutive increase at that level. Growth was led by gasoline stations, which rose 2.8%. Sales excluding autos, rose 0.7% and excluding autos and gas were up 0.5%. Other growth leaders were apparel stores, building supply stores and other general merchandise stores. The only segment posting a decline was department stores. Growth was up a strong 5.8% from a year earlier, compared to 3.3% in November. The year-ago growth leader was non-store retailers, where sales were up an impressive 19%. Gasoline sales were up 11%. It was a good holiday season for retailers. Modest sales growth is projected going forward. Fundamentals are positive but are slowing. Stock market and housing price gains are more limited. Income growth is slowing as the job creation rate itself is slowing. This suggests modest gains going forward.
Business inventories paused in November. Inventories fell by 0.2% in November, after rising 0.1% in October. Manufacturer’s stocks rose 0.3%, retailers swooned 0.8% and wholesale stocks slipped 0.1%. On a positive note, business sales jumped 0.7%. The inventory-to-sales ratio did fell from 1.4 to 1.39. Among the categories, autos and parts inventories fell 1.8% in November. Demand for new autos is past the peak and we project slightly slower sales in 2020-21. Excluding autos, demand for other retail categories is up slightly. Demand is still shifting from brick & motor stores to e-commerce.
Residential construction improved in December. Housing starts increased 16.9% to an annual pace of 1.608 million in December and were up 40.8% above the December 2018 total. Single-family starts had a strong increase, improving 11.2% above November’s total, equaling an annual rate of 1.055 million. Single family starts were up 29.6% y/y. Multi-family starts rose 32% m/m to 553,000. Housing permits decreased 3.9% to a 1.416 million pace. Single-family permits fell 0.5% to 916,000, while the multi-family sector saw a 9.6% decline to 500,000. The December report was impressive in terms of starts and more down-to-earth for permits. Year earlier gains were impressive because December 2018 was the peak before the Fed started to cut rates. Rental and homeowner vacancy rates are near cyclical lows and interest rates are low favoring housing. The job market is tight, all factors that will support housing in 2020.
Industrial production fell 0.3%, following a 0.8% gain in November. Industrial production has fallen in three out of the last four months. Weather took a toll, as utility output fell 5.6%. Manufacturing rose 0.2%, following a 1.0% advance in November. For the fourth quarter, total IP fell 0.5%. Manufacturing decreased 1% in the fourth quarter. The gain in December for manufacturing came despite a 4.6% decline in auto and parts production. Excluding the motor vehicle industry, manufacturing increased 0.5%. Durable goods output fell 0.2% in December, while nondurable goods advanced 0.6%. The industrial sector of the economy is having a hard time stabilizing. Total IP has fallen three out of the last four quarters. The Feds Beige Book mentioned layoffs in manufacturing, transportation and energy. Boeing’s problems with the MAX 747 will hurt production in the near term. The trade deal may reduce uncertainty and help manufacturing, but progress is expected to be slow.


China’s economic growth cooled to its weakest in nearly 30 years in 2019 amid a tough trade war with the United States. More stimulus can be expected this year as China tries to stabilize the world’s second biggest economy. Recent data suggest efforts by the government are bearing fruit as business confidence is being restored and earlier growth efforts are starting to take hold. China’s real GDP slowed to 6.1% in 2019 from 6.6% in 2018. Although strong by global standards, it was the weakest expansion since 1990. Recent data, along with optimism with the Phase One trade deal, have raised hopes the economy might be bottoming out. On a quarterly basis, the economy grew 1.5% in the fourth quarter, about the same as the previous three quarters. External headwinds from trade should ease further in coming months. Industrial output grew 6.9% from a year earlier in December, while retail sales grew 8.0%, both exceeding expectations. Assuming the trade deal holds and with additional stimulus, real GDP should track near 5.9% this year.

Important Data Releases This Week

The December Chicago Fed National index will be released on Tuesday, January 21, at 8:30 AM. The index came in at 0.56 in November and we expect a slight increase to 0.67.
The December existing home sales index will be released on Tuesday, January 21, at 10:00 AM. November’s sales pace came in fairly strong and we project that December will see a 5.35 million unit’s pace.
The December leading economic indicator report will be released on Thursday, January 23 at 10:00 AM. We project the indicators to remain unchanged for the month.
Markit’s manufacturing and services index for January will be released on Friday at 9:45 AM. We project the manufacturing index o equal 54.2 for January and he services index to hit 52.8.

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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.