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.
Chinese equity shares fell sharply on Friday after data showed exports contracting the most in three -years, pointing to a further slowdown in China’s economy and stirring talk of a “trade recession” despite actions to stimulate the economy. Chinese stocks plunged more than 4% on Friday, the worst day in five months, while Japan’s Nikkei closed 2% lower. The dark mood spilled into European stock markets where the STOXX 600 index slipped 0.5%, poised for the first weekly drop in a month. ECB President Mario Draghi said the economy was in “a period of continued weakness and pervasive uncertainty” as he pushed out a planned rate hike and instead offered bans a new round of cheap loans. China’s exports fell 20.7% from a year earlier, the largest decline since February 2016. Economists expected a 4.8% drop. China’s imports fell 5.2%, worse than analysts’ forecasts for a 1.4% fall. Trade data from the first two months of the year should be read with caution due to business disruption caused by the Lunar New Year holidays. However, export momentum on a three-month basis as moderated significantly since the third quarter last year and is likely to remain soft in the near term.
U.S. stocks finished lower on Friday last week, with the Dow Jones notching its longest losing streak since June, after a disappointing jobs report and a slump in Chinese exports added to concerns about slowing global growth. The Dow Jones Industrial Average slid 0.1% on Friday to 25,450.24. The S&P slid 0.2% to 2,743.07, the worst string of losses since November. For the week, both the Dow and the S&P fell 2.2%. Investors were caught off guard by a surprisingly weak jobs number, with the addition of just 20,000 jobs for February. The five-day session for the Dow was the lengthiest since an eight-day skid that ended June 21. The decline for the S&P 500 was longest for a period that ended Nov. 14. Another ominous sign is flashing in the Dow Jones Transportation Average, which fell for an 11th consecutive session last Friday to cap its biggest loss in 47 years. Because they form the infrastructure on which commerce is conducted and provide clues about the strength of the economy, weakness among trucking companies, shippers and airlines is often viewed as an early warning sign for the broader market.
The world economy just had a bad week. The Organization for Economic Co-Operation and Development cut its forecast for global growth to 3.3% in 2019 and 3.4% in 2020. That was down 0.2 percentage points for 2019 and 0.1% for 2020 from November’s forecast. Meantime, exports from China tumbled almost 21% y/y in February, the most in three years. Germain factory orders dropped 2.6% in January, the most since June. Manufacturing purchasing manager indexes are in contraction territory in China, Japan and the euro-area and there is concern that the bloc’s economy and markets risk repeating Japan’s lost decades of growth. Deutsche Bank is warning the first quarter for the U.S. could grow less than 1% and the bout of labor market weakness will sow worries about the spending power of commerce. There are caveats. U.S. wage gains were the fastest of the expansion.JP Morgan & Co. predicts wage growth for rich nations will start advancing by 3% this year. Financial conditions are more relaxed after tightening late last year, with the MSCI World Index of stocks up almost 9% in 2019.
Much will depend on whether China and the U.S. can resolve their trade dispute, clearing a fog of uncertainty that’s stopping businesses from investing and hiring. It would help if the U.K can avoid tumbling out of the European Union without a divorce deal. Another case for optimism that the worst may be over is that some governments and central banks are starting to dole out aid. China’s government announced a cut to its value added tax as much as $800 billion yuan ($119 billion), as it lowered its growth target from 6.5% to 6.0%. The European Union Central Bank unveiled more stimulus in the form of new cheap loans for bans and a commitment not to raise interest rates until 2020. This is a moment of heightened uncertainty for global growth. A Fed pause, trade truce and China stimulus are reasons for optimism. However, from U.S. jobs to China exports, the most recent data is painting a more pessimistic picture. We continue to expect stabilization in the second quarter. Risks to that call are tilted to the downside.
