Downside Risks Remain Elevated as the Consumer is Expected to Moderate

By | February 10, 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.

Overview

Coffee and Economic Review

Fears surrounding the coronavirus took a swipe at global markets on Friday, though that wasn’t going to stand in the way of the best week for stocks since June and the strongest on the dollar since August. Europe’s trading dyt began with stocks down and safe-haven government bonds up, a pattern that had been set in Asia where the death toll from the virus has more than doubled in less than a week. It stood at 638 on Friday and two elsewhere and it was revealed that one of the doctors that first raised the alarm about the virus died from it in a hospital in Wuhan, the outbreak’s epicenter. The week up to this point had been one long rebound that lifted MSCI’s main world index up 3%, almost back to the record highs it started the year with. Thanks to a $400 billion wipeout on Monday, Shanghai posted the worst week in eight months but other Asian indexes are ahead. China has engineered a massive response, with Beijing pumping billions of dollars into money markets to try and stabilize confidence.

Stocks booked losses on Friday as fears of the coronavirus impact on U.S. multi-nationals and the global economy offset better than expected jobs gains in the January employment report. The S&P 500 fell 0.5% to end Friday near 3,328. The Dow Jones Industrial Average dropped 277 points, or 0.9% to end around 29,103. Last month’s employment report showed that 225,000 jobs were added in January, well above expectations. The unemployment rate edged up to 3.6%. Risk assets sagged following reports by companies of disruptions to supply chains and sales from the coronavirus outbreak in China.

U.S. employers added 225,000 new jobs in January, exceeding expectations last week. However, the factory sector shed jobs for third time in four months and net layoffs were reported for finance and retail, as well. For the first time in six months, the ISM manufacturing index was not in contraction but coronavirus worries have not shown up in the ISM numbers. There was strength in the non-manufacturing sector, as the ISM index edged higher to 55.5 with most subcomponents also in expansion territory. The trade deficit widened for the first time in three months in December. In recent months, there has been a slowing in both imports and exports, but trade picked up on both sides of the ledger in December. There were signs of life in capital spending in the numbers. Imports of industrial supplies shot up by $4.0 billion, accounting for almost all the increase in imports and partly reversing four months of consecutive declines.

There are signs that the global slowdown and global easing cycle may be nearing its end. The U.S. and China both had solid fourth quarter growth rates. Australia’s central bank governor suggested last week that the growth slowdown may be coming to an end. The coronavirus will affect growth in China in the first quarter and likely will have some lingering effects in the second quarter. There will be a rebound from the impact of the virus and some recent data suggests the industrial sector may be trying to right itself. The improved sentiment in the ISM manufacturing index may be pointing to a turn in the manufacturing sector. However, the virus may postpone the recovery.

When SARS hit 20 years ago, China was very much an emerging economy with limited resources. Back then, China accounted for 4% of global GDP, compared to 16% today. China has become an integral part of the global manufacturing supply chain, accounting for about one-fifth of global manufacturing output. A 1% reduction in China’s real GDP reduces global GDP by about a 0.4 percentage point. The coronavirus is expected to reduce global GDP (excluding China by 0.8% in the first quarter and 0.3% for the year. Since the global economy is starting 2020 on a weak note, this raises recessions risks, which had receded after the truce in the U.S.-China trade war. The Chinese economy grew 6% in the fourth quarter, bringing the expansion for 2019 to 6.1%, the weakest in nearly three decades. Growth of about 5.6% is expected to meet the long-term target for GDP. It will be hard to see the turning point for the impact of the virus. First quarter growth could dip below 5% and may persist in the second quarter. Many economists are projecting growth as low as 5.4% for 2020. During the SARS outbreak, China’s growth slowed to 9.1% in the second quarter of 2003 from 11.1% in the first, before rebounding to 10% in the third quarter, bringing the full-year expansion to 10%.

Next week, we get a look at the NFIB small business optimism index, retail sales, consumer prices, business inventories and industrial production. The economy seems to be tracking near its 2% trend. There has been some deescalating in trade, but downside risks remain elevated as the consumer is expected to moderate and the industrial side, although showing some positive news, is still weak.

Latest Data

The U.S. Economy:

U.S. construction spending finished the year on a weak note. Construction spending fell 0.2% in December, following a 0.7% increase in November. The details were weak. Residential construction spending did increase 1.4% following a 1.5% increase in November. Construction spending on new single-family homes increased 1.4% from November and finished the year 5.2% higher. Spending on multi-family homes fell 1.8% m/m and was down 7.1% from December a year earlier. Nonresidential construction spending fell 1.8% in December and 0.5% in November. Public construction spending fell 0.4% in December and rose 1.0% in November. The report shows that the strength in residential and public construction spending was not enough to offset the weakness in nonresidential construction spending. We look for the upward trend in single-family housing to continue. There will be strength in the highway spending sector but other modes of public construction spending will be weak. The nonresidential side will also be weak in 2020.

