June Economic Roundup

It is quite possible that much of this early year weakness is attributable to temporary factors, as the first quarter and early second quarter have been plagued by poor weather, tariff-related fluctuations in trade, the government shutdown, and a disappointing tax return season. As a result, fundamentals would suggest at least a modest rebound in activity in upcoming months. However, the U.S. shift on trade policy in May, raising tariffs on China and instituting new tariffs on Mexico, is likely to hinder economic growth going forward. If there is a rebound in activity in upcoming quarters, it is likely to be subdued.  

GDP

Revised estimates of first quarter U.S. gross domestic product (GDP) showed that the economy grew at a 3.1 percent pace of growth, up from the 2.2 percent pace in the previous quarter. This was down slightly from initial estimates of 3.2 percent, though year-over-year growth remained strong at a near four-year high of 3.1 percent.

There were some minor changes in the details of the GDP revision, but the overall picture of the economy remained the same. Growth during the first quarter was primarily driven by gains in the service sector, inventory building, and a reduction in the size of the trade deficit. The goods side of the economy grew at a far slower pace, leading to weak freight demand at the start of the year.

Trend to watch: Consumer spending on goods declined during the first quarter of the year, much as it did during the first quarter of 2018. Last year, enthusiasm over tax cuts and strong job growth led to a surge spending on goods in the second and third quarters. Goods consumption should improve in the secord quarter this year, but without the boost from tax cuts, the rebound may be more modest.

Industrial production and manufacturing

In the industrial sector, total production also unexpectedly struggled in April, falling 0.5 percent from March’s levels. This was the third drop in total factory output in the last four months, pushing year-over-year growth below 1 percent for the first time since early 2017. Manufacturing industrial production, which makes up approximately 70 to 75 percent of the total, also declined 0.5 percent in April, with yearly growth tumbling into negative territory at -0.2 percent.

Other data surrounding the manufacturing sector has also been weak. Survey data from the Institute of Supply Management has clearly downshifted on the manufacturing side of the economy, and responses on new orders were barely above the expansionary threshold of 50 at the start of the second quarter. Durable goods orders plunged in April because of aircraft orders, but core orders have essentially stalled since the third quarter of last year.

Trend to watch: The trade conflict with China sucked much of the wind out of the sails of the manufacturing sector by the third quarter of 2018. Orders for manufactured goods haven’t plunged yet, as they did during the freight recession in 2015 and 2016, but the latest round of tariffs may make a bad situation worse in the manufacturing sector

Retail and inventories

Retail sales activity pulled back in April, falling 0.2 percent after a 1.7 percent surge in the previous month. Large drops in building materials, autos and electronics & appliances weighed overall sales during the month, though this was partially offset by a 1.8 percent increase in gasoline sales. Core retail sales, which excludes autos and gasoline from the total, also fell 0.2 in April with year-over-year growth falling to 3.2 percent.

On the inventory side, the total inventory/sales ratio fell to 1.37 in March, marking the first monthly decline since May 2018. While much of the buildup in inventories in the fourth quarter was driven by tariff-related imports, poor sales at the start of 2019 likely played a role in the continued buildup in inventories in the economy. As a result, even with March’s decline, inventories remain generally elevated in the economy.

Trend to watch: Retail sales have been choppy throughout the early months of the year, with gains in January and March followed by declines in February and April. Throughout the choppiness, yearly growth has settled around 3 percent to 3.5 percent. As long as job growth and confidence holds up, it is likely to stay in that range in upcoming months.

Labor markets

Job growth remained generally strong in April, as the economy added an impressive 263,000 jobs in April. As a result of the strong pace of hiring, the unemployment rate dipped to 3.6 percent and wage growth remained generally strong at 3.2 percent year-over-year. There was a brief scare in the labor market in February, but jobs and hiring has been one of the more consistent sources of strength in the economy over the last several years. This has led to healthy income growth for U.S. households and provides a solid foundation for consumer spending in the economy.

However, gains in the sector did not carry over into the trucking industry, where payrolls declined by 500 in April. This marks the first decline in trucking employment since April 2018, ending a stretch which saw over 35,000 jobs added in the industry. Trucking hires have essentially stalled since January of this year, as carriers have found themselves in a softer demand environment

Trend to watch: Hiring performance within the trucking industry remains a trend worth keeping an eye on. Nearly 45,000 jobs were added to payrolls in the industry in 2018, contributing to the rise in capacity. Over the past three months, however, job growth has been essentially flat as freight demand has cooled. Falling rates have emerged over the last several months within trucking, and this is likely to put further downward pressure on hiring in the industry.

Housing and construction

April results were generally positive for housing construction, as total housing starts rose 5.7 percent from March’s levels to a 1,235,000 annualized rate. This marks the second consecutive monthly increase in housing starts in the economy after March’s upwardly revised 1.7 percent gain. Starts are still 3.2 percent lower than they were at his point last year, but the positive momentum is a good sign after poor weather disrupted activity over the last several months.

On the demand side, new home sales declined 6.9 percent in April from March’s levels. However, revisions to previous data showed that new sales during the first quarter occurred at the fastest pace since mid-2007. Even with April’s decline, new home sales were 7.0 percent higher than a year ago. The overall positive news in new sales was offset by a decline in existing home sales, as a lack of inventory of homes for sale continues to restrain home-buying activity. Solid job and income growth combined with easing mortgages rates should keep demand fairly solid in upcoming months, though limited housing inventory will continue to be a factor.

Trend to watch: The strength in new home sales is positive for a couple of reasons. For one, it helps drive downstream purchases of appliances and furniture once completed. In addition, solid demand for new homes helps spur construction of new homes, which further boosts freight demand.

International Trade

Advance reports on international trade show that the goods trade deficit widened to $72.1 billion in April, up from -$71.9 billion in the previous month. The wideninging trade deficit has negative implications for second quarter GDP in the economy, after net exports made the largest single contribution to the 3.1 percent pace of GDP growth during the first quarter.

The details in the April report were also not positive for freight demand conditions. Goods exports tumbled 4.2 percent from March’s levels, pushing year-over-year growth back into negative territory at -3.6 percent. Goods imports did not perform any better during the month, falling 2.7 percent as year-over-year growth slipped to -0.9 percent.

Trend to watch: Trade trends will be all the rage over the next several months, as analysts will be watching to see any effects of the recent tariff hikes on China and Mexico. Last year’s experience suggests that these tariff moves will introduce some additional volatility into the monthly numbers, but in the end they will be bad for trade volume in the U.S. economy.

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.