Monday, April 2, 2018

ISM optimism

The monthly surveys of the Institute for Supply Management are very timely (though not real-time) indicators of the health of the manufacturing and service sector industries, and that's a good reason to pay attention to each release on the first of the month. They aren't perfect, but when they register strong levels it is almost always the case that the economy is doing well. I dedicate this post to today's manufacturing sector release, which was uniformly positive. That's comforting, given the backdrop of tariff wars.

It's obvious that the market is more concerned about the threat of a tariff war, as evidenced by today's renewed decline in stock prices, than it is bolstered by the strong ISM surveys. Trump has mandated tariff hikes targeted to China, and China is now retaliating with its own tariffs on selected US goods. This way lies misery, and the real losers will be consumers in both China and the US, who will be saddled with higher prices for a wide range of products. We can only hope that these are negotiating tactics on both sides, and that in the final analysis trade between the US and China will become more fair and more free. If not, we will have a mess on our hands and Trump's presidency will end in ignominy. Can he really be so stupid as to carry this tariff war to its disastrous conclusion? Thank goodness he has Larry Kudlow at his side to warn him of this danger.

Chart #1

Chart #1 compares the overall ISM manufacturing index to quarterly GDP growth. The two don't track perfectly, but as I look at the chart it strongly suggests that Q1/18 GDP growth is very likely to exceed current estimates, which, according to the current output of the Atlanta and NY Fed's models, is likely to be just under 3%. I'd wager that if the ISM index remains at or near these levels for several more months, we are very likely to see some stronger-than-expected GDP numbers before too long.

Chart #2

Chart #2 tracks export orders. Although the March reading dropped from the very high level of the February reading, this survey still suggests that overseas economies are doing well, and US exporters are enjoying strong demand.

Chart #3

Chart #3 shows that a significant number of ISM respondents are experiencing rising prices. This could be a harbinger of higher inflation ahead, but it could only be a sign of generally strong global conditions.

Chart #4

Chart #4 shows that a meaningful number of manufacturing firms are planning to increase their hiring activity in the months to come. That in turn reflects a decent level of optimism on the part of industry executives.

Chart #5

Chart #5 compares the US manufacturing index to a similar index/survey of Eurozone manufacturing firms. Both have been quite strong of late, but conditions in the Eurozone appear to have softened a bit in recent months. Eurozone stock markets have been underperforming their US counterparts for many years, however, so somewhat weaker conditions in Europe are not "new" news.

UPDATE: Today's release of the ISM Service Sector surveys (4/4/18) adds to the growing list of indicators which point to stronger US GDP growth:

Chart #6

Chart #7 compares the monthly changes in private sector employment as calculated by the Bureau of Labor Statistics and ADP. We are seeing here preliminary signs of an increase in the trend rate of growth in private sector employment. I think there is a decent chance that Friday's jobs report will be somewhat stronger than the market is currently expecting (+190K).

Chart #7

The market is obviously torn between the good news, reflected in part by the above charts, and the bad news, which is a budding tariff war with China. Comparing the two, I'm inclined to say that "a bird in the hand (i.e., stronger US GDP growth) is worth two in the bush (i.e., the possibility of a trade war with China)." Tariffs are for the moment only in the threat stage, still months away from actually being imposed, whereas it is becoming more clear that the US economy is gaining upward momentum.


WealthMony said...

I've concluded that Donald Trump is his own worst enemy. I think I am in sympathy with what the president is attempting to accomplish: fairer trade that results in more American jobs that are well paying. At the same time, his tweets against Amazon may be making some CEOs very uncomfortable, and although the president is limited in what he can do regarding Amazon, investors who are already spooked, become more nervous and the media has more noise with which to fill the airwaves.

Maybe it is not his style, but I would rather that the president be more presidential in his pursuit of his objectives.

Scott Grannis said...

WealthMony: I too wish that Trump could be more presidential.

Benjamin Cole said...

Though I secretly enjoy Trump pulling on the tail of the self-reverential (and expensive) Washington foreign-policy establishment, there are times I wish he would be more presidential.

And how does one deal with chronic mainland Chinese theft of intellectual property? More furrowed eyebrows and stern memos?

steve said...

"Can he really be so stupid as to carry this tariff war to its disastrous conclusion?"

Seriously? When he has dolts like Navarro and Ross giving him the advice he WANTS to hear? Kudlow is window dressing. Trump will self destruct. Just a matter of time-and with him goes GOP.

