THE DAILY EDGE: 16 AUGUST 2019

Economic Outlook from Freight’s Perspective

(…) With the -5.9% drop in July, following the -5.3% drop in June, and the -6.0% drop in May, we repeat our message from last two months: the shipments index has gone from “warning of a potential slowdown” to “signaling an economic contraction.” We acknowledge that: all of these negative percentages are against extremely tough comparisons; and the Cass Shipments Index has gone negative before without being followed by a negative GDP. However, weakness in demand is now being seen across many modes of transportation, both domestically and internationally. (…)

The weakness in spot market pricing for many transportation services, especially trucking, is consistent with the negative Cass Shipments Index and, along with airfreight and railroad volume data, strengthens our concerns about the economy and the risk of ongoing trade policy disputes. (…)

• We are concerned about the severe declines in international airfreight volumes (especially in Asia) and the ongoing swoon in railroad volumes, especially in auto and building materials;
• We see the weakness in spot market pricing for transportation services, especially in trucking, as consistent with and a confirmation of the negative trend in the Cass Shipments Index;
• As volumes of chemical shipments have lost momentum, our concerns of the global slowdown spreading to the U.S. and the trade dispute reaching a ‘point of no return’ from an economic perspective grow.

U.S. Retail Sales Post A Strong Increase; Nonauto Sales Surge Unexpectedly

Consumer spending continues to exhibit strength. Total retail sales rose 0.7% (3.4% y/y) during July following a 0.3% June rise, revised from a 0.4%. May’s increase was revised to 0.5% from 0.4%. A 0.3% July sales gain had been expected in the Action Economics Forecast Survey. Retail sales excluding motor vehicles and parts gained 1.0% (3.7% y/y). It was the largest increase since April. June’s 0.3% rise was revised from 0.4% and May’s 0.5% gain was revised from 0.4%. The latest reading compared to expectations for a 0.5% improvement.

Purchases of motor vehicle & parts held back last month’s overall sales increase with a 0.6% decline (+2.3% y/y). It followed two months of modest increase. Last month’s result compared to a 2.0% m/m easing in unit sales of motor vehicles.

A measure of the underlying pace of retail spending is nonauto sales growth excluding gasoline and building materials. These [“control”] sales rose 1.0% (5.1% y/y) last month. That followed a 0.7% gain in June and a 0.8% May increase.

Sales exhibited broad-based improvement last month. (…) Restaurant & drinking establishment sales increased 1.1% last month (3.8% y/y) after five months of strong gain.

“Control retail sales”, which feed directly into GDP calculations, are up at a 7.2% annualized rate since February following the December-January aberration and were up 5.1% YoY in July. Note how this series seems to bottom out at the 2.5% YoY growth rate, except during recessions

After the retail-sales report, Macroeconomic Advisers raised its GDP growth prediction to a 2% annual rate in the third quarter from 1.7%. The Atlanta Fed also raised its estimate of third-quarter growth to 2.2%, up from 1.9% in the Aug. 8 estimate.

The above must have something to do with the below: compensation per hour was up 4.3% YoY in Q2:

U.S. Productivity Growth Increases in Q2, But Downward Revisions Shift Trend

Productivity in the nonfarm business sector grew at a greater-than-expected 2.3% seasonally adjusted annual rate during Q2’19 (1.8% year-on-year), following a slightly upwardly-revised 3.5% gain in Q1’19 (was 3.4%). The Action Economics Forecast Survey expected a 1.6% increase in Q2. However, annual revisions took prior quarters’ growth down meaningfully. Q4’18 productivity edged up just 0.1% versus the previously reported 1.3% gain. As a result, year-on-year growth in Q1’19 was taken down to 1.7% from 2.4% (which had been the quickest rate of increase since Q3’10). The gain in productivity in Q2 reflected a 1.9% rise (2.6% year-on-year) in real output coupled with a 0.4% decline (+0.8% y/y) in hours worked.

Despite healthy productivity growth in Q2, unit labor costs grew a faster-than expected 2.4% (2.5% y/y), as compensation costs jumped 4.8% (4.3% y/y). (…) Compensation was revised substantially higher to a 9.2% rate Q1 — the fastest rate since the end of 2012 — raising unit labor cost growth to 5.5% (was -1.6%) and 1.5% y/y (was -0.8%). As a result of the revisions to productivity and compensation, the downward trend in unit labor costs that was evident before the revisions has been reversed.

