Global Trade Indicators Improve

Global Trade Indicators

Global Trade Indicators - The official trade reports take a few months to come out which is why I can only can say growth slowed from the beginning of the year to May. The official numbers are very important, but if you want up to the minute results, you can review the indicators below.

As you can see, it shows the Baltic Dry index, the China Containerized Freight index and the DJ Global Shipping Stock index. To be clear, this is a z-score, not year over year growth. The overall index now has a positive z-score because the Baltic Dry index has recently spiked. Interestingly, the Shanghai Composite has been rising recently. Since August 17th, the index is up 4.2%.

This could be a temporary blip, or a sign of some improvement in China. China drives global trade growth.

Global Trade Indicators - Peak Manufacturers’ New Orders?

The manufacturing sector was very strong in the first half. Manufacturing is the most cyclical part of the economy which is why I have been skeptical of a permanently high plateau.

The chart below is a great depiction of why I think manufacturing can’t grow much from here and has a lot of room to fall. As you can see, manufactures’ new orders for non-defense capital goods excluding aircrafts peaked at $70 billion last cycle and peaked at that rate earlier in this cycle. It peaked at a slightly lower level in the previous cycle.

We’re back at the ceiling with global growth slowing and trade growth slowing. Manufacturing is more global than services which is why I expect it to slow soon.

Global Trade Indicators - End Of Synchronized Growth

I have documented throughout this year that the global synchronized growth story has ended. The chart below shows the synchronization of developed economies to the global average.

Not only are emerging markets falling out of sync with American growth, but also some developed markets are out of sync with the global average.

The chart below shows the developed economies have about a 0.45 correlation which is down from about 0.65 earlier in the year. This is probably caused by weakness in Europe.

This chart shows correlation was the lowest in 2012 which is when Europe experienced the sovereign debt crisis.

Global Trade Indicators - Divergent Expectations

After the Dallas Fed came out with great results, I thought it was time to focus on divergent forecasts and sentiment readings.

As you can see from the chart below, the NY Fed’s Q3 GDP forecast is below 2% and the Atlanta Fed’s forecast is above 4.5%. They have been different for a while.

They diverged further last week was because of the durable goods report. I agree with the NY Fed that the GDP estimate should fall because of that report since the headline reading was poor.

In the medium term, it’s good to have strong core growth because it means the trend is solid.

Maybe the Atlanta Fed thinks it’s great news for August and September because aircraft order growth will probably jump back since it is volatile. It’s tough to predict where aircraft order growth will go in the near term.

If the economy is growing it’s probable that growth will eventually improve after a bad number.

 

Global Trade Indicators - Strong Dallas Fed Report

As I mentioned, the Dallas Manufacturing report was great. This means there were two great regional Fed manufacturing reports and two weak ones.

The Richmond Fed reading on Tuesday will tip the scales in one direction. Considering the amazing results from every other month this year, signs of weakness still aren’t great.

There is a fair debate if growth is slowing opposed to earlier in the year where it was very difficult to be bearish on the economy.

The Dallas Fed production index fell slightly from 29.4 to 29.3. The general activity index fell from 32.3 to 30.9. This beat estimates for 28. Even though the headline indexes fell, they showed evidence that the manufacturing sector maintained a steady high growth rate.

The growth rate of orders index increased from 17 to 19.9. New orders were up 0.6 to 23.3.

There was a lot of underlying change in the supply chain as it normalized.

The unfilled orders index fell 5.8 points to 9.1 and the finished goods inventories index increased 15.8 points to 13.9 from -1.9. This caused the inflation calculations to fall. The prices paid index fell 3.3 points to 45.3 and the prices received index fell from 22.9 to 15.3.

The outlook for businesses increased 6.9 points to 27.3 and the uncertainty index fell from 17 to 16.2. Their uncertainty will probably fall when businesses hear about the trade deal between America and Mexico which I will discuss in detail in a future article.

It’s interesting that even though those forward looking indicators were solid, the 6 month future indicators weakened. Expectations for production fell from 50.6 to 46.6. The expectation for new orders fell from 50.6 to 47.4.

Company outlook and general business activity indexes fell 2.9 and 1.5 points respectively. The good news is the 6 month forecast for capex rose 8 points to 39.9.

Overall, this was a great report. It may have been strong because the Dallas district has a large energy industry.

A machinery manufacturing firm’s CEO said, “As a global free-market capitalist, I do not believe in tariffs or subsidies. I believe that President Trump’s initial proposals are simply how he negotiates. Yet companies are basing their decisions on his initial offer, not the final deal. Business should react to policy, not proposals.”

It appears the negotiations worked with Mexico as a deal was stuck. Hopefully, this is a signal other deals are about to be made.

Global Trade Indicators - Conclusion

Usually, the ISM manufacturing PMI is near the regional Fed average. It will be interesting to see if that trend is maintained with the divergence in the reports.

It’s also interesting to see if Q3 GDP continues to follow the Atlanta Fed’s predictions or if the NY Fed is right this time. GDP growth below 2% would be a big slowdown from Q2.

Calls for a recession could ramp up again.

 

 

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