John said...

Trump may be manipulating the markets to his and family/friends advantage. He knows how to make investors nervous one day, reassure them the next. Plus there was this from an interview in 2004:

"The real estate markets crashed. Now, I don't want to blame the real estate markets, because I always made a lot of money in bad markets. I love bad markets. You can you do very well in a bad market."

Mark H. Tekamp said...

Wow. I find myself in the unusual (unique?) position of disagreeing with Scott whom I have the utmost respect for. I'm struck by how universal the "amen chorus" is for the merits of free trade with its rivaling love as a dispenser of universal benefits while lacking almost in the entirety any offsetting costs. China is a unique situation. There is a very good reason why democracies and capitalism tend to accompany one another. Respect for the rule of law and property rights to be more specific. China respects neither and is thus a rogue element seeking to benefit from a system which it is abusing gratuitously believing that the greed of the capitalists will result in their continuing to turn a blind eye to its behavior. Agreements which aren't honored by both parties are something else and if sanctions aren't imposed on the violating party then all we have is the law of the jungle. Trump didn't create this. When he resolves it then don't forget what side of the issue you started out on.

Scott Grannis said...

Mark: you correctly observe that one genuine problem with our China trade is China's lack of respect for property rights. But that does not justify imposing tariffs on Chinese imports. Tariffs are not just "sanctions" on China, they are also higher taxes on American consumers. We are punishing our own people by imposing tariffs on Chinese goods. These same tariffs may hurt Chinese producers as well. But does it make sense to go into a fight only after tying one hand behind our back?

Mark H. Tekamp said...

The most recent era of globalization began with the collapse of the then USSR in 1991. From 1995 to 2005 global trade grew at a rate 50% faster than global gdp. This also resulted in increasing global imbalances between deficits and surpluses with the USA "owning" the great majority of global deficits. One can argue the deficits create the offsetting surpluses or its the surpluses that create the deficits but by definition the two must equal. The resulting imbalances led to increasing fragility in the global financial system leading to the Global Financial Crisis. I share this knowing this is all familiar to you to make the case that globalization doesn't come without costs or consequences. I would posit that China and Germany are two countries pursuing mercantilistic economic policies. Of course the offset of a trade deficit is a capital surplus with the US and its deep capital markets being the destinations of choice. Trump is recognizing that the price the US and its workers are being forced (not asked) to pay significantly outweights the benefits to US consumers. The Trump administration also views (I would argue realistically) China as posing the single greatest geopolitical risk to this country. This is a choice China made,not the US. To conclude, I think the administration has made the determination that if fight we must we're better off fighting over the Sudentenland rather than waiting for Poland. The US is also extraordinarily fortunate in terms of timing. China is in desperate need of rebalancing its economy from an investment driven to a consumer demand driven model. China's 375.2 billion dollar trade surplus with the US is a source of demand it can scarcely do without. I have a strong suspicion this will play out very well for this country.

Benjamin Cole said...

IT but interesting...

China tariff fears ease
Sinéad Carew

"NEW YORK (Reuters) - Wall Street’s three major indexes staged a comeback to close around 1 percent higher on Wednesday as investors turned their focus to earnings and away from a trade conflict between the United States and China that wreaked havoc in earlier trading."

Wall Street rally right after China announced additional tariffs on US exports.

Even if there is a trade war, I expect lots of domestic substitution and very little impact on overall GDP. Believe me, corporate profits are doing fine, better than ever. That is the fundamental that will hold up Wall Street.

ckhajavi said...

It’s really a shame how trump is behaving - we’ve struggled for so long with subpar economic growth and just as we are about to hit escape velocity he is seemingly becoming more unstable by the minute - it’s hard not to be optimistic focusing on the economic data and it’s hard not being pessimistic seeing his petulant behavior that is becoming increasingly erratic

Benjamin Cole said...

From Zacks----a great quarter ahead:

"Total Q1 earnings for the S&P 500 index are expected to be up +16% from the same period last year on +7.4% higher revenues, the highest quarterly earnings growth pace in 7 years.

• Earnings growth is expected to be in double-digit territory from the year-earlier level for 11 of the 16 Zacks sectors, including the Technology and Finance sectors. Only two sectors (Autos & Conglomerates) are expected to show earnings declines in Q1.

• Energy sector earnings are expected to be up +60.2% from the same period last year on +15.6% higher revenues. Excluding the Energy sector, total S&P 500 earnings growth drops from +16% to +14.6%. "

Trade war, smrade war.