In the manufacturing sector, productivity fell 1.6% last quarter (+0.2% y/y) following an upwardly-revised 1.1% rise during Q1’19, (was 0.4%). Revisions to previous quarters’ productivity were less substantial, thus y/y growth in Q1 was revised up just 0.1 percentage point. The decrease in productivity in Q2 reflected a 2.1% drop (+0.4% y/y) in real output accompanied by a 0.5% decline (+0.2% y/y) in hours worked.

Unit labor costs in the factory sector jumped 5.8% (4.3% y/y — the fastest growth since Q3’15) following an upwardly revised 6.8% gain Q1 rise (was 2.0%). Compensation increased 4.1% (4.5% y/y) in Q2 following a 8.0% surge during Q1’19. The revisions to compensation raised unit labor cost growth to 1.2% y/y in Q1 from the previously report flat reading.

U.S. Industrial Production Lower on Manufacturing and Mining

Industrial production declined 0.2% during July (+0.5% year-on-year) following offsetting revisions to May and June — now both 0.2% gains revised from 0.4% and unchanged respectively. The Action Economics Survey forecast a 0.1% increase in July.

Manufacturing activity fell 0.4% (-0.5% y/y) during July, after growth of 0.6% in June and 0.2% in May (was 0.4% and 0.2% respectively). (…)

By market group, consumer goods output rose 0.2% in July (unchanged y/y), while business equipment declined 0.4% (+1.0% y/y) and construction supplies fell 1.0% (+1.2% y/y). Materials output decreased 0.3% (+0.6% y/y) driven by the same contraction in energy materials (+3.7% y/y).

In the special aggregate groupings, production of high technology products increased 0.2% (5.3% y/y). Semiconductor & electronic components declined 0.2% (-0.1% y/y) while computer & peripheral equipment was up 0.6% (3.2% y/y). Output in communications equipment grew 0.8% and previous months were revised substantially higher. The y/y growth decelerated to a still strong 20.9% in July from the 23.3% y/y gain in June (May’s reading of 24.3% was the fastest gain since April 2007). Factory sector production excluding the motor vehicle and high tech sectors declined 0.4% (-0.9% y/y) and is still 11% below its 2007 peak.

Capacity utilization declined to 77.5% in July from a downwardly-revised 77.8% (was 77.9%). Factory sector use decreased to 75.4%, and is down 1.9 percentage points from December’s cyclical peak. Capacity in the manufacturing sector grew 1.2% y/y, though capacity is still slightly below its 2008 peak.

GLOBAL WARMING?

Trump Says He Plans to Talk ‘Very Soon’ With China’s Xi on Trade

President Donald Trump said he has a call scheduled “very soon” with China’s President Xi Jinping over trade.

Powell Expected to Seek Another Cut Despite Strong Spending

(…) Powell may give a hint of his thinking when he speaks on Aug. 23 at the annual central bankers retreat in Jackson Hole, Wyoming. The topic of his remarks is Challenges for Monetary Policy, according to the Fed’s public schedule updated on Thursday. (…)

JPMorgan Picks Tariff Stocks and Shaves S&P 500’s 2020 Estimate

(…) “Tariffs remain the largest source of risk for equities,” strategists led by Dubravko Lakos-Bujas wrote in a note Thursday. The bank is reducing its 2020 earnings estimate for companies in the Standard & Poor’s 500 Index to $177 a share from $178 to account for tariffs that are expected to hit on Sept. 1. (…)

JPMorgan warned that small businesses have limited capacity to pass costs along to suppliers and end users. And the strategists see tariffs costing an average of about $1,000 annually per household with the new round of 10% tariffs, up from about $600 from earlier stages of the trade war. That would largely offset the benefits from tax cuts, which averaged out around $1,300 per household, they said.

“The impact from reduced spending could be immediate for discretionary goods and services since tariffs are regressive,” the strategists wrote. “Unlike the agriculture sector which is receiving subsidies/aid to offset the impact of China’s retaliatory actions, there is no simple way to compensate consumers.” (…)

Still, the relatively direct damage to consumers from fresh tariffs ahead of the 2020 election suggests there’s “a good chance” the decision is reversed, the strategists said.

