The Trade War has Already Exacted Long-Term Damage to the Economy

By | November 13, 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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Uncertainty about the fate of trade negotiations between the U.S. and China kept markets on their toes on Friday, with European stocks mimicking their Asian peers and retreating from the previous day’s highs. The Dow and the S&P 500 reached new records on Thursday on hopes of a truce to end the damaging trade war but a Reuters report that the White House opposed aspects of the tentative deal limited Friday’s gains. The mood contrasts with Thursday’s hopes that Washington and Beijing had agreed to roll back tariffs as part of a first phase of a trade deal. Meantime, German exports posted their biggest rise in almost two years in September, easing some concerns that Europe’s biggest economy would dip into recession in the third quarter.

Oil prices faltered and global equity markets slipped on Friday, halting a week-long record setting rally on hopes of a U.S.-China trade deal was close. Statements out of Washington cast fresh doubts about progress between Beijing and Washington. Optimism about a deal earlier in the week darkened after fierce opposition from the White House to roll back tariffs after the U.S. President Trump reinforced negative feelings. He then reversed himself later in the day and optimism returned to the marketplace, with all three major indexes ending trading at record highs. MSCI’s gauge of stocks across the globe pared losses to close little changed, down 0.03% on the day and just 1.5% from a record high set in January 2018. The Dow Jones Industrial Average rose 6.44 points, or 0.02% to 27,681.24. The S&P gained 7.9 points, or 0.26% to 3,093.08. Optimism around a deal has run into uncertainty about the strength of the global economy and corporate results, which is driving fear of more weakness ahead. It is very difficult to forecast what this administration will do. People are pretty-pessimistic even though logic suggests the administration needs a deal going into an election year.

Optimism soared last week on hoes of a forthcoming trade deal. Equity markets soared to an all-time high and interest rates climbed, with the ten-year yield rising almost 20 bps this week to 1.91 and was up almost 50 bps from a month ago. However, market chatter about a “phase-one” deal has been completely devoid of any concrete details. Until we hear reports of a material pause or de-escalation of the trade war, it is best to assume that the 15% tariffs on the $150 billion of consumer goods imports will go it effect on December 15. This suggests some of the recent gains in the equity markets remain at risk. Still, the economy is showing signs of stabilization. The Fed’s willingness to adjust policy to confront factors out of its control, that is trade policy and slowing global growth-and its actions to shore up liquidity in short-term funding have eased fears of recession.

The ISM non-manufacturing index beat expectations last week by climbing to 54.7 from a three-year low of 52.6 in September. The fall in the non-manufacturing survey in September came just two days after the manufacturing counterpart fell to 47.8, indicating contraction at the fastest rate since 2009. The improvement of both surveys, with the manufacturing index rising to 48.3, was a welcome sign of stabilization, given the forward-looking new orders rose in both surveys. To be clear, the manufacturing index is still negative and fears continue that the weakness in manufacturing will spill over to the service sector. That remains a risk but the spread between the two rose in September and healthy consumer fundamentals point to continued resilience.

There are both up and downside risks. If a trade deal is reached, there could be a short-term rebound. However, the trade war has already exacted long-term damage to the economy. Business fixed investment, which drives long-term productivity growth, as fallen the last two quarters. Productivity growth declined 0.3% annualized in Q2, the weakest pace since 2015. Tariffs have played a large role in the slower pace of capital formation, imports of industrial supplies and capital goods are down 14.8% and 6.0%, respectively, over the past year. The slowdown in productivity growth and rising compensation have lifted unit labor costs growth to the highest in five years. A failure to close a trade deal may push the consumer to retrenching. An easing of tensions could lead to an upside exposure. Deal. Or no deal, the Fed may be in the right position now by staying where they are at.

Latest Data

The U.S. Economy:

U.S. vehicle sales decreased in October to a seasonal adjusted annual rate of 16.6 million, following a 17.2 million rate in September. October sales were down 4.3% from a year earlier. Economic growth has slowed but has been supported by strong consumer sentiment. The October reading may be the beginning of a slower sales trend that will proceed into 2020. Both car and light truck sales fell in October. Light truck sales fell 6.5% to an annual pace of 12.2 million. Car sales fell from 4.8 million to 4.5. The contraction in manufacturing may be partly to blame. When economic growth slows, manufacturers slow down production and use less incentives to push sales. With less incentives, consumers slow purchases. It’s the classic chicken and egg question. The October decline in sales came mainly from cars. Car sales accounted for 27% of sales, down from nearly 50% in 2013. The average price of a new vehicle has increased much faster than wages. The price increases may be starting to hurt marginal consumers. Vehicle sales will likely slow further in 2020.

Factory orders fell 0.6% in September, following a 0.1% decline in August. Transportation orders were down 2.8% after a 0.2% advance in August. Motor vehicles and parts orders fell 0.8%, following a 1% decline in August. Some of the weakness can be attributed to the UAW strike. Nondefense aircraft orders dropped 11.8%, while defense aircraft orders fell 41.7%. Excluding transportation, orders were down 0.6%. Core capital goods orders fell 0.6% in September and 0.8% in August. Fundamentals for business investment have turned less supportive. Real equipment spending fell in the third quarter. It is unusual for capital spending to decline for two consecutive quarters outside of a recession or early in a recovery. Capital spending did fall in 2015 and 2016 but that was because of weak energy investment. Part of the weakness can be attributed to Boeing, which is not shipping many aircraft. There is a strong correlation between corporate profits and equipment investment. Corporate profits are forecast to be in the low single digits well into 2020. Business investment in equipment is likely to struggle for some time.

The trade deficit narrowed to $52.5 billion in September from $55 billion in August as imports fell more than exports. Changes in goods exports were mixed. Nominal exports fell 0.9%, following a 0.2% gain in August. Goods exports lost 1.3%, after rising 0.3% in August. Changes in goods exports were mixed. Food, feed and beverage exports fell 12.3% after gaining 3.8% in August. Consumer exports rose 2.9% after a 4.8% decline in August. Nominal imports decreased 1.7% after gaining 0.5% in August. Goods imports fell 2.1%. Imports declined across most categories. Consumer goods imports fell 4.4%, dropping to the second lowest level in 2019. Capital goods imports lost 1.8%. The nominal petroleum balance moved into surplus for the first time in the series, which extends back to the late 1970s. The trade war remains a drag on the economy but a potential agreement could remove some uncertainty. The administration has indicated that any agreement would mean more purchases by the Chinese of agricultural products. Some imposed tariffs may also be rolled back.

The ISM’s non-manufacturing index shows the service side of the economy is doing fine. The ISM non-manufacturing index improved from 52.6 in September to 54.7 in October. Details were mixed. Business activity increased from 55.2 to 57.  New orders increased from 53.7 to 55.6.  10 industries reported growth in new orders during the month and six reported a decline. Super deliveries increased from 51 to 52.5. Imports fell from 49 to 48.5. Exports fell from 52 to 50. Backlogs fell from 54 to 48.5. Although the factory sector is still struggling, the non-manufacturing sector, which accounts for 88% of the economy, is doing just fine. After a September stall, growth in this area bodes well for future growth. On the downside, trade and supplier deliveries remain a sore spot. The handshake deal between China and the U.S. will help. However, two years of tariffs and World Trade Organization lawsuits and settlements have shaken supply chains. This weight won’t lift for at least a few quarters. Labor is a commodity listed in short supply and this will be a headwind in 2020.


Euro-zone business activity grew slightly more than originally thought but remain close to stagnation. The euro zone’s composite PMI rose to 50.6 in October, up from September’s 50.1, its lowest in more than six years. The headline PMI was consistent with GDP growth of 0.1%. Risks are tilted toward the downside. The euro zone’s manufacturing PMI contracted last month. There are fears the manufacturing slump is increasingly acting as a drag on services. The euro zone’s services PMI measuring new business was at 49.6, above September’s 48.7 but the second consecutive month below the 50 mark.

The German Federal Statistics Office reported that seasonal adjusted exports increased by 1.5% in September, the biggest increase since November 2017. The German economy shrank by 0.1% in the second quarter and data suggested manufacturing fared badly in the third, which could put Germany in a technical recession. The trade data suggests that there will be little negative effect on third quarter GDP and if private consumption increased slightly, the economy may barely escape recession. The DIHK Chamber of Commerce expected exports to grow by 0.3% this year but decline 0.5% next year, which would be the first fall since the global financial crisis.

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%.

The October NFIB small business optimism index will be released on Tuesday, November 12 at 6:00 AM. The index has been on the decline with business investment down and tariffs cited by 30% of the sample as negative for their business. For October, the forecast calls for 102 versus 101.8 in September.

The October consumer price index will be released on Wednesday, November 13 at 8:30 AM. Consumer prices cooled in September remaining unchanged and the core only rose 0.1%. We project a 0.3% rise for October for the headline index and a 0.2% increase for the core. This brings the year-over-year increase to 1.7% for the headline and 2.4% for the core.

The October producer price index will be released on Thursday, November 14 at 8:30 AM. Producer prices were soft in September, with the headline and the core both falling 0.3%. We project a 0.3% rise for October for the headline index and a 0.2% increase for the core. This brings the year-over-year increase to 0.9% for the headline and 1.6% for the core.

October retail sales will be released on Friday, November 15 at 8:30 AM. Retail sales came mostly flat in September but didn’t break the mostly upward yearly trend. We expect sales to rise 0.2% for total sales and 0.3% excluding gas and autos. Auto sales did fall sharply in October.

October import and export prices will be released on Friday, November 15 at 8:30 AM. Import prices fell sharply in September because of petroleum. Export prices fell on agricultural products. We look for import prices to fall 0.2% and import prices to decline 0.1% for the month.

The October industrial production report will be released on Friday, November 15 at 9:15 AM. After a strong August, September industrial production fell more than expected. We expect another 0.4% fall in total output. Manufacturing fell 0.5% in September, in part a result of the UAW strike. We project another 0.5% decline in manufacturing for October.

September business inventories will be released on Friday, November 15 at 10:00 AM. Business inventories are forecast to rise 0.1% in September after no change in August.

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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.