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.
Stocks rose and the pound gained on the prospects of a U.S.-China trade deal and an election victory for Boris Johnson’s Brexit-backing Conservative party cleared two of the darkest clouds on the global investment horizon. Trade optimism lifted Wall Street to record highs. MSCI broadest index of Asia Pacific shares outside Japan jumped 1.5% to the highest since April. Europe’s STOXX 600 jumped 1.5% higher on the twin boosts. Washington has set its terms for a trade deal with China, offering to suspend some tariffs on Chinese goods and cut others in exchange for Beijing’s buying more American farm goods. As of this writing, there has been no official response from Beijing. If a deal is reached, there will be positive implications for the U.S. economic outlook. However, global trade volumes are not going to turn on a dime and any positive impact of the trade deal will take time to work its way through the U.S. and global economies.
Wall Street inched forward on Friday as details concerning the U.S.-China trade deal was unveiled. The Dow increased by 3.33 points on Friday, ending the week up 0.6%, while the S&P increased 0.23 points to end the week up 0.4%. The United States and China cooled their trade war, announcing a “Phase one” agreement that reduced some U.S. tariffs in exchange for increased Chinese purchases of American farm products and other goods. Beijing has agreed to buy $32 billion in additional agricultural goods over the next two years from a base of $24 billion purchased in 2017. China would also ramp up purchases of U.S. manufactured goods, energy and services. The United States would suspend tariffs on Chinese goods due to go in effect on Dec. 15 and reduce others.
Some business groups hailed the deal as an end to uncertainty that slowed global growth. Others questioned whether the trade war had been worth the job losses and drop in sales. The 25% tariff on approximately $250 billion of imports from China remains and the deal did not fully address some for the fundamental issues that sparked the trade war. Although passage of “Phase two” will unlikely pass before the presidential election, the finalization points to some upside impact for the current outlook. The passage of USMCA looks more assured as House Democrats last week endorsed an updated version that looks likely to pass the Senate once taken up in 2020. The passage will remove some uncertainty for affected industries, including autos. However, the deal tweaks rather than overhauls NAFTA and likely will have little effect on policy that will affect business decisions.
After cutting the target range for the fed funds rate by a cumulative 75 basis points this year, the Federal Open Market Committee took the December meeting off, which was widely expected. There were few changes to the statement as the Fed added it judges the current stance of monetary policy as appropriate to support the expansion. The forward guidance noted that the central bank remains data dependent but also no9ted global developments and inflation pressures will factor in where rates are heading. The updated dot plot showed rates on old in 2020 before slowly rising in 2021 and 2022. Inflation has picked up a little strength the last couple of months but that is largely attributed to energy. Core inflation remains at target and is likely to remain subdued. Monetary policy is likely to remain on hold unless something negative develops that might change the outlook in 2020.
Inflation figures released last week suggest a modest but steady rise of inflationary forces. Overall consumer inflation ticked up to a 2.1% year-over-year pace in November, but the core index was steady at 2.3%. The producer price index suggests domestic inflation pressures remain generally tame. The index was unchanged in November, held down by a drop in services. Retail sale were positive, but modest in November, rising 0.2%. This followed a 0.4% advance in October. Sales 3.3% above their year earlier level. The consumer has slowed spending from the more robust pace of last spring. Fundamentals remain solid and the consumer will continue to lead the economy at a modest pace.
Next week, we get a look at housing starts, existing home sales, leading economic indicators, personal income and outlays, the GDP deflator and the third GDP revision for the third quarter. The economy is growing near its long-term trend of about 2%. The passage of the trade deal does represent some upside potential by removing some uncertainty. Basically, the deal brings Trump and Xi back to step one, a block, or two behind. Although the deal is good news, it will take time to bring the global economy and trade volumes back to health. Some clouds have been removed for 2020, but others remain and next year is an election year, with its own brand of uncertainty.
The U.S. Economy:
The NFIB small business confidence index rose 2.3 points in November to 104.7. The increase was led by seven of the index’s components. Owners saying now is a good time to expand increased by 6 points and those expecting better business conditions increased by 3 points. The uncertainty index had declined by 6 points in November to 72, the lowest reading since May 2018. A net 30% reported raising compensation, unchanged from October and 26% plan to do so in six months, up 4 pints and the highest since December 1989. November does represent a departure from previous months where recession fears dampened confidence. Confidence has improved but remains below its cyclical high. Better financial conditions and a more positive view about a potential trade deal with China likely had a hand in raising confidence levels in November.
The producer price index was unchanged in November, after increasing 0.4% in October. The core goods index rose 0.2%, after remaining unchanged the month preceding. On a year ago basis the final demand index was up just 1.1% and the core goods index was up just 0.6%. The consumer price index rose 0.3% in November, following a 0.4% rise in October. Food prices rose 0.1%, while energy gained 0.8%. Gasoline prices were up 1.1%, the second consecutive monthly gain. The core index rose 0.2% in both November and October. On a year ago basis, the CPI was up 2.0% and the core 2.3%. Inflation remains tame and is unlikely to make a lot of headway in the near-term. This will help keep monetary policy on hold for 2020.
Retail sales increased 0.2% in November, with the top line supported by a 0.5% jump in auto sales. Excluding the auto sector, sales grew a more modest 0.1%. Growth was mixed across segments, with strength led by non-store retailers, gasoline statins and electronic and appliance stores. Declined were led by drugstores, department stores and sporting goods stores. Sales were up 3.3% from a year earlier, up slightly from October’s 3.2% reading. Consumption is growing at a healthy rate but has slowed from where it was last spring. Future gains in consumption are likely to be modest as job growth slows but the consumer will continue to be the driving force of the economy.
The inventory build started up again in October, with business stockpiles rising 0.2%, following small declines the previous two months. The gains were broad-based, with manufacturing and wholesale stocks up 0.1% and retail stocks advanced 0.3%. Total business sales slipped 0.1%. The inventory-to-sales ratio was unchanged at 1.40. The relatively high level of stocks indicate that further reductions are needed. Demand remains soft and that complicates inventory control. A slight inventory reduction can be expected over the near-term.
Important Data Releases This Week
November housing starts will be released on Tuesday, December 17 at 8:30 AM EDT. After posting a modest increase in October to a 1.314 million annualized pace, starts will increase to 1.350 million. Low mortgage rates are boosting the single-family market.
The November industrial production report will be released on Tuesday, December 17 at 9:15 AM EDT. Inflation was weak in October, falling 0.8%. We do expect total IP to rise 1.2% as auto production picked up after the UAW strike ended. Manufacturing remains weak and it will take some time before results can be expected.
The November PPI report will be released on Thursday, December 12 at 8:30 AM. The PPI was also strong in October rising 0.4%. The increase was largely energy driven. For November, we see a more modest 0.2% increase.
The November existing home sales will be released on Thursday, December 19 at 10:00 AM. Sales were decent last month, rising to 5.46 million. We expect a small decline in November to 5.44 million.
The November personal income and outlays report will be released on Friday, December 20 at 10:00 AM. Personal income was weak in October, remaining unchanged. We expect a trend-like 0.3% rise for November. Spending in October held up better than incomes, rising 0.3%. We project a 0.4% advance for November. Inflation remains tame, with the GDP deflator projected to only advance 0.1%.