Fed Officials Are Worried That Inflation Was Coming in Too Weak

By | May 28, 2019

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.


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World stocks edged higher on Friday and oil prices recovered from bruising falls, after U.S President Donald Trump nurtured hopes of progress in U.S.-China talks. Meantime, concerns over the health of the world economy persisted. Trade tensions did roil global equity markets, with the MSCI All Country World Index up 0.2% on Friday, but in line with more than a 1% fall for a third week in the red, the longest losing streak Asian equity markets are torn between fears of a more protracted U.S.-China trade war and hopes the two sides can come to a deal soon.  Key parts of the yield curve remain inverted, flashing another warning sign about the health of the world’s biggest economy.

Wall Street’s major stock market indexes edged higher on Friday after falling most of the week, as hopeful comments from President Trump regarding trade relations with China assuaged concerns of some investors. Trump said late on Thursday that he saw a resolution to the trade war “happening fast.” He added that Chinese telecom equipment dealer company Huawei could be included in a trade deal. The Dow ones Industrial Average rose 0.37% to 25,585.69, but fell 0.68% for the week. The S&P 500 Index gained 0.14% on Friday, but ended the week 1.16% lower. Stocks have been down roughly 1% a week over the last three weeks on fears that the U.S.-China trade war would result in a global economic slowdown. Adding to fears are concerns about a slowing broader economy. Data showed that orders for U.S.-made capital goods fell more than expected in April.

The world faces a “clear and present danger” from trade war escalation, said Angel Gurris, the head of the Organization for Economic Co-operation and Development. “The world economy is in a dangerous place,” Angel Gurris said at a meeting of OECD recently. Trade tensions are the reason that growth in the global economy will slow to 3.2%, the slowest pace in three years and down from rates of about 5% before the last recession. He said that the world economy could pick up next year, but only if Washington and Beijing drop their latest tariff moves. If Trump proceeds with his trade escalation, global growth will get hurt by 0.7% in 2021-22, according to the OECD. A full-scale trade war, combined with debt crisis, could knock 2% off of Chinese growth.

Dark clouds from trade continue to affect financial markets and are having an impact on the broader economy. Increasingly harsh dialogue suggests a wider gap between the two participants than initially thought. Trade headwinds likely played a role in the weakness in the factory sector. Durable goods orders fell 2.1% in April, mainly hurt by civilian aircraft weakness. Cancelations of the 737 MAX led to a profound weakness in aircraft orders. On a brighter note, lower mortgage rates have helped slow the downturn in home sales seen last year. New home sales fell 6.9% from March but were up 7% from a year earlier.

Meantime, notes from the Federal Reserve, FMOC meeting revealed the strong GDP report assuaged many official’s fears the mounting downside risks that had accumulated at the end of 2018. Many Fed officials are worried that inflation was coming in too weak. Bear in mind the recent escalation of trade tensions happened after the meeting. With economic data coming in weaker than expected, we project the Fed will sit patient and keep rates unchanged through the remainder of the year.

Next week, we get a peek at pending home sales, international trade in goods, real GDP for the first quarter and personal incomes and outlays.

Latest Data

The U.S. Economy:

The NFIB small business optimism index increased from 101.8 in March to 103.5 in April, the highest reading since December. Details were generally positive. Plans to increase employment rose from 18 to 20. Plans to raise compensation were unchanged at 20%. Capital expenditures were unchanged at 27%. Expectations for the economy to improve rose from 11% to 13%. Small business confidence has held up better in recent months than some other measurements of confidence. A large percentage of jobs in the economy are created by small businesses and their expectations are important. The biggest problem small businesses have is finding qualified workers.

The pace of economic activity declined in April. The Chicago Fed National Activity Index decreased to -0.45 I April, down from -0.05 in March. Three out four of the major categories that make up the index, decreased in April and two made negative contributions to the index. Production-related indicators normally introduce wild swings in the index and last month was no exception. Production-related indicators contributed -0.44 to the index in April, compared to -0.04 the preceding month. The sales, orders and inventories category made a small contribution of 0.01, less than last month’s 0.06 the previous month. Employment-related indicators contributed 0.04, compared with 0.03 the previous month. The personal consumption and housing category contributed -0.05 in April, compared to a neutral reading in March. Manufacturing was weak in April and faces headwinds from a slowing global economy and Trump’s tariffs. Payrolls, on the other hand, continue to increase and employment growth was strong in April. Spending has been volatile but remains positive on trend.

