Economy on a Solid 2% Growth Path for 2020

By | January 27, 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

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.

The spread of China’s coronavirus is providing stock market investors with another reason for near-term caution as major U.S. benchmarks trade near all-time highs, offering a potential trigger for a near-term pullback. Conditions in the broad market are ripe for a pause as sentiment and overbought conditions are at high levels. The virus might be the trigger. The S&P fell 0.9% on Friday for its biggest one-day loss since Oct. 8. The Dow Jones Industrial Average fell 0.58%, or 170 points on Friday. Stocks have spent the new year building on a torrid 2019 rally. The S&P remains up 2% since the end of last year and sits just 1% from its all time high set Jan. 17. The virus could affect Chinese retail sales and personal consumption and may reduce first quarter growth by as much as 1%.

There was little economic news last week, but existing home sales rose a solid 3.6% to a 5.54 million-unit annual pace. The home buying renaissance seems to be continuing. Inventories are very low and that is driving house prices higher and may slow sales going forward. The World Economic Forum in Davos got its usual media attention. Global leaders expressed confidence in the global economy. The IMF was slightly less optimistic, reducing its global forecasts to 2.9% for 2019 and 3.3% for 2020. On the sidelines, President Trump threatened tariffs on the EU and raised tariffs on certain metals. This threw water on the notion that Trump would let trade simmer for the election. Trade uncertainty will not go away in 2020.

A recent poll of economists by Reuters says that a global upturn will remain elusive this year as the economy still faces an array of daunting tasks, despite improved sentiment from the initial U.S.-China trade deal. The global economy in 2019 may have been near its weakest since the financial crisis thanks to trade protectionism and political uncertainty, but world stocks had a blowout year, with several indexes setting record highs. With easy monetary policy set to continue, the split between markets and evets may extend into this year, according to a survey of 500 economists in 46 major economies.

When asked what is more likely for developed and emerging economies for this year, about 400 economists, or three-quarters said, “about the same as last year.” James Sweeney, chief economist at Credit Suisse said, “The world’s growth trends are sustainable, but fragile. We do not see a recession in major economies, nor do we expect a sharp rise in inflation. But we are respectful of late cycle dynamics and various political and long-term risks.” “Global manufacturing and trade have been in a slump since late-2018, but cyclical indicators are likely to improve in 2020. The rebound is unlikely to be vigorous.” Jim O’ Sullivan, chief economist at U.S. TD Securities said, “In the end, we’re not expected business confidence to roar back. We don’t think trade uncertainty is going away.”

Next week, we get a look at advance trade in goods, durable goods orders, pending home sales, the first look at Q4 GDP, personal income and outlays and GDP deflator. We look for the economy to have expanded 2.3% in the final quarter of 2019. Consumption will have been solid but slowing from the previous two quarters. Business investment will have come in weak and residential investment will be a bright spot. The economy seems to be on a solid 2% growth path for 2020.

Latest Data

The U.S. Economy:

The leading economic indicators point to further cooling in U.S. economic growth. The Conference Board’s index of leading economic indicators slipped 0.3% in December to 111.2. This follows a 0.1% increase in November and a 0.2% decline in October. The decline in December was mainly due to jobless claims and falling housing permits. Manufacturing indicators held steady during the month but remain weak overall. The increase in jobless claims was influenced by the late-Thanksgiving holiday and have returned to recent trend. Manufacturers’ new orders for consumer goods and materials goods contributed positively to the index. However, the core capital goods’ orders were negative. Average manufacturing hours were unchanged. Financial markets were a source of strength. Building permits were the second largest source of negative contributions. The index points to further cooling in the economy.

The pace of economic growth slowed in December. The Chicago Fed National Activity Index fell to -0.35 in December from 0.41 in November. Three out of four major components made negative contributions to the index. The 3-month moving average did increase to -0.23 in December from -0.31 in November, marking the 11th consecutive month, the index has been negative. Production related indicators contributed -0.26 to the index in December, partially reversing November’s 0.4 reading. The sales, orders and inventories category contributed -0.05, comparted to November’s -0.02 contribution. Employment-related indicators contributed -0.06, compared to 0.04 in November. The personal consumption and housing category added 0.03, compared to -0.01 in November. The negative reading suggests that economic growth was below average.

Existing home sales closed 2019 on a strong note, increasing 3.6% in December and were up 10.8% from a year earlier. Sales equaled an annual pace of 5.54 million, up from 5.34 million in November. Both single—family and condo/co-op sales increased in December. However, inventory fell sharply and the inventory-to-sales ratio of single-family homes fell to 3.0 months, down 0.6 from November and also down 0.6 from a year earlier. This suggests sales will slow in coming months from lack of listings. Price appreciation remains strong in a tight housing market. The average median price for an existing home was $276,900 in December, up 8% year-over-year. The key driver of housing demand is low mortgage rates. The 30-year fixed mortgage rate fell from 4.51% in early-2019 to 3.65% in mid-January, supporting housing activity.

International:

Euro-zone business activity remained weak at the start of the year, a day after the European Central Bank said that manufacturing remained a drag on the economy, but there were signs the worst may be over. The Euro-Zone’s Composite PMI held steady at 50.9 in January. The index was held back by the factory sector, where the manufacturing PMI registered 47.8 in January, up from December’s 46.3 reading. It was the 12th month below the expansion rate of 50. Output rose to 47.5 from 46.1, its highest since August. While, most indicators in the manufacturing index remained in negative territory, orders, employment and backlogs did rise in January. The services index dropped to 52.2 from 52.8. The index suggests that economic growth was still weak, but manufacturing seems to be stabilizing, suggesting economic growth is turning, albeit slowly, upwards.

Important Data Releases This Week

The December new home sales report will be released on Monday, January 27 at 10:00 AM. Sales are expected to reach 725,000in December, up- from 719,000 in November.

The December advance durable goods orders report will be released on Tuesday, Jan. 28 at 8:30 AM. Durable goods orders fell 2.1% in November and core orders moved up 0.1%. We expect total orders to advance 1.0% and the core orders to increase 0.2% for December.

The first estimate of Q4-2019 GDP will be released Thursday, Jan. 30 at 8:30 AM. We expect real GDP to have expanded 2.3% in the fourth quarter.

The December personal income and outlays report will be released on Friday, Jan. 31 at 8:30 AM. Personal income surged 0.5% in November and spending rose 0.4%. We expect a 0.3% rise for both spending and income for December. The GDP deflator will rise 0.1%.


FTR is the leader in economic analysis and forecasting for the commercial freight and transportation equipment markets. For more information: Click here

Category: Monday Morning Coffee Tags:

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.