July 3, 2018
I was in beautiful Alabama last week, which is in the midst of an economic boom. There are six major automotive manufacturing plants in Alabama, with Mercedes being the most prominent. Despite all the talking heads on TV gossiping about tariffs, virtually no one I ran into expects that Mercedes will divert more manufacturing to Alabama due to tariffs, since they do not believe tariffs will be increased above the current 2.5% level. The German auto manufacturers recently made it crystal clear that they are in favor of eliminating the 10% European Union’s tariff on U.S.- made autos and 25% on pickup trucks.
In other words, no one in Alabama believes the talking heads on TV and the constant commentary that the Trump Administration is increasing the cost of goods via tariffs. Naturally, Alabama is an extremely pro-Trump state and proud of its ability to compete with anyone in the world. The overwhelming feeling in Alabama is that U.S. manufacturing and exports are on the rise, which is fueling the economic boom there.
The stock market got off to a rough start last week on fears of trade, tariff and potential restrictions on foreign investment. However, these concerns were overblown, so the market quickly recovered, only to fizzle again on Wednesday. Trump’s Senior Trade Advisor Peter Navarro said on CNBC last week that there were “no plans to impose investment restrictions on any countries that are interfering in any way.” Despite this strong statement, Wall Street continues to blow trade concerns all out of proportion.
Speaking of trade, the Commerce Department reported on Wednesday that the trade deficit declined 3.7% to $64.8 billion in May, substantially better than the economists’ consensus estimate of $69.2 billion. Exports rose 2.1% in May, while imports rose only 0.2%. In the past 12 months, exports have risen 13.4%, while imports have risen 8.4%, so the trade deficit has significantly declined and is now boosting overall GDP growth. In the wake of the lower-than-expected trade deficit, multiple economists have revised their second quarter GDP estimates higher. Some economists are now estimating as high as 5.3% annualized second quarter GDP growth while the Atlanta Fed has reduced their estimated to 3.8% growth.
The Other Economic News Was Not So Exciting Last Week
The other economic news last week slipped a notch. On Tuesday, the Conference Board reported that its consumer confidence index slipped to 126.4 in June, down from a robust 128 in May. The current conditions component remains high, while the expectations component was largely responsible for the dip in consumer confidence. It is now likely that higher energy prices are impacting consumer expectations.
On Wednesday, the Commerce Department announced that durable goods orders declined 0.6% in May, which was better than the economists’ consensus estimate of a 1.3% decline. The biggest drop in new orders for new cars and trucks since 2015 was largely responsible for the decline. Excluding vehicles, durable goods orders declined 0.3% in May. April durable goods orders were revised to a 1% decline, up from a 1.7% decline previous estimated. Overall, we have to keep a close eye on the automotive sector, since it is possible that higher gasoline prices are now impacting consumer behavior in driving and car buying.
On Friday, the Commerce Department announced that consumer spending rose 0.2% in May, well below economists’ consensus estimate of 0.4%. Personal income rose 0.4% in May, so the savings rate actually improved by 0.2%, since income exceeded consumer spending. The Personal Consumption Expenditure (PCE) index rose 0.2% in May and is now up 2.3% in the past 12 months. The core PCE, excluding food and energy, rose 2% in the past 12 months, so the Fed finally hit their 2% inflation target for the first time in several years. Since the core PCE index hit the Fed’s inflation benchmark, you might think that Fed watchers would be expecting more interest rate hikes. However, the Fed just raised key interest rates in June and said that the current wave of inflation may be temporary, so market rates remain well-behaved.
Crude oil prices are now at their highest level since 2014, so the energy sector is heating up. On Wednesday, the Energy Information Administration (EIA) announced that crude oil supplies declined 9.9 million barrels in the latest week, the largest weekly decline this year and the second week in a row with a substantial inventory decline. Naturally, the summer driving season is now in full swing and may be partly responsible for the dramatic decline in crude oil inventories. According to the EIA, gasoline inventories rose by 1.2 million barrels last week, so prices at the pump may not rise too much this week.
Finally, on Sunday, Mexico seems to have elected its own version of Donald Trump, former Mexico City mayor Andres Manuel Lopez Obrador. This is his third attempt to become President and the third time’s a charm, since Mexicans seem “mad as hell” about stagnant wages and the ongoing corruption within their country. Obrador is best described as a “leftist populist” who has discussed decriminalizing the drug gangs. According to CNN, 132 politicians have been killed in this campaign season, so the drug gangs have made a powerful statement. Naturally, if the drug gangs are decriminalized, President Trump will resume his demand for a border wall and demonize those who oppose him, including Obardor. The U.S. does a tremendous amount of trade with Mexico, especially in manufacturing regions like Monterrey, so I suspect that the outcome of this election will mean that the trade debate may escalate further, soon.