Next Tuesday, America will be 15 months away from the next elections. Somebody at the WH must be doing some math for Trump: how long will it take to get manufacturing back on track and what is needed to make sure farmers stay loyal? (The blue line is to Q1’19)

On the trade war, Trump knows he is in a very uncomfortable corner. How far will he backpedal, not only to spare the consumer, but also manufacturers still stuck with the 25% tariffs, and farmers losing the Chinese market?

At the same time, Powell gets more and more pressure as the WH is winning the communications war: a recession would be caused by the Fed tightening in 2018 and easing too slowly in 2019.

To save his re-election and his image, Trump could remove tariffs entirely to “save the economy from the Fed’s stupidity” and say he will deal with China in 2021.

But that would remove the incentive for Fed cuts…

That said, the President sees things very differently:

Trump says China talks ‘productive’; Beijing vows tariff retaliation U.S. President Donald Trump said on Thursday that U.S. and Chinese negotiators were holding “productive” trade talks and expected them to meet in September despite U.S. tariffs on over $125 billion worth of Chinese imports taking effect Sept 1.

(…) “I think the longer it goes the stronger we get,” Trump said of the trade war. “I have a feeling it’s going to go fairly short,” he said. (…)

In a separate statement, China’s foreign ministry spokeswoman, Hua Chunying, said, “We hope the U.S. will meet China halfway, and implement the consensus of the two heads of the two countries in Osaka.”

China hopes to find mutually acceptable solutions through dialogue and consultation on the basis of equality and mutual respect, she added. (…)

“By the looks of it, they know they will hit a brick wall in a cul-de-sac at some point, so now they are but slowing their pace and delaying the hit,” the People’s Daily wrote.

“By not turning back, they will ultimately hit the wall and break their heads.” (…)

Trump’s Fall 2019 China Tariff Plan: Five Things You Need to Know

US retailers’ lament: where are the Chinese tourists? Businesses count the cost of falling visitor numbers as trade war bites

(…) While Chinese nationals accounted for fewer than 8 per cent of overseas visitors to the US in 2018 compared with almost 12 per cent who came from the UK, according to the National Travel and Tourism Office, they contributed more to the US economy than those from any other country. (…)

‘Crazy inverted yield curve’ vexes Fed, with no clear resolution

(…) Called a “yield curve inversion,” this has been a traditional warning sign for the economy: If smart investors see more risk two years ahead than 10 years down the road, it can’t be good for near-term growth.

In response, President Donald Trump and others have upped demands for a U.S. Federal Reserve rate cut. (…)

U.S. Home Starts Fall on Further Weakness in Apartment Building U.S. new-home construction unexpectedly fell in July for a third month.

Residential starts dropped 4% to a 1.19 million annualized rate after a downwardly revised 1.24 million pace in the prior month, according to government figures released Friday. The median forecast in a Bloomberg survey of economists called for a 1.26 million pace.

Multifamily home construction slumped for a second month, while starts of single-family housing increased to the highest level since January. (…)

Total building permits, a proxy for future construction, rose 8.4% to a 1.34 million rate, exceeding estimates. The monthly increase was the largest in more than two years. (…)

U.S. Home Builder Sentiment Improves Slightly

INVERSION

• Recession and the Signal from the Treasury Yield Curve

• Oh, Inverted World

• The Yield Curve: What Is It Really Predicting? (Ed Yardeni) (Tks Fred)

• After the yield curve inverts — here’s how the stock market tends to perform since 1978 (Tks Pat)

(…) Data from LPL Financial also corroborate the tendency for markets to punch higher in the long term. (…)

On top of all that, a yield-curve inversion, doesn’t instantly result in an economic recession. From 1956, past recessions have started on average around 15 months after an inversion of the 2-year/10-year spread occurred, according to Bank of America Merrill Lynch.

GLOBAL WARMING!

Trump Shows Interest in Buying Greenland, But Denmark Won’t Sell

Trump sees potential for golf resort. The man has vision!

https://www.youtube.com/watch?time_continue=8&v=l4bTOLfXVaM