Fallout from the Coronavirus will Slow Growth

By | February 17, 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

Global stocks rose slightly on Friday as investors bet on a lull in the proliferation of the coronavirus, while oi prices made the first gain since early-January. Wall Street rose late in the trading day after a CNBC report surfaced that the White House was considering a tax incentive to buy stocks. Investors are still trying to gauge the economic fallout of the coronavirus outbreak, with Chinese health authorities reporting more than 5,000 new cases on Friday. The U.S. stock market will be closed on Monday for President’s Day. MSCI’s global gauge gained 0.06% on Friday. The Dow Jones Industrial Average fell 25.23 points, or 0.09% to 29,398.08 and the S&P 500 gained 6.22 points, or 0.185 TO 3,380.16. Oil prices rose 1% and posted the first weekly gain since early-January amid hopes demand will rebound.

Retail sales increased for a fourth straight month in January, underscoring the strength of the U.S. consumer Fundamentals are solid and consumer spending should be healthy in the coming months. Spending increases were broad-based with nine of the 13 categories seeing gains in January. The consumer is strong but the industrial sector still is struggling. Industrial production fell 0.3% in January, the fourth decline in five months. Manufacturing fell 0.1%, largely due to a 10.7% decline in aircraft and parts production, a result of Boeing stopping production on the 737 MAX. Outside of the Boeing impact, there were solid gains in motor vehicles and parts, computers, and electronics. Looking ahead, headwinds should continue to bother the industrial sector as concerns are now centering on supply chain disruptions emanating out of China as a result of the coronavirus outbreak.

The U.S. economy continues to show a somewhat more positive trend the last few months. The consumer side is solid. The industrial side appears to be, at least stabilizing. That being said, it is likely the first quarter may come in below the 2% trend. A modest drag from trade, an inventory correction and some fallout from the coronavirus will slow growth. To the 1.5% to 1.7% range for the first quarter. For now, most projections assume the virus won’t develop into a full-blown pandemic and manageable. Real GDP should track near 2% for the remainder of the year.

Next week, we get a look at housing starts and building permits, FMOC minutes, the leading economic indicators, producer prices and existing home sales. We will also be looking for developments from the coronavirus outbreak. Investors seem to be sitting on a fence between seeing the beginning of successful containment of the virus, or a worse economic outcome. When contained, global economic activity should pick up.

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 by 1.4% following a 1.5% increase in November. Construction spending on new single-family homes increased by 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 an 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 NFIB small business optimism index rose from 102.7 in December to 104.3 in January, a slightly better increase than expected. Details were mixed. Hiring and capital expenditures didn’t budge, while expectations for the economy to improve slipped from 16% to 14%. Despite the decline, expectations for the economy in January were generally better than we saw in the second half of 2019. The net percent of respondents planning to expand employment didn’t budge at 19%. Plans to raise compensation were unchanged at 24%. This suggests that the labor market is not becoming too tight or over-heating. Still, finding qualified workers is still small business’s chief concern. The index remains elevated for the cycle and confidence will remain at a decent level.

Business inventories increased 0.1% in December, following a 0.1% decrease in November. Among categories, manufacturers’ inventories were the strongest performer, rising 0.55 for the month. Retail was flat and wholesalers slipped 0.2%. Business sales fell 0.1% in December, following a 0.5% rise in November. The business inventory-to-sales ratio rose from 1.39 to 1.4 in December 2018 was 1.39. The cycle low for December 2018 was 1.39. The cycle low was 1.25 and the recession high was 1.49. Auto parts dealers held steady with inventories after recording a large decline in November. Demand for new autos is past its peak and the forecast calls for slightly lower sales in 2020. The existing large pile of inventories will slow future production and inventory gains. We see little inventory gains and a slight reduction in stockpiles in the next few quarters.

Boeing’s decision to drop production of the 737 MAX contributed to the 0.3% January decline in industrial production. Total IP also fell 0.4% in December. Manufacturing production slipped 0.1%. Excluding production of civilian aircraft, manufacturing rose 03%. Utility output dropped 4%. Mining output rose 1.2%, but given the recent slide in global oil prices, this increase is unlikely to stick. Capacity utilization slipped 0.3 of a percentage point to 76.8%. Manufacturing’s capacity utilization slipped from 75.2% to 75.1%. All told, Boeing is distorting the message from industrial production. Motor vehicle and parts output rose 2.4% after slipping 5.1% in December. Excluding the auto sector, manufacturing declined 0.3%. Looking through the volatility, manufacturing seems to have stabilized, or improved slightly lately. However, the coronavirus could be an issue this quarter and projections for China have been revised down lately. We won’t get hard data on the virus until March. We think first quarter DP could be down about 0.4 of a percentage point, but that will be made up later. Risks are still weighted to the downside for the industrial sector.

International:

The coronavirus will hit the Chinese economy hard in the first quarter, according to a poll of economists polled by Reuters. However, the downturn will be short. A poll of 40 economists predicted that China’s annual growth rate will slump to 4.5% from 6.0% in the fourth quarter. The decrease will bring the full year growth rate to 5.5% from 6.1% in 2019, its weakest since 1990, when comparable records began. The coronavirus was first detected in the Chinese city of Wuhan, a nerve center in the global supply chain with a population of just under 11 million. So far, it has claimed 13,000 lives. That outstrips the SARS outbreak which killed 774 people. Lost production will likely be made up later in the year, but some service sector activity will be lost. Growth is expected to slow to a 3.5% rate in the first quarter, in a worst-case scenario. Most economists think the virus will be contained by April. A full economic recovery may take year to reach previous output. Compared to SARS, it is more damaging. China’s industrial output is 16% of the global total, compared to 4% in 2002-03.

Important Data Releases This Week

The January housing starts report will be released on Wednesday, February 19 at 8:30 AM. We expect starts to decline from the 1.608 million seen in December to 1.415 million. December’s numbers were juiced by warm weather. Permits are expected to rise from the 1.420 million to 1.435 million.

The January producer price index will be released Wednesday, February 19 at 8:30 AM. The PPI rose 0.1% in December and we expect a 0.2% rise in January.

The January leading economic indicators report will be released on Thursday, February 20 at 10:00 AM. The leading economic indicators should bounce back from the -0.3 reading for December. Manufacturing weighed the index down and a better ISM reading should pull the index up slightly.

He January existing home sales report will be released on Friday, February 21, at 10:00 AM. Existing home sales should decline modestly from the December 5.54 million rate to 5.35 million.


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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.