March Economic Roundup
As part of FreightWaves overall coverage of freight markets, it publishes a summary of the changes in the economy over the past month, both in terms of the data releases and developments in public policy. The Economic Roundup is designed to synthesize the events of the past month as they relate to freight markets, and provide a guide to trends to keep an eye on in the upcoming month. The Roundup is published on the first business day of each month with the next release scheduled for Monday, April 1st.
Overview:
The U.S. economy continues to downshift in the early months of the year, continuing a moderating trend that began at the end of 2018. February saw the release of a number of data updates that were previously delayed by the government shutdown, as well as plenty of fresh information covering January data. The overarching theme through most of the data is that the economy slowed down at the end of 2018, and continues to slow down further at the start of 2019.
GDP
After strong back-to-back quarters of growth in the second and third quarters of 2018 (4.2 percent and 3.4 percent, respectively), U.S. GDP slowed to a 2.6 percent pace of growth in the fourth quarter. The pace was strong enough to push year-over-year growth to 3.1 percent during the quarter, however, and capped off an impressive year for an economy that grew at the fastest pace since 2015.
Consumer spending growth slowed slightly during the fourth quarter, but continued to drive most of the growth in the economy overall. Business investment provided a positive surprise in the fourth quarter GDP numbers, contributing an additional 0.8 percent to growth overall. While the second and third quarters of growth were subject to wild swings in inventories, imports and exports (likely driven by attempts to circumvent tariffs), growth in the fourth quarter saw more modest movements in these often-volatile components.
Trend to watch: The combination of the government shutdown, smaller tax refunds and poor winter weather is likely to cause GDP to slow even further in the first quarter. Early results from this quarter have predominantly fallen below expectations, and the economy is trending towards growth below 2 percent to start 2019.
Manufacturing and industrial production
Industrial output fell well short of expectations in January, as industrial production fell 0.6 percent from December’s levels. This was led by a 0.8 percent decline in the manufacturing sector, fueled by broad-based declines across most of the industries in the sector. Year-over-year growth in both total and manufacturing industrial production has clearly cooled from the highs seen in the third quarter of 2018, registering 3.8 percent and 2.9 percent, respectively.
Survey data from the manufacturing sector has reinforced the movements in the manufacturing sector, as both data from the Institute of Supply Management (ISM) and regional Federal Reserve manufacturing readings have cooled from the high readings that emerged last year. The manufacturing sector still faces headwinds from weaker investment demand, a strong dollar and softening global growth, and these factors will continue to restrain growth in upcoming months.
Trend to watch: Year-over-year growth in both industrial and manufacturing production is still higher than average at the start of 2019. However, the comparisons may get more difficult over the next several months, and growth should continue to trend down.
Retail and inventories
Retail sales provided the biggest surprise of the month, as previously delayed data on December sales showed a 1.8 percent decline from November’s levels. This brought year-over-year growth down to 2.3 percent and provided a disappointing end to the 2018 holiday season. With the exception of building materials and motor vehicles, every major industry in the sector declined in December, including a stunning drop in non-store (mostly online) sales.
On the inventory side, the total inventory/sales ratio held stable after creeping up over the previous several months. As mentioned early, some of this inventory build was likely driven by tariff concerns, as business built up additional inventory in case tariff increases are implemented. The tariff picture remains uncertain for the time being, but eventually these built- up inventories will be drawn down.
Trend to watch: Almost immediately following the December retail sales report, analysts began to question the validity of the data and whether the government shutdown affected the Census Bureau’s ability fully capture activity. The fundamentals for consumer spending are still generally strong, so watch for either a large revision to December data or improved January and February data to get things back on track in retail.
Labor markets
Job growth continued its impressive growth in January, starting out the year with 304,000 jobs added. Unemployment crept up to 4.0 percent during the month, though this was likely caused by the government shutdown. Wage growth remained above 3.0 percent year-over-year, and the number of job openings continued to outpace the number of unemployed people in the economy. As a result, the labor market continues to exhibit strength in early 2019, and has shown little to no signs of slowing down.
Trucking hires continued on a positive path in January, adding 3,600 workers to payrolls during the month on the heels of upwardly revised gains in both November and December. This marks the ninth consecutive month with positive job growth and puts trucking employment 2.9 percent higher than at this point last year. The rate of job openings within transportation has cooled some in recent months, however, which suggests that the labor market in the industry is not much tighter than it is for the economy overall.
Trend to watch: Job growth continues to defy expectations, but historically job growth is a lagging indicator of economic performance. With the economy showing signs of slowing overall, the pace of hiring will likely eventually follow.
Housing and construction
Housing data performed well below expectations during the month, signaling continued weakness in the construction sector. Previously delayed data showed that housing starts fell to a 1.08 million annualized pace in December, marking the slowest pace in over two years. The demand side of the housing sector also fared poorly, as a decline in existing home sales outweighed positive results from new home buying.
The housing sector has been plagued by both short-term disruptions such as weather, and long-term structural challenges like housing affordability and shortages of labor. Residential investment subtracted from overall GDP growth all through 2018, and it is likely housing will remain subdued throughout 2019.
Trend to watch: Hurricane season, California wildfires, and poor winter weather are all likely holding back construction even further over the past several months. There should still be some pent-up activity that will eventually come out, but it will probably have to wait until the weather returns to normal.
International Trade
The Census Bureau reported that the U.S. economy’s goods deficit widened in December to -$79.5 billion on a seasonally adjusted basis, from a revised -$70.5 billion in the previous month. This is considerably larger than consensus estimates of -$73.1 billion, and set a fresh record high for the goods trade deficit.
Struggling exports contributed to the increase in the deficit in December, declining -2.8 percent from November’s levels. This marks the third consecutive decline in goods exports from the U.S., and the largest monthly decline in nearly four years. Year-over-year growth in goods exports continued its free fall from the highs seen in May 2018, dipping into negative territory at -0.3 percent. Goods imports rose 2.8 percent during the month, erasing some of last month’s 3.6 percent decline. Year-over-year growth in goods imports improved in December, but remained relatively subdued at 3.2 percent.
Trend to watch: Trade growth is another area that has clearly cooled in recent months. Some of this is due to trade policy uncertainty, but the fundamentals for trade growth are also not strong, with concerns over both domestic and global growth. Trade talks with China appear to be progressing, but softer trade growth will likely persist, even if a deal is reached.
Ibrahiim Bayaan is FreightWaves’ Chief Economist. He writes regularly on all aspects of the economy and provides context with original research and analytics on freight market trends. Never miss his commentary by subscribing.