The January ISM manufacturing survey brought encouraging news, rising from a revised 47.8 in December to 50.9 in January. Factory conditions are unlikely to stay positive the next few months as Boeing halts production on the 737 Max. The January details were generally better than in December. New orders increased from 47.6 to 52 in January. Of the 18 manufacturing industries.10 reported growth in January, while five reported a decline. The production index hit 54.3 in January, compared with 44.8 in December. According to the ISM, an index reading of 51.7 over time is generally consistent with an increase in industrial production. Seven industries reported growth in production in January, while seven saw a drop. The employment index improved from 45.2 to 46.6. The supplier deliveries index fell from 54.6 to 52.9. A reading below 50 means faster deliveries. The inventory index slipped in January, coming in 48.8, from 49.2 in December. The prices paid index increased from 51.7 to 53.3. New export orders increased from 47.3 to 53.3. New import orders increased from 48.8 to 51.3. The anecdotes were mixed, A respondent in the computer/electronic products noted business had picked up considerably, but tariffs were a concern. Another respondent noted that a lack of faith in the economy is hurting sales.

Manufacturing conditions improved in January, but many of the weights are still in effect. The weak global economy, the high dollar, trade concerns and Boeings problems with the 737 will still be headwinds for manufacturing. In addition, the coronavirus virus will hit the Chinese economy in the first quarter and hurt U.S. exports. The virus could shave 02 to 03% from first quarter U.S. GDP growth. Boeings problems with the 737 Max could also shave 0.4% from first quarter growth. We do expect that manufacturing’s recovery to be limited in the first quarter, but conditions are slowly falling into lace to factory production to become positive.

Vehicle sales started 2020 on a decent note, by increasing to an annualized pace of 17 million, up slightly from 16.9 million in December. Light truck sales led the January increase, jumping 3.1% to 383,000 annualized units to 12.5 million. Car sales were down 5.1% to 4.5 million. January vehicle sales were up 1.9% above January 2019 sales. The new vehicle market has gone from an almost even spilt between cars and trucks to being dominated by light trucks. The market share of light trucks ranged between 45% and 55% between 1997 to 2014. The percentage over the past five years went from 55% to 77%. However, some interesting trends are emerging that will affect sales in the future. In 2007, 45% of vehicles sold to people under the age of 45. In 2017, the percentage dropped to just 28%. Slower population growth and the rise of the ride-sharing industry is changing the industry. Sales should be just slightly below 17 million in 2020. The strength of the American consumer does raise some modest upside risks.

Factory orders increased 1.8% in December, largely driven by defense capital goods, which surged 89.8%. Nondurable goods orders advanced 1.1% in December and 0.7% in November. Durable goods orders increased 2.4% in December and decreased 3.1% in November. Core capital goods orders fell 0.8% in December, after remaining unchanged in November. Factory shipments were up 0.5%, better than the 0.3% gain in November. Fundamentals for business capital remain weak. Factory orders were decent in December, but excluding the defense component, they remain unimpressive. Some factory data has shown slight improvements, including the return of the ISM manufacturing index to positive territory. However, Boeing’s halt of the 737 Max will likely weaken the first quarter. The outlook calls for a slight improvement for manufacturing after the first quarter, but the gains will be modest.

The trade deficit widened more than expected in December, equaling $48.9 billion, up from $43.7 billion in November. Nominal exports were up 0.8% in December, while imports surged 2.7%. the goods deficit widened by $5.1 billion, while the services surplus narrowed slightly in December, coming in at $20.8 billion. Within exports, goods rose 0.9%, the second consecutive monthly increase. For imports, goods increased 3.2%. The nominal trade deficit narrowed between 2018 and 2019. But it was due to an improvement with the deficit with China. Some of the improvement came from petroleum. China has agreed to import more U.S. goods and services, but that is likely to increase the value of the dollar, which will reduce U.S. exports and increase U.S. imports.

While factories struggle, the much larger non-manufacturing sector is doing just fine. The ISM non-manufacturing index increased to 55.5 in January, up from 54.9 in November. Details were mixed among the indexes. The business activity index jumped from 57 in December to 60.9. Twelve industries reported an increase in business activity and four reported declines. New orders were another bright spot. Ten industries saw an increase in new orders and four reported a decline. The employment index slipped from 52.5 to 51.7. The inventory index dropped from 51 to 46.5, consistent with falling industries. The prices paid index moderated from 59.3 to 55.5. The non-manufacturing component makes up about 90% of output and employment. The strength in services is making up for the weakness in gods producers. Respondents noted favorable sales to start 2020, increased customer interest and fewer pricing issues related to tariffs. We expect the non-manufacturing component of the economy to remain healthy but the tight labor market and slower income growth will moderate growth.

The year started on a strong note for employment. Payrolls increased by 225,000 in January, following a revised addition of 147,000 in December. Additions were uneven across industries. Construction payrolls increased by 44,000, driven by both residential and nonresidential sectors. Manufacturing payrolls fell by 11,000. Hourly earnings perked up, increasing by 7 cents, or 3.1% for the year. The unemployment rate increased to 3.6%, as the participation rate hit a cyclical high of 63.4%. The January report included the benchmark revision. For the benchmark revision of March 2019, employment fell by 514,000. The year ended 422,000 jobs lower, prior to the benchmark. Month-to-month changes were revised upward for the final quarter of 2019. Part of the January strength came from warmer than usual weather. The halt of production of the Boeing 737 MAX and the impact of the coronavirus have not shown up yet in the data. Average monthly gains are expected to moderate this year as the labor market tightens.

