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.
Asian stocks climbed to the highest level in six weeks, as signs of progress in U.S.-China trade global talks and aggressive stimulus from the European Central Bank helped to calm fears of a global recession. MSCI’s broadest index of Asian-Pacific equities outside of Japan, edged up 0.5% to highest level since Aug 1, while Japan’s Nikkei rose more than 1.0% to a four-month high. The United States on Thursday welcomed China’s renewed purchases of U.S. farm products while maintaining the threat of tariffs as the world’s two largest economies prepare for talks aimed at breaking their trade war impasse. On Thursday, the European Central Bank cut interest rates to minus 0.50%, promising rates will stay low for longer and restarting bond purchases of 20 billion euros a month from December. Investors think there may be a deal between the U.S. and China, but are wary that Trump might do an about-face, as he did in May and August.
The S&P 500 ended the day down slightly on Friday but less than 1% below its all-time high as a drop in Apple stock countered cooling U.S.-China trade tensions. All three major U.S. stock indexes posted their third straight weekly advance, capping a week that saw new signs of a potential thaw between the world’s two largest economies, which has gripped markets for months. On the economic front, retail sales helped Treasury yields reach multi-week highs, suggesting that strong consumer spending will continue to support the longest-ever economic expansion. Markets have been see-sawed by the increase in trade tensions and accumulating evidence of a slowing global economy. An ease of tensions should help buoy markets.
Business confidence has been shaken by the increase in trade tensions, but the consumer continues to largely unfazed by the trade wars. Retail sales rose 0.4% in August, following a strong 0.8% advance in July. Consumption is on trend to increase 2.9% in the third quarter, but spending is coming weaker than in the strong second quarter. Monetary policy hawks will notice the heating up of the core inflation numbers, in which the three-month annualized rate reached a 13-year high. However, core goods inflation has been in decline since 2013. Prices are rising now about 1% over the past year, clearly illustrating the pass-through of tariffs to the consumer. The NFIB small business index fell modestly to 103.1, off its cyclical high of 108.8 one year ago but still consistent with solid economic growth. Small business owners increasingly see a divergence between conditions today and what they expect in the future reported earnings and sales remain strong. However, hiring and capital spending plans have come down.
Next week, we get a look at industrial production, housing starts, existing home sales and leading economic indicators. All eyes will be on the FMOC meeting, where the committee is expected to cut rates another quarter percent citing global slowing, trade tensions and the associated risks to the manufacturing sector. Expectations are that there will another quarter point reduction this year. A highlight will be Fed projections for growth in the near and mid-term. Economic prospects appear to be more positive as trade tensions are abating for the moment and the yield curve has let up somewhat. Downside risks are still high as Trump has already reversed his position on trade several times this year.
The U.S. Economy:
The NFIB small business index slipped to 103.1 in August from 104.7 in July. The details were generally weaker, as plans to expand employment declined and expectations for the economy to improve fell to the lowest level since March. However, capital expenditure plans did move forward from 27% to 28%. Expectations for the economy to improve in the next six months fell from 20% in July to 12% in August. The net percentage of respondents planning to expand employment fell from 21% to 20%. The uncertainty index increased in August to 80% from 76% in July as respondents said they are uncertain or don’t know about questions on credit conditions, future economic conditions, future sales, whether this is a good time to expand and capital expenditure plans. That index was still below its cyclical high, even with trade tensions rising. Tariffs and trade uncertainty are starting to undermine confidence even in industries not directly associated with trade. Goggle searches for “recession and “next recession” spiked in August to the highest point since 2009. Trade tensions are starting to recede slightly as both the U.S. and China delayed additional tariffs ahead of the meeting in October. Confidence measures will follow the outcome of the trade talks in October.
The producer price index for final demand increased just 0.1% in August, following a 0.2% advance in July. Service prices rose 0.3%, but goods prices fell 0.5%. Excluding food and energy, core goods PPI was unchanged in August. There was little in the report that had any great implications for monetary policy. The CPI rose just 0.1% in August, following a stronger 0.3% advance in July. The core CPI advanced 0.3% for the third consecutive month. On a year ago basis, the CPI was up 1.8%, but the core was up 2.4%. In the last three months, core inflation has increased at a 3.4% annualized pace, the strongest since 2006. This acceleration suggests the Fed was right about inflation being held back by transitory factors. In the last three potential cuts by the Federal Reserve this year, December is looking less likely, based on how data plays out. Inflation largely remains under control, at least for the near term.
