The Coronavirus Emerged as the Latest Economic Threat

By | March 2, 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 ReviewThe coronavirus panic sent world shares skidding again on Friday, compounding their worst crash since the 2008 global financial crisis and pushing the week’s wipeout in value terms to $5 trillion. The rout showed no signs of slowing as Europe’s main markets slumped and sent U.S. government bonds to fresh record lows. Hopes that the epidemic that started in China would be over in months and that economic activity would quickly return to normal were shattered last week as the number of international cases spiraled. Bets are now that the Federal Reserve will cut rates and other central banks will try and follow and nurse economies through the troubles. Disruptions to international travel and supply chains. School closures and cancellation of major events have blackened the outlook for a world economy that was already struggling with the U.S.-China trade war fallout.
The S&P fell for a seventh straight day on Friday and the benchmark index suffered its biggest weekly drop since the 2008 financial crisis on growing fears the fast-spreading coronavirus could push the economy into recession, although stocks did regain some ground at the end of a volatile session. The Dow and the Nasdaq also registered their deepest weekly loss since October 2008. On Thursday, all three indexes had confirmed correction territory by finishing more than 10% below their record closing highs. Equities found some support after U.S. Federal Reserve Chair Jerome Powell said the fundamentals of the American economy remain strong and the central bank would act as appropriate to provide support. But investors had spent most of the day dumping equities for the safety of U.S. Treasuries, pushing 10-year yields to their fourth record low this week.
The COVID-19 coronavirus hammered financial markets this week and rapidly raised the perceived likelihood of additional Fed accommodation. Moreover, the wave of fear and risk-off moves drove the U.S. ten-year yield to an all-time low last week, while corporate bond spreads are rising rapidly. Clearly, financial market conditions are tightening and threaten to choke off growth beyond the direct effects of the coronavirus. The bond market now expects two more Fed cuts by the end of the year and raises questions how lower interest rates would alleviate supply chain disruptions. Despite the bond market’s conviction, it is impossible to say with certainty what will really happen. No one can predict the spread of the virus, although news headlines and financial markets will certainly try. For right now, patience is the best option.
Economic news last week was mainly positive. Nondefense capital goods rose 1.1% in January, pulling the three-month annualized rate to the highest point since the trade war flared up last August. Yet, just as the Phase I trade deal provided relief to the lagging manufacturing sector, the coronavirus emerged as the latest threat. Consumer confidence rose to a six-month high but in coming weeks supply chain disruptions and the effects of the coronavirus will weigh against the strong labor market. New home sales set a cycle high and housing should continue to strengthen, with mortgages at record lows. Personal income rose 0.6% in January, while personal spending rose 0.2%.
Most of the real economic impact of the coronavirus is hitting the global economy. The virus has spread to more countries and there was a surge in new cases in Korea and Italy. Parts of Northern Italy are essentially on lockdown and Korea has announced a package of temporary fiscal measures. Germany may relax its no debt policy. Most economist say that the best way to deal with the current crisis is fiscal, not monetary. The current crisis is a supply shock and fiscal policies are the best way to deal with it.
The upcoming week will be busy on the economic calendar. We get a look at the ISM manufacturing and non-manufacturing indexes, construction spending, vehicle sales, factory orders, trade deficit and employment. All eyes will be glued on financial markets and further developments of the coronavirus.

Latest Data

The U.S. Economy:

New home sales weakened are hitting its stride. New home sales jumped 7.9% in January to 764,000, the highest level since 2007. Sales were also revised higher in December to 708,000. The number of new homes for sale was little changed from December but the inventory-to-sales ratio dipped from 5.5 months to 5.1 months. The median price of a new home increased 7.4% to $348,000. The combination of low mortgage rates, robust consumer fundamentals and favorable weather are fueling demand. New home sales are now at the highest level since 2007 following the last two months of solid increases. Most of the increase is demand driven as the supply of new homes haven’t moved much over the past year. We project sales to increase over the next few quarters.
The pace of economic activity ticked up in January. The Chicago Fed National Activity Index rose to -0.25 from -0.51 in December. A four broad categories increased in January but only one made a positive contribution. The index’s 3-month moving average ticked up to -0.09 from -0.23 I December, marking the 12th month the moving average has been negative. The negative reading means economic growth is below average. Production-related indicators contributed -0.23 in January from -0.51 in December. The sales, orders and inventories category contributed -0.23 in January, compared to -0.06 in December. Employment-related indicators contributed -0.03, compared to -0.03 in December. The personal consumption and housing category contributed 0.03, up from 0 in December.
U.S. durable goods continue to paint a mixed picture for manufacturing. Orders fell 0.2% in January, following a 2.9% increase for December. The weakness in January was confined to transportation, particularly defense aircraft and motor vehicles. Orders in the volatile nondefense aircraft segment soared 346.2%. Excluding transportation, new orders increased 0.9%. New orders in the important core capital goods segment excluding aircraft, were up 1.1% after falling 0.5% in December. Transportation orders, down four of the last five months, fell 2.2% in January after rising 8.8% in December. Motor vehicles and parts orders were down 0.8% in January. Total durable goods shipments fell 0.2% in January, the sixth consecutive monthly decline. Durable goods orders continue to bounce around, Looking into the core capital goods segment, orders remain weak. Fundamentals remain soft for business investment. Weakness in corporate profits are not promising for business investment and weakness in manufacturing will be around for several quarters.
The nominal goods deficit narrowed in January, as imports slipped. The deficit came in at $65.5 billion, compared to $68.7 billion in December. Nominal goods exports fell 1% in January, after gaining 0.9% in December. Following a 3.1% advance in December, nominal goods imports dropped 2.2%, with declines in imports of industrial supplies, autos and imported capital goods. January’s dip in the deficit got the quarter off to a decent start, but the disruption of supply chains caused by the coronavirus will affect February data. Shipping delays at Chinese ports began in January and resulted in delays reaching U.S. ports. As manufacturing rebounds in China, the disruption will rebound trough trade data for months. The fall in the equity markets may result in less spending on consumer goods. Real GDP may fall 0.5% in the first quarter because of the virus. Unless it is contained, a global recession may follow.
Personal income jumped 0.6% in January but December was revised from 0.2% to 0.1%. Personal spending only advanced 0.1% in the first month of the year, following a 0.1% advance in December and 0.2% in November. Durable goods spending increased 0.5% but nondurable goods spending fell 0.2% in January. Warm weather caused spending on utilities to fall in the last two months. Spending should pick up as the weather warms. Income gains will drive spending in coming months. The risk is that the drop in the financial markets may have a consumer reaction. Downside risks are significant until the virus is contained.

Important Data Releases This Week

The coronavirus panic sent world shares skidding again on Friday, compounding their worst crash since the 2008 global financial crisis and pushing the week’s wipeout in value terms to $5 trillion. The rout showed no signs of slowing as Europe’s main markets slumped and sent U.S. government bonds to fresh record lows. Hopes that the epidemic that started in China would be over in months and that economic activity would quickly return to normal were shattered last week as the number of international cases spiraled. Bets are now that the Federal Reserve will cut rates and other central banks will try and follow and nurse economies through the troubles. Disruptions to international travel and supply chains. School closures and cancellation of major events have blackened the outlook for a world economy that was already struggling with the U.S.-China trade war fallout.
The S&P fell for a seventh straight day on Friday and the benchmark index suffered its biggest weekly drop since the 2008 financial crisis on growing fears the fast-spreading coronavirus could push the economy into recession, although stocks did regain some ground at the end of a volatile session. The Dow and the Nasdaq also registered their deepest weekly loss since October 2008. On Thursday, all three indexes had confirmed correction territory by finishing more than 10% below their record closing highs. Equities found some support after U.S. Federal Reserve Chair Jerome Powell said the fundamentals of the American economy remain strong and the central bank would act as appropriate to provide support. But investors had spent most of the day dumping equities for the safety of U.S. Treasuries, pushing 10-year yields to their fourth record low this week.
The COVID-19 coronavirus hammered financial markets this week and rapidly raised the perceived likelihood of additional Fed accommodation. Moreover, the wave of fear and risk-off moves drove the U.S. ten-year yield to an all-time low last week, while corporate bond spreads are rising rapidly. Clearly, financial market conditions are tightening and threaten to choke off growth beyond the direct effects of the coronavirus. The bond market now expects two more Fed cuts by the end of the year and raises questions how lower interest rates would alleviate supply chain disruptions. Despite the bond market’s conviction, it is impossible to say with certainty what will really happen. No one can predict the spread of the virus, although news headlines and financial markets will certainly try. For right now, patience is the best option.
Economic news last week was mainly positive. Nondefense capital goods rose 1.1% in January, pulling the three-month annualized rate to the highest point since the trade war flared up last August. Yet, just as the Phase I trade deal provided relief to the lagging manufacturing sector, the coronavirus emerged as the latest threat. Consumer confidence rose to a six-month high but in coming weeks supply chain disruptions and the effects of the coronavirus will weigh against the strong labor market. New home sales set a cycle high and housing should continue to strengthen, with mortgages at record lows. Personal income rose 0.6% in January, while personal spending rose 0.2%.
Most of the real economic impact of the coronavirus is hitting the global economy. The virus has spread to more countries and there was a surge in new cases in Korea and Italy. Parts of Northern Italy are essentially on lockdown and Korea has announced a package of temporary fiscal measures. Germany may relax its no debt policy. Most economist say that the best way to deal with the current crisis is fiscal, not monetary. The current crisis is a supply shock and fiscal policies are the best way to deal with it.
The upcoming week will be busy on the economic calendar. We get a look at the ISM manufacturing and non-manufacturing indexes, construction spending, vehicle sales, factory orders, trade deficit and employment. All eyes will be glued on financial markets and further developments of the coronavirus.


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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.