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.
European shares on Friday shrugged off cares over the coronavirus outbreak after the World Health Organization designated it an emergency for China, but not yet a threat for the rest of the world. The virus has killed 125 people and infected at least 800 in China and the infection rate could accelerate as millions of people travel on the week-long Lunar New Year holiday, which began last Friday. The broad Euro STOXX 600 gained 1.1% in early trading. The global MSCI index, which tracks shares in 47 countries gained 0.2% on early trading on Friday.
World shares fought to regain footing on Friday as investors clutched at hopes that China could contain the coronavirus, even as headlines spoke of more cases and deaths, evacuations and factory shutdowns. Europe opened 0.3% higher, following a bounce in Tokyo, but did little to repair what has been of the most turbulent and costly week for many markets since August. MSCI’s broadest index of world shares got back to flat. Asia-Pacific shares outside of Japan extended their fall, however, dropping 0.4% and approached the worst weekly fall in a year. There are reports that some Chinese provinces are asking companies not to re-start until Feb. 10 after the New Year Holiday. Manufacturing is expected to take quite a hit until the virus is contained.
The Dow took a nosedive on Friday after President Trump declared a public health emergency emanating from the coronavirus outbreak in China. The Dow Jones Industrial Average fell 603.41 points, or 2.1% to settle in at 28,256.03. The S7P lost 58.14 points ending at 3,225.52, or 1.8%. Year-to-date, the Dow is down 0.99% and the S&P is down 0.16%. China’s National Health Commission said that so far 213 people have died and 9,700 have sickened, exceeding the toll from the SARS outbreak in late 2002-03. Goldman Sachs Group Inc. said that the virus will cut U.S. GDP growth by 0.4% in Q1 as the number of tourists from China plunges and exports slow. The virus is threatening to disrupt parts of China’s manufacturing machine and its global supply chains. A Chinese government economist said that growth may fall to 5% or lower from 6.1% in 2019. In the SARS epidemic in 2002-03 growth fell two percentage points but rebounded quickly as the disease was controlled.
U.S. growth is running near potential. The first estimate of fourth quarter 2019 GDP growth came in at 2.1%, the third consecutive quarter of near potential growth. Despite a modest slowing, consumer spending remained a major contributor to growth, adding 1.2 percentage points to growth, down from 2.1 percentage points in the third quarter. Government contributed 0.5 Percentage points to growth and inventories subtracted 1.1 percentage points. Trade was a 0.1% drag and business investment was neutral. The economy is being supported by the consumer. The biggest drag is business investment. Businesses remain cautious despite the trade deal. The nation’s trade deficit has widened and upended global growth and lifted the value of the dollar. Manufacturing is in recession. Growth should continue, but job growth will slow and the consumer will provide less support. With less velocity, the economy will be more vulnerable to shocks.
The first week of the Chinese Lunar New Year started off with the coronavirus fears sending financial markets into a tailspin over the potential impacts of a worldwide spread of the virus on weak global growth. However, between the market volatility, the U.S. economy continues to hold up fairly well. Real GDP grew 2.1% in the fourth quarter, a slid pace that tracks near the average over the past decade. In other developments, the Federal Reserve left the federal funds rate unchanged. Durable goods orders jumped 2.4% in December, thanks to a jump in defense orders. Excluding defense, orders fell 2.5%. New home sales slipped 0.4% in December, but ended the year up 10.3% thanks to lower mortgage rates. Personal income grew 0.2% in December, but spending only rose 0.1%, raising some questions about the ability of the consumer to support the economy in 2020. The effect of the virus on the global economy and residual impact on the U.S. is likely to be temporary. The U.S. economy will stay on its 2% trend. However, if the consumer doesn’t do their part, the outlook would be much lower.
Next week will be busy on the economic calendar. We get a look at the ISM manufacturing and nonmanufacturing indexes, construction spending, motor vehicle sales, factory orders and employment data.
The U.S. Economy:
Durable goods painted a mixed picture for manufacturing in December. Orders increased 2.4% in December, following a 3.1% decline in November. The strength was isolated to transportation, particularly defense aircraft. Orders for defense aircraft soared 168% and were the bulk of the increase. Excluding transportation, new orders slipped 0.15. Core capital goods orders fell 0.9% in December, after rising 0.1% in November. Motor vehicles and parts orders were down 0.9%, reversing some of the 1.6% gain in November. Looking through the report, the key trend is the weakness in the core capital goods sector. It will take some time before manufacturing and business investment to turn upwards. Although trade uncertainty has lessened, fundamentals remain soft for business equipment investment.
New home sales weakened further in December but the broader trend remains favorable. Sigle-family homes sales total an annualized pace of 594,000 in December, down 0.4% from November. New home sales were up 23% year-over-year New homes listed increased during the month, raising the inventory-to-sales ratio from 5.5 months to 5.7 months. The median home price increased 0.5% to $331,400. Overall, the trend remains favorable, with new homes sales up significantly from a year ago. Fundamentals are favorable for sales. Mortgage rates are below 4% and the job market is supportive. This suggest sales will advance in 2020.
Personal income moderated in December, rising only 0.2% after a 0.4% advance in November. Real consumer spending also weakened in December, rising only 0.1% after a 0.3% advance in November. The slower pace of income and spending does place a shadow on the consumer, whom is the driver of economic growth. For all of 2019, consumer spending increased 4.0%, the smallest gain in three years, after advancing 5.8% in 2018.Pricing gained a little momentum in December, with the PCE deflator rising 0.3%, after a 0.1% advance in November. Both the headline deflator and the core PCE were up 1.6% from a year earlier.
Euro-zone growth. grew less than expected in the last quarter of 2019, while core inflation slowed in January, a worrying sign for the European Central Bank. Gross domestic product in the 19-nations rose 0.1% for the quarter, or a 1.0% year-on-year gain. Most economists expected a 0.2% increase for the fourth quarter and a 1.1% increase. The disappointing growth for the euro zone was caused by GP contractions in France and Italy. Eurostat said that consumer prices fell 1.0% month-on-month in January for a 1.4% year-on-year rise, lower than the ECB target of 2%.
Important Data Releases This Week
The January ISM manufacturing index will be released on Monday, February 3 at 10:00 AM. The index is projected to rise from the 47.2 reading for December to 48.0. Boeing’s halt of its 737 MAX will have a negative impact on production but the end of the UAW strike will have a small positive impact. The index will stay below 50.
The December construction spending report will be released on Monday, February 3 at 10:00 AM. Construction spending increased 0.6% in November and we expect another 0.6% rise in December. The strength in single-family and public construction is being held back by weakness in the nonresidential sector.
The January motor vehicle report will be released on Monday, February 3 at 4:15 PM. We expect sales to equal the 16.7 million annual pace seen in December.
The December factory orders report will be released on Tuesday, February 4 at 10:00 AM. We already know the durable goods segment was positive, up 2.4% but the other components of the report were weak. Following the 0.7% decline in November, factory orders will rise 1.4% in December.
The January ISM nonmanufacturing index will be released on Wednesday, February 5 at 10:00 AM. The index is projected to decline slightly from the 55 reading for December to 54.9. The consumer remains solid but is expected to slow consumption over the course of 2020.
The January employment report will be released on Friday, February 7 at 8:30 AM. Employment grew by a slower but still decent 145,000 in December. We expect a 164,000 increase for January, helped by warm weather.. Average hourly earnings will rise 0.3%, up from the slow 0.1% advance in December. The unemployment rate will be unchanged at 3.5%.