Business inventories began the third quarter with a soft gain. Stockpiles increased 0.4% in July, following no change in June. Inventories were up 4.8% on a year ago basis. Among the three categories, retail led inventory gains with a 0.8% surge. Manufacturers and wholesalers both posted a 0.2% gain. Among retailers, motor vehicles and parts dealers saw a 1.5% increase. Excluding that sector, retailers saw a more modest 0.3% rise for the month. Business sales stayed on par with a 0.3% increase, following no change in June. This kept the inventory-to-sales ratio steady at 1.40. The I/S ratio is only 0.9 below its recession high. The I/S ratio was 1.34 in June 2018. The ratio has ranged from the cycle low of 1.25 to its recession high of 1.49. Clearly, the current level is too high and does not bode well for future inventory gains and domestic production. Tariffs have clouded the inventory process by pushing businesses to import stocks before tariff deadlines. Until a final agreement is made, uncertainty levels will remain high.
Retail sales increased 0.4% in August, following a strong 0.8% increase in July. However, the headline number was tempered by the fact that sales in August were unchanged excluding autos, and only increased 0.1% excluding autos and gas. Motor vehicles and parts sales grew an impressive 1.8% in August. Building supply store sales increased 1.4% and non-store sales rose 1.6%. Sales were down 0.9% at gasoline station and at clothing stores. Total sales were up 4.1% y/y, an improvement of July’s 3.6% reading. Sales have been trending high, with and without vehicles and have been since March. Prior to March, there was a period of about nine months where sales were flat. Sales have averaged 0.5% in the last three months in total and 0.4% excluding autos. Job growth continues at a decent rate and the tight labor market is generating upward pressure on wages. The stock market has not gained much in the last 18 months and house price appreciation has slowed. All this means consumers will continue to spend at a modest pace. There are downside risks from trade and the slowing global economy. If businesses start to lay off workers, consumption will falter. There are also upside potential if a trade deal with China is reached and uncertainty is reduced.
Europe’s largest economy is not facing a bigger downturn or a pronounced recession after contracting slightly in the second quarter. However, there are no signs of a turnaround yet, the Economic Ministry said recently. The German economy contracted by 0.1% on quarter in the second quarter and some additional weak data has fueled concern the economy could slip into recession in the third quarter. The Ministry said “that the economy is going through a weak phase.” However, “A bigger downturn or even a pronounced recession is not expected at the moment.” On the other hand, “Indicators don’t point to a economic turnaround yet, for the better.” The German economy has weakened as its export-dependent manufacturing sector languishes in recession due to trade conflicts and uncertainty linked Britain’s planned departure from the European Union.
Important Data Releases This Week
The August NFIB small business optimism index will be released on Tuesday, September 10 at 6:000 AM EDT. The index posted a broad rebound in July to a better than expected 104.7. We project a sight decline in August to 103.5.
August industrial production will be released on Tuesday, September 17 at 9:15 AM EDT. Manufacturing fell a sharp 0.4% in July and together with mining pulled total IP down by 0.2%. We look for both manufacturing and the total IP to rise 0.1% for August.
August housing starts will be released on Wednesday, September 18 at 8:30 AM EDT. Starts and permits hve been uneven month-to-month but have inched higher. Starts in August are expected to come in at a 1.250 million annual pace versus the July 1.191 million pace. Permits are projected to come in at 1.300 million, down from the 1.336 million pace for July.
August existing home sales will be released on Thursday, September 19 at 10:00 AM EDT. Existing home sales rose strongly in July to a better-than-expected 5.420 million annual pace. We look for a step back to a 5.375 million pace for August.
August leading economic indicators will be released on Thursday, September 19 at 10:00 AM EDT. Following the strong 0.5% advance in July, the leading indicators are projected to advance 0.1% in August.