Existing home sales dropped slightly in April to an annual pace of 5.19 million in April, down from 5.21 million in March. Sales were down 4.4% from April 2018. Existing single-family home sales for April totaled 4.62 million, down 11% from March and down 4% from a year earlier.

Single-family home listings totaled 1.61 million, up 9.5% from March and upon 1.9% from April 2018. Listings of condo/coop sales totaled 222,000 units in April, up 8.8% from March and 3.3% y/y. The inventory/sales ratio bot existing home sales equaled 4.7 months, up from 4.5 months in March and 3.9 months March 2018. Overall, the housing market is stuck with excess demand and low affordability. Despite the fall in mortgage rates, the affordability index is below the 2017 average.

New single-family home sales slid back in April, cutting out some of the gains from the first quarter. Sales fell 6.9% from March but were up 7% from April 2018. Sales fell in three out of the four census regions. The Northwest was the only positive contributor. Sales totaled 673,000 in April, down from 723,000 in March. Despite a fall in inventory, the market loosened because of the fall in sales. There were 332,000 new single-family homes for sale at the end of April, down 0.9% from March but up 11% from April 2018. The inventory-to-sales ratio was 5.9 months in April, up from 5.6 months in March and 5.7 months a year earlier. Given the recent fall in mortgage rate and the fact that the new single-family market is tight, there is some reason for optimism concerning the short-term market. The main downside is that the housing industry is operating at near full capacity and may not be able to keep u with demand for the next few years.


China reported surprisingly weaker growth in retail sales and industrial output for April, adding pressure on Beijing to roll out more stimulus as the trade war with the United States escalates. Overall retail sales rose 7.2% from a year earlier in April, the slowest pace since May 2003. Sales in March were 8.7%. Clothing sales fell for the first time since 2009, suggesting Chinese consumers are growing more worried about the economy. Growth in industrial output slowed to 5.4% in April, pulling back from a four-and-a-half year high of 8.5% in March. Motor vehicle production dropped nearly 16% as demand weakened. Sedan production plunged 18.8, the steepest decline since September 2015. Auto sales fell 14.6% in April, the 10th consecutive month of decline. Fixed asset growth slowed to 6.1% in the first four months of the year, dampening projections for a 6.4% increase. Private sector investment slowed sharply to 5.5% from 6.4%, suggesting the private sector continues to face difficulties. The private sector accounts for a majority of jobs in China and 60% of total investment. The trade war is having a negative effect on China and it could get worse. Economists at Citi estimate that the U.S. tariff increase could lop 50 basis points of China’s GDP growth, reduce exports by 2.7% and cost 2.1 million jobs, although they think a trade deal would be reached eventually. Analysts at BofA Merrill Lynch believe a prolonged period of brinkmanship would drag Chinese growth to 6.1% this year, down from a near 30-year low of 6.6% in 2018.

The German economy returned to growth in the first quarter as the householder spent more freely and construction activity picked up. However, the government warned that the outlook remains clouded by trade disputes. Real GDP grew 0.4% on a quarter-to-quarter basis. The economy contracted 0.2% in the third quarter and stagnated in the fourth. Growth was driven by construction and household spending. Corporate investments in machinery and equipment helped, while state spending was slightly negative. The trade development sent mixed signals as both imports and exports picked up for the quarter. Analysts say that any growth rebound this year will be modest. The massive threat to world trade is a clear negative as well as the uncertainty caused by Britain’s chaotic departure from the European Union. The government halved its 2019 growth projection to 0.5% last month, down from growth of 2.2% in 2017 and 1.4% in 2018.

Important Data Releases This Week

April pending home sales index will be released on Thursday, May 30 at 10:00 AM EDT. The index is expected to improve only slightly in April by 0.3%, after jumping 3.8% in March.

April international trade in goods will be released on Thursday, May 30 at 8:30 AM EDT. We project the trade deficit in goods will rise to $72 billion from March’s $71.4 billion.

Real GDP (second estimate) 2019-Q1 will be released on Thursday, May 30 at 10:00 AM EDT. We think the first quarter will be revised down to 3.0% from the 3.2% first estimate. Revisions of consumer spending will be unchanged from the first estimate.

April personal income and outlays will be released on Friday, May 31 at 8:30 AM EDT. Personal income is seen rising 0.3% in Aril, following the0.1% advance in March. Consumer spending is projected to increase 0.2%, following the 0.9% surge in March. The PCE index is projected to increase 0.3% in April, up 1.6% from a year earlier. The core PCE index is projected to increase 0.2% for April up 1.6% y/y.

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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.