With Fed policy on “pause”, all eyes are on economic data for clues on the next move. Nonfarm payrolls came in well below expectations, as employers added just 20,000 jobs in February. Through the volatility the 3-month average of 186,000 is still rather strong, but it does point to moderation in economic activity. An increasingly tight labor market is finally feeding through to stronger wage growth, as average hourly earnings rose to 3.4% y/y, the strongest pace of the cycle. Purchasing managers’ surveys point to a growing divergence between the manufacturing and service sectors. The ISM non-manufacturing index rebounded three points to 59.7. The business activity index jumped to 64.7 and the new orders index increased to 65.2. If this strength follows through, the Fed may have to raise rates one more time this year. That’s assuming the Fed’s pause allows the economy works through the current “cross-current” phase. The manufacturing index tells another story at 54.2, the index has retreated from sky-high readings of the last couple of years amid slowing growth overseas and no deal reached yet with China.
Speaking of trade wars, the U.S. trade deficit widened in December to $59.8 billion, a ten-year high. Exports fell 1.9% and imports rose 2.1%. Exports to China have fallen for seven consecutive months. Happier news came in from the housing sector, where starts increased 18.6% in December. Strength was concentrated in the single-family sector, where starts rose 25.1%. Total permits rose 1.4%, suggesting that although it is unlikely that we will see December-like strength soon, but neither will we see big declines in the near term.
Next week will be busy on the economic calendar. We will see retail sales, business inventories, the NFIB small business optimism index, CPI, PPI, durable goods orders, construction spending, import and export prices, new home sales, consumer sentiment and industrial production.
The U.S. Economy:
Construction spending declined 0.6% in December, following a 0.8% increase in November. Residential construction drove the December decrease, falling 0.6%. Total public construction also fell 0.6% for the month. Nonresidential construction increased 0.4% in December. Despite the December pullback, total construction spending does remain elevated and is up 1.6% from a year earlier. Construction spending was disappointing at the end of the year with a broad-based weakening at the end of the year in line with economy losing some steam at the end of the year. Residential construction is the clear laggard in 2018. Sending on single-family construction has dropped considerably, with new construction on multi-family structures only slightly offsetting the drop in single-family outlays. Public construction has fared better in 2018 rising 4.2% y/y. Of the largest components of private nonresidential construction, spending on manufacturing facilities rose 1.7% m/m and was up 5.7% y/y. Spending on power and utility structures fell 2.7%m/m and is down 4% y/y. Spending on commercial structures increased 6.4% from November and is up a whopping 37% from its year earlier level.
New home sales rebounded in December, increasing 3.7% from a revised November level. New home sales in December were still down 2.4% from a year earlier. Sales equaled an annual rate of 621,00 in December. Three out of four Census regions recorded an increase in December. New homes listed for sale at the end of December totaled 344,000 units, up 3% from November and up by 17% from December 2017. This was not enough to keep up with sales, so the inventory-to-sales ratio fell to 6.6 months in December, down from 6.7 in November. Although tempered by the November revision, sales in December were decent and suggests there is no serious correction on the horizon. Although mortgage rates have fallen a little, affordability is still an issue, so although we don’t expect sales to fall sharply, they are unlikely to move upwards at an appreciable rate. Look for flat sales for 2019.
The ISM non-manufacturing index increased from 56.7 in January to 59.7 in February, a sign the service sector is expanding on a broader front. Details were mixed. On the upside, the business activity index jumped from 59.7 to 64.7 and new orders rose from 57.7 to 65.2. On the downside, employment declined from 57.8 to 55.2. Supplier deliveries rose from 51.5 to 53.5. Seven industries reported slower deliveries, including mining, logistics, wholesale trade, retail trade, information, professional/scientific/technical services and healthcare. Sentiment has increased since the government went back to work. Fed policy remains on hold. However, the stimulus is fading away and the economy has slowed in response and future increases in the index are expected to become more muted. Labor shortages were a common theme among survey anecdote and this problem won’t go away quickly.
Residential construction had a decent start to the year as housing starts surged in January regaining some velocity lost last year. Housing starts increased 18.6% m/m to an annual pace of 1.230 million. Starts did remain down 7.8% from a year earlier. The increase in starts was driven by single-family construction, where starts increased 25.1% m/m to an annual pace of 926,000. Multi-family starts rose a more modest 2.4% to 304,000. Total permits increased 1.4% to 1.345 million. Permits for single-family construction fell 2.1% in January, while permits for multi-family units increased 7.2% m/m. The January construct numbers were good despite unseasonably cold weather in the last week that likely affected construction n the Midwest. The resurgence does suggest that housing is more-steady than the sharp dip in December indicated. Mortgage rates fell in January and applications have been trending up modestly since the beginning of the year. The slight rise in permits suggest that housing activity won’t decrease much over the next few months.