When y/y quarterly earnings are up 15% to 16%, and corporate profits are already at all-time records highs absolutely and relative to GDP, I think we can take the small-hurdle trade war with China.

For Corporate America, these are the good ol' days.

It is Fat City time.

WealthMony said...

It could be that President Trump in his very unorthodox way will accomplish something with China and North Korea that no other administration has been able to do. I certainly hope so. Although I am troubled by his public methods, I am in full agreement with his objectives.

What actual new tariffs have gone into effect thus far? Solar panels and washing machines? It could very well be that none of the other announced tariffs by either party will be implemented. Let's go for it: free trade that is fair trade and that means no stealing of intellectual property.

Scott, your site makes for thoughtful reading with informed debaters for the most part.

ckhajavi said...

I agree with the spirit of what trump is trying to accomplish but his tactics and focus on tarriffs seems very misguided - also his mad man strategy that he seems to employ in every negotiation works well when it works and fails miserably when it fails - the Chinese don’t seem ready to roll over and are fighting back much more aggressively than I envisioned - the problem with the market is that most “quality” companies are expensive and the “value” sector requires confidence in a rising economic tide with trump at the helm which becomes for a more difficult bet to make by the day - value continues to struggle as rates go nowhere suggesting the market definitely not pricing in better economic growth - hopefully things work out for the best - let’s see

John said...

As Trump and Kudlow play good-cop, bad cop, will tomorrow be up or down on Wall Street? Proclaiming $100B in tariffs, looks another sell-off, you think? Officer Dennison's on patrol. Ridiculous.

minnesota nice said...

China will not "roll over" and neither will Trump. Both need to win politically, not just economically. The headlines will be fierce, what matters is what actually happens.
Headline: Trump imposes steel/alum tariffs.
What happened: Mexico & Canada get exempted right away. Soon all EU countries were exempted along with key developing markets.
Result: Trump is seen as tough on trade without (hopefully) any severe economic effects.
Will the same concept play out in China? Clearly Trump wants to be seen as strong and needs a political "win" in both China and N Korea before the fall elections.

Randy Johnson said...

People are bashing Trumps style as if it’s not the reason why he has (tax reform) and will likely (trade renegotiation) accomplish the goals he set out to accomplish. His entire persona, especially his twitter rants, are purposeful.

If you’re (let’s say you’re china) negotiating with someone that you believe has a few screws loose, you’re not likely to push the envelope too far for fear of causing a global economic collapse knowing that the other guy (Trump) is crazy enough to just let it happen.

This tariff talk is simply the creation of leverage. Same thing for DACA. Take what the other side wants away from them so that you have a wild card to negotiate with.

I’m not saying I like it when our president pounds out some incoherent tweet about an issue that’s completely irrelevant to what’s going on in our country, but I am saying he’s not doing it because he’s crazy. It’s his style and so far his style has worked. Clearly the presidents of the past weren’t able to do anything about making trade fair, so we might as well see if Trump can succeed using a different approach.

Scott Grannis said...

Randy: I agree. For further perspective on this argument, I recommend Victor Davis Hanson's latest column in NRO:

Excerpt: The proverbial knot of Gordium was impossible to untie. Anyone clever enough to untie it would supposedly become the king of Asia. Many princes tried; all failed.

When Alexander the Great arrived, he was challenged to unravel the impossible knot. Instead, he pulled out his sword and cut through it. Problem solved.

Scott Grannis said...

I also highly recommend John Cochrane's post today regarding the effective impact of the Trump/China tariffs. (Hint: vanishingly small!)


As hare-brained as they are, I have to opine that the actual economic consequences of US steel import tariffs and Chinese soybean tariffs are essentially zero.

Why do I say that? Each country is assessing a tariff on goods produced only by the other country. Well then, why not park the ships overnight in Vancouver, or Tokyo, fill out some paperwork, and say steel is imported first from China to Canada, and then Canada to the U.S., and vice versa?

China sells steel to Canadian steel users, who currently buy from Canadian firms. Canadian steel producers reorient their production to the US, and sell to US companies who formerly bought from China. The steel is genuinely Canadian.

US soybean producers, rather than sell to China, sell to Canada, Brazil, and Europe. Producers there sell to China. The total amount made is the same in each country. The total amount used is the same in each country. It is just as if we parked the ships.

randy said...

@randy Johnson: No one can argue that Trumps tactics aren't