International:

The Caixin China manufacturing index edged down from 51.5 in December to 51.1 for January. Although remaining above the neutral 50 mark, the figure indicated only a marginal improvement in the health of the manufacturing sector. Notably, the rate of improvement was the slowest since the current upturn that began in August 2019. Weighing on the index was the softer rise in new orders. The rate of increase in new work was modest and the rate of growth has eased for a third consecutive month. Data indicated that the slowdown was partly caused by weaker domestic demand, as new exports fell for the first time in four months. An easing of trade tensions helped business confidence rise to a 22-month high in January, before the outbreak of the coronavirus, which is slowing production in recent weeks.

Important Data Releases This Week

Fears surrounding the coronavirus took a swipe at global markets on Friday, though that wasn’t going to stand in the way of the best week for stocks since June and the strongest on the dollar since August. Europe’s trading dyt began with stocks down and safe-haven government bonds up, a pattern that had been set in Asia where the death toll from the virus has more than doubled in less than a week. It stood at 638 on Friday and two elsewhere and it was revealed that one of the doctors that first raised the alarm about the virus died from it in a hospital in Wuhan, the outbreak’s epicenter. The week up to this point had been one long rebound that lifted MSCI’s main world index up 3%, almost back to the record highs it started the year with. Thanks to a $400 billion wipeout on Monday, Shanghai posted the worst week in eight months but other Asian indexes are ahead. China has engineered a massive response, with Beijing pumping billions of dollars into money markets to try and stabilize confidence.

Stocks booked losses on Friday as fears of the coronavirus impact on U.S. multi-nationals and the global economy offset better than expected jobs gains in the January employment report. The S&P 500 fell 0.5% to end Friday near 3,328. The Dow Jones Industrial Average dropped 277 points, or 0.9% to end around 29,103. Last month’s employment report showed that 225,000 jobs were added in January, well above expectations. The unemployment rate edged up to 3.6%. Risk assets sagged following reports by companies of disruptions to supply chains and sales from the coronavirus outbreak in China.

U.S. employers added 225,000 new jobs in January, exceeding expectations last week. However, the factory sector shed jobs for third time in four months and net layoffs were reported for finance and retail, as well. For the first time in six months, the ISM manufacturing index was not in contraction but coronavirus worries have not shown up in the ISM numbers. There was strength in the non-manufacturing sector, as the ISM index edged higher to 55.5 with most subcomponents also in expansion territory. The trade deficit widened for the fist time in three months in December. In recent months, there has been a slowing in both imports and exports, but trade pickedu p on both sides of the ledger in December. There were signs of life in capital spending in the numbers. Imports of industrial supplies shot up by $4.0 billion, accounting for almost all the increase in imports and partly reversing four months of consecutive declines.

There are signs that the global slowdown and global easing cycle may be nearing its end. The U.S. and China both had solid fourth quarter growth rates. Australia’s central bank governor suggested last week that the growth slowdown may be coming to an end. The coronavirus will affect growth in China in the first quarter and likely will have some lingering effects in the second quarter. There will be a rebound from the impact of the virus and some recent data suggests the industrial sector may be trying to right itself. The improved sentiment in the ISM manufacturing index may be pointing to a turn in the manufacturing sector. However, the virus may post pone the recovery.

When SARS hit 20 years ago, China was very much an emerging economy with limited resources. Back then, China accounted for 4% of global GDP, compared to 16% today. China has become an integral part of the global manufacturing supply chain, accounting for about one-fifth of global manufacturing output. A 1% reduction in China’s real GDP reduces global GDP by about a 0.4 percentage point. The coronavirus is expected to reduce global GDP (excluding China by 0.8% in the first quarter and 0.3% for the year. Since the global economy is starting 2020 on a weak note, this raises recessions risks, which had receded after the truce in the U.S.-China trade war. The Chinese economy grew 6% in the fourth quarter, bringing the expansion for 2019 to 6.1%, the weakest in nearly three decades. Growth of about 5.6% is expected to meet the long-term target for GDP. It will be hard to see the turning point for the impact of the virus. First quarter growth could dip below 5% and may persist in the second quarter. Many economists are projecting growth as low as 5.4% for 2020. During the SARS outbreak, China’s growth slowed to 9.1% in the second quarter of 2003 from 11.1% in the first, before rebounding to 10% in the third quarter, bringing the full-year expansion to 10%.

Next week, we get a look at the NFIB small business optimism index, retail sales, consumer prices, business inventories and industrial production. The economy seems to be tracking near its 2% trend. There has been some deescalating in trade, but downside risks remain elevated as the consumer is expected to moderate and the industrial side, although showing some positive news, is still weak.


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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.