China plans on shoring up its slowing economy through billions of dollars in planned tax cuts and infrastructure spending, with economic growth at the weakest in almost 30year due to softer domestic demand and the trade war with the United States. China plans on cutting its growth target from 6.5% to 6.0% this year, much slower than the 6.6% rate the country saw in 2018. Premier Li Keqiang addressed the nation’s annual meeting of the parliament and warned of challenges the world’s second largest economy faced. Li said that there will be a more forceful fiscal response, with planned cuts of nearly 2 trillion yuan ($298.3 billion) in tax cuts ad fees for companies. That is more than the 1.3 trillion yuan delivered in 2018 and include reductions aimed at supporting the manufacturing, transport and construction sectors. China’s GD expanded at the slowest pace since 1990, due to the trade war and a crackdown on financial risks, which raised corporate borrowing costs and hurt investment. To support growth, China will closely monitor employment at exporting companies heavily exposed to the United States and cut the value-added tax (VAT) for the manufacturing sector to 13% from 16%. VAT for the transport and construction companies will be cut to 9% from 10%. The budget deficit is expected to rise to 2.8% of GDP from 2.6% because o the lower taxes and added spending. The government set an inflation target of 3%, despite a recent softening to less than 2%. The government said it will continue to promote Sino-U.S. trade negotiations and was committed to safe guard globalization and free trade.
Important Data Releases This Week
January retail sales will be released on Monday, March 11 at 8:30 AM EDT. Limited snap-back strength is the call for retail sales after the sharp 1.25 decline in December. Total retails sales are projected to be unchanged in January, but sales are expected to rise 0.5% excluding autos and gasoline.
December business inventories will be released on Monday, March 11at 10:00 AM EDT. Business inventories are expected to increase 0.6% for December, following the 0.1% decline in November.
The February NFIB small business optimism index will be released on Tuesday, March 12 at 6:00 AM EDT. After falling more than 3 points to the lowest level in more than two years we expect the index to bounce back to 102.8, up from 101.2 in January. February saw a sharp drop in the economic outlook and negative sentiment on both inventories and employment growth.
The CPI for February will be released on Tuesday, March 12 at 8:30 AM EDT. Moderate inflationary pressure is the call for February, with a 0.2% rise for both the CPI and core CPI. This will bring the headline CPI up 1.6% y/y and the core up 2.2%.
January durable goods orders will be released on Wednesday, March 13 at 8:30 AM EDT. A second month of weakness for core capital goods orders was the unwanted feature for December’s durable goods report. We see core capital goods orders only rising 0.1% in January. Total new orders are expected to fall 0.8% for the month. Excluding transportation, orders are projected to rise 0.1%.
The PPI for February will be released on Wednesday, March 13 at 8:30 AM EDT. Producer prices have been quiet, with a 0.2% increase projected for February.
January construction spending will be released on Wednesday, March 13 at 10:00 AM EDT. Extended weakness in the single-family component pulled down construction spending by 0.6% in December. We expect a 0.3% rise for January.
February import and export prices will be released on Thursday, March 14 at 8:30 AM EDT. We project import prices will rise 0.3% in February. Export prices, which have fallen the last three months, are expected to rise 0.2%.
January new home sales will be released on Thursday, March 14 at 10:00 AM EDT. New home sales came in at an annual pace of 621,000 in December. We expect a small decline to 620,000 for January.
February industrial productions will be released on Friday, March158 at 9:15 AM EST. We see manufacturing bouncing back for February. Both the headline number and the manufacturing component are projected to rise 0.4%.
The University of Michigan’s March consumer sentiment index will be released on Friday, March 15, at 10:00 AM EDT. We see the index rising from February’s 93.8 reading to 94.8.