Trade is a Concern

By | July 8, 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.


Coffee and Economic Review

World stocks clung to their 17-month highs on Friday and bonds paused after this week’s rally ahead of U.S. jobs data. The employment report should shed some light on market expectations concerning an aggressive policy easing by the U.S. Federal Reserve. Trade was light in global markets as the financial markets were closed in the U.S. because of Independence Day. The pan-region European STOXX 600 index slipped 0.3% on Friday. The losses came after German industrial orders had fallen far more than expected. A waring from the economy minister said he thought Europe’s largest economy was likely to remain weak in coming months. There were gains in Asia, where MSCI’s index of Asia-Pacific shares outside of Japan was set for its fifth straight weekly rise. World stocks have rallied since June on hopes global central banks will keep policy easy to support growth. The cease-fire in the Sino-U.S. trade conflict has also bolstered sentiment.

U.S. stocks dipped on Friday as the S&P snapped a three-day streak of record closes, following a stronger than expected U.S. jobs report that led investors to reassess how dovish a stance the Federal Reserve will take at the next meeting. Traders sharply scaled back their expectations of a rate cut of half a percent by the central bank on its next policy meeting July 30, although confidence remains high the Fed will cut rates by 25 basis points. Stocks slumped in May as trade talks between the United States and China were at a standstill and economic data began to point to a slowing. However, equities have rallied since June as the Fed, and other global central banks, signaled they were becoming more dovish. The jobs report was strong at 224,000 but wage growth is slowing. The S$P lost 5.41 points, or 0.18% on Friday to 2,990.41 and the Dow lot 43.88 points, or 0.16% to 26,922.12.

Last Monday, the current economic expansion entered its 121st month, the longest uninterrupted expansion in modern American history. The sheer age of the expansion has caused heightened speculation in recent months when the next downturn will transpire. However, economic expansions do not simply die of old age. Expansions die of policy mistakes or when a growing imbalance in the economy surfaces. Recent data suggest that the economy is not immediately heading for a recession, but it does seem to be moderating. The June jobs report was strong but the average of the last six months at 172,000 is down from the 211,000 average of the previous six months. Manufacturing is weak and was negative in the first quarter. The ISM manufacturing index held up better than expected for June, at 51.7 and new orders hit 50. On the other hand, the ISM non-manufacturing remained firmly in expansion territory, although concerns about tariffs are a central issue.

Trade is a concern. Trade data through May show goods exports have yet to return to the peak that occurred in May 2018, the month before the tariff on steel and aluminum took effect. Tariffs have not reduced imports nor made a dent in the overall trade deficit, which has widened 27.7% since the start of 2017. There is growing evidence of a re-routing of foreign supply chains. Imports from China are down over the last six months, but imports from Vietnam and other Pacific nations are up significantly. We are not importing less but the country-of-origin has changed. Trade is probably the greatest risk to the expansion and that emanates from the slowing global economy. Manufacturing PMIs are falling across the globe. The service sector so far is holding firm but there are increasing downside risks as trade tensions are still high. Trump has a ceasefire with China, but areal trade deal is likely still far off and downside risks from the uncertainty are growing.

Next week will be busy with economic data. We get a look at the NFIB small business optimism index, wholesale trade and the PPI and CPI. Monetary policy will be front and center as Jerome Powell speaks before the House Financial Services Committee on Wednesday and the Senate banking Committee on Thursday.

Latest Data

The U.S. Economy:

U.S. construction spending declined 0.8% in May, following a 0.4% advance in April. Total private construction spending declined 0.7% in May. Residential construction spending declined 0.6% for the month, with singe family construction spending down 0.8% for the month and down 6.3% for the year. Nonresidential construction spending fell 0.9% in May, down 0.1% for the year. Of the components of nonresidential construction spending, manufacturing structure investment was down 0.6% m/m but was up14% for the ear. Commercial structure construction was down 3.4% m/m and 15.4% y/y. Public construction spending fell 0.9% for the month but is up 10.8% for the year. Construction spending has been held back by the single-family sector and nonresidential construction spending is flat. The public sector is elevated despite the May decline.

The ISM manufacturing index fell from 52.1 in May to 51.7 in June, the third consecutive monthly decline. Growth in manufacturing has narrowed since the beginning of the year. Production increased from 51.3 to 54.1. New orders declined from 52.7 in May to 50.0 in June.  Out of 18 manufacturing industries, 10 reported growth in new orders. Among the industries reporting growth n June were furniture/related products, textile mills and printing. Six industries reported a decline versus four in May. The inventory index came in at 49.1 in June, compared to 50.9 in May. Supplier deliveries dropped from 52 to 50.7. According to the ISM, supplier deliveries are improving with many respondents reporting more readily goods and shorter lead times. There were still mention of transportation bottlenecks. The employment index increased from 53.7 to 54.5, with 12 out of 18 industries reporting growth in employment. The prices paid index fell from 53.2 to 47.7. Items up in price were corn, printed circuit board assemblies, soybean products and steel Commodities down in price were aluminum, copper, lumber and scrap metals. New export orders fell from 51 to 50.5. New import orders rose from 49.4 to 50. U.S. manufacturing has softened as the global economy is slowing and the U.S. economy moderates. Although China and the U.S. have declared a truce, the two sides are still far apart on some issues and a deal will likely take a prolonged period. Trump is now threatening the EU and trade tensions are still a force to contend with. Manufacturing is likely to remain weak through the year. Inventories remain high, slowing production.

U.S. vehicle sales retreated from an annualized pace of 17.4 million units in May to 17.2 million in June. Sales of cars increased 1.4% to 5.1 million. Light truck sales fell from 12.4 million in May to 12.1 million in June. Vehicle sales are slowly trending downwards, a drift that can be traced back to 2015, when an average of 17.5 million vehicles were sold. Trade tensions are a risk and the magnitude of the risk continues to swing dramatically. If tariffs rise globally, consumer prices will increase for autos and eventually general economic growth will slow. Fuel prices have been volatile on a month-to-month basis affecting light truck sales. The labor market remains strong, but confidence is starting to waver. Vehicle sales will track at of near the 17 million for the remainder of the year.

The trade deficit widened to $55.5 billion in May, up from $51.2 billion in April. Nominal exports rose 2% and goods exports gained 2.8%. Food, feed and beverage exports gained 6.5% and automotive exports were up 4.8% m/m. Total nominal imports increased 3.3% and goods imports were up 4%. Nearly all categories of imports increased. Automotive imports shot up 7.5% and industrial supplies rose 4%. The rebound in trade volumes was encouraging and exports nearly recovered from April’s decline. Although trade flows have been shaken by the ongoing trade war, May’s stronger exports suggest the damage has not been severe so far. Businesses will get some breathing room from the truce called by President Trump and President Xi. It is unclear how long the truce will last. Our base economic assumption assumes some deal will be made but probably not real soon. Tariffs will not likely wind down until 2020. The likely scenario will be for China to make large purchases of U.S. goods and a slow wind down of tariffs.

Factory orders fell 0.7% in May, following a 1.2% decline in April. May was the third decline in four months. The important nondefense capital goods excluding aircraft component increased 0.5% in May, following a 1.1% decline in April. Core capital goods shipments did advance 0.6% in May. Transportation orders fell 4.6% m/m and were down 8.4% y/y. Manufacturing is struggling as the expansion ages. May’s decline was led by transportation but excluding that sector, orders only rose 0.1%. In addition, the advance in core capital goods orders did not make up for April’s loss. We expect a bumpy rise for manufacturing as the global economy cools and tariffs are creating significant headwinds for trade.

The ISM non-manufacturing index fell from 56.9 in May to 55.1 in June. Details were not so great. New orders fell 2.8 percentage points to 55.8. Fourteen industries reported growth in new orders. Business activity retreated from 61.2 to 58.2 and employment fell 3.1 points to 55. The non-manufacturing sector remains in good hands, but the breadth of growth is narrowing. Anecdotes of the survey are sounding like a broken record. Tariffs and the tight labor market remain the recurring complaints. There were reports of stockpiling to limit the effect of the tariffs. The labor market remains tight.

Payrolls increased by a better than expected 224,000 in June, up from the weak 72,000 addition in May. The second quarter averaged a decent 171,000, close to the 174,000 of the first quarter. Job growth has shifted down, it averaged well over 200,000 in 2018. Average hourly earnings increased 0.2% in June, up 3.1% y/y. Wage pressures are not intensifying but have deaccelerated in recent months. There is little evidence the federal government is gearing up for the Census. Federal employment only rose by 33,000 for the month. The participation rate rose slightly to 62.9% from 62.8%. The unemployment rate rose from 3.6% to 3.7%. The labor market has now expanded every month for 9.5 years. The pace has fallen short of earlier expansions but demographic reasons sch as a slowing growth of the working age populations and structural changes such as increased automation are behind the slower growth. The report will affect Federal Reserve thinking. It may keep them on the sidelines longer concerning rate cuts than many investors anticipate.


Business activity in the euro-zone picked up slightly last month as a weak but broad bases upturn in the services industry offset a deep downturn in factory output. The IH Markit Euro Zone PMI nudged up to 52.2 in June from May’s 51.8 reading. The services PMI bounced to 53.6 in June, up from May’s 52.9 reading. The manufacturing MI for the euro zone fell to 47.6 in June from May’s 47.7 reading. It was the fifth straight month that operating conditions deteriorated in the euro zone. The weakness was not widespread. Conditions among manufacturers of consumer goods improved to the greatest degree since January. In contrast intermediate and investment goods producers recorded marketed deterioration. For intermediate goods, it was the sharpest decline since April 2013. Manufacturers face a challenging economic environment by the ongoing global trade tensions and under performance in the auto industry.

Important Data Releases This Week

June ISM manufacturing index will be released on Monday, July 1 at 10:00 AM EDT. The index is expected to fall to 51.2 in June from 52.1 in May.

June NFIB small business optimism index will be released on Tuesday, July 9 at 6:00 AM EDT. The small business optimism index posted back-to-back gains in April and May that indicate an improvement in the economic outlook and capital spending plans. We project to index will fall from the 105 reading in May to 104.5.

May wholesale trade will be released on Wednesday, July 10, at 10:00 AM EDT. Wholesale inventories rose 0.4% n the advance data for May and are expected to rise at the same rate in the second estimate.

June consumer prices will be released on Thursday, July 11 at 8:30 AM EDT. Consumer prices have been subdued and we project no change in the headline index for June. The core CP is projected to rise 0.2%. This brings the headline index up 1.6% for the year and the core up 2.0%.

June producer prices for final demand will be released on Friday, July 12 at 8:30 AM EDT. Producer prices have been weak lately and we expect the headline index to only rise 0.1% for June. The core PPI is projected to rise 0.2% in June. This brings the headline PPI up 1.7% y/y and the core up 2.2%.

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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.