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.
Hopes of a trade deal between Washington and Beijing turned world stock prices upwards on Friday, though an escalating wave of global protests from Hong Kong to Chile left some deep scars. Europe’s main bourses followed Asia upwards after White house economic advisor Larry Kudlow said on Thursday that the U.S. and China were close to an agreement. Despite Friday’s rise, emerging market stocks were down 1.7% for the week, while the violent escalation of pro-democracy protests in Hong Kong left the Hang Seng down 4.7% for the week, the worst since 2011 with a 7% plunge. The policy sensitive two-year yield rose to 1.6101% from 1.593% on Thursday after Federal Reserve Chairman Jerome Powell said the risk of the U.S. economy facing a dramatic bust is remote. A Reuters poll of 100 economists showed that while concerns have eased over a U.S. recession, few see an economic rebound and most believe a trade truce is unlikely.
Wall Street’s main stock indexes closed at record highs on Friday, fueled by fresh optimism over a potential calming of U.S.-China trade tensions. The benchmark Dow Jones Industrial Average rose 222.93 points on Friday, or 0.8% to close at 28,094.89. The S&P 500 gained 23.83 points, or 0.77% to 3,120.46. Healthcare stocks soared after President Donald Trump made an announcement on healthcare transparency. Economic data showed that retail sales rebounded modestly in October although consumers did cut back on purchases of big-ticket items, which could temper expectations for a strong holiday season. Retail sales gained 0.3% in October, but the gain was confined to gasoline stations and consumption fell in September for the first time in seven months. The figures suggest consumer spending may only rise 1.5% in the fourth quarter, a sharp drop from the two previous quarters. Also, total industrial production fell 0.8% in October and manufacturing 0.6%. The strike by the UAW affected manufacturing, which should see a modest rebound in November and December. Excluding the auto sector, manufacturing fell 0.1%. This suggests that manufacturing is not in a deep decline but will struggle in the coming months.
With the global economy weak and trade issues still up in the air, despite some apparent easing of tensions, the manufacturing sector will continue to struggle. Growth in the economy is being driven by the consumer and a slowdown in spending is a powerful threat to future growth. Following the retail sales and industrial production reports, the Atlanta Fed lowered its fourth-quarter GDP forecast to 0.3% from 1.0%. Consumers are cutting back on discretionary spending and that does not bode well going into 2020. Next week will be light on the economic calendar. We get a look at housing starts, existing home sales and the leading economic indicators.
The U.S. Economy:
The NFIB small business optimism index rose from 101.8 in September to 102.4 in October, still a touch below levels seen earlier in the year. The index showed a little improvement as hiring and capital expenditures plans inched forward. The October increase reversed some of September’s losses but the index remains lower than was seen in the third quarter. The et percentage of respondents planning on raising capital expenditure over the next six months increased from 27% to 29%. The net percent planning on increasing employment rose from 17% to 18%. The net percent planning on raising prices raising prices increased from 15% to 20%. Businesses were especially downbeat regarding business conditions through next spring. A trade agreement would likely lift sentiment but a failure would depress sentiment.
Energy and food prices boosted producer prices in October. The producer price index for final demand rose 0.4% in October, following a 0.3% decline in September. Goods PPI increased 0.7% for the month, largely driven by energy prices. Food prices also increased during the month. The headline PPI was up 1.0% from a year earlier but core goods was down 0.6%. In contrast to the PPI, the CPI increased 0.4% in October, following no change in September. The core CPI rose 0.2% in October, following a 0.1% increase in September. On a year ago basis, the headline CPI was up 1.8% and the core index is up 2.4%. Within the core CPI, car prices dropped 0.2%, the fourth consecutive decrease, but medical expenses rose 0.9%, the third consecutive monthly increase. The core CPI has firmed recently but not enough to change Fed policies. That day may come, but not any time soon. With a weak global economy and a slow U.S., inflation will remain subdued, well into 2020.
Retail sales bounced back modestly after falling in September. Sales rose 0.3% after declining 0.3% the previous month. Sales rose 0.2% excluding auto dealers and 0.1% excluding autos and gas. Sales were up 3.1% year-over-year, a decline from September’s 4.1% rate. Growth was mixed across segments, with strength at gasoline stations, non-store retailers, grocery stores and vehicle dealers. There were declines at apparel stores, furniture stores and sporting goods and hobby stores. The outlook for spending is positive, but modest going forward. Wages are rising and the unemployment rate is low, but job creation is slowing. The stock market has reached record highs but really has not moved much since 2018. There are risks concerning trade and that the recession in manufacturing may spread to the consumer sector. If tariffs go up on consumer items, there could be a negative reaction.
Industrial production fell 0.8% in October, following a 0.3% decline in September. Manufacturing declined 0.6% in October, hurt by a 7.1% decline in motor vehicles and parts output. The strike by the UAW was a big factor in October’s drop-in manufacturing. This sector is expected to bounce back in November. Manufacturing excluding the auto sector fell a more modest 0.1%. Machinery output rose 0.2%, but that did not offset the2.2% decline in September Computer and electronics outp0ut fell 0.5%, after a steady rise over the past few months. Business equipment output fell 0.6% ad this comes on the heels of a 1.1% decline in September. Mining fell0.7% in October and 0.8% in September. Utility output declined a sharp 2.6%. Weather played a role in the lower utility output, but fires in California and blackouts also contributed to the decline. Manufacturing is struggling but the resolution of the UAW strike will boost output in November and December. Low oil prices are hurting mining. Business investment is soft and trade uncertainty is hurting capital investment. All told, the outlook for the industrial sector will be weak over the next few quarters.
Stockpiles are no longer rising and while this may mean a temporary drag on growth, the inventory correction is long overdue. Business inventories only increased 0.05% in September, following a 0.1% drop in August. Retailers saw a 0.4% decline in stocks in September, while manufacturers saw a 0.3% increase and wholesalers saw a 0.2% increase. Total business sales contracted 0.2% in September. The inventory-to-sales ratio held steady at 1.4. Business inventories have been bloated for some time, but it does appear that a correction may be starting. Inventories have been rising sharply since early-2018 ad a correction is needed. Demand is softening, evident with slower business sales. Income growth has slowed and the global economy has lost momentum. Inventories have increased in line with announcements of tariffs by the Trump administration. This means a painful loss of production until stocks are more aligned with final demand. This is bad news for the short-term but perhaps, good news for the long-term.
Important Data Releases This Week
September retail sales will be released on Wednesday, October 16 at 8:30 AM EDT. After posting a soft August except for auto sales, we are looking for a 0.3% in sales for September. Sales excluding autos and gasoline are also projected to rise 0.3%.
October housing starts will be released on Tuesday, November 19 at 8:30 AM. Starts and permits have been volatile month-to-month but have been showing accelerating trends for single-family homes. Starts are projected to come in at a 1.320 million annual pace, sharply higher than the September 1.256 million pace. Permits are pointing to a small decline at 1.380 million versus 1.387 million in September.
October existing home sales will be released on Thursday, November 21 at 10:00 AM. At an annual rate of 5.380 million, existing home sales fell back in September though the three-month average posted a solid gain with a two-and-a-half year high. A sharp improvement is expected for October to 5.485 million.
October leading indicators will be released on Thursday, November 21 at 10:00 AM. We project the leading indicators to fall 0.1% in October, after a similar decline in September. Most of the September weakness was in manufacturing. This index has been pointing to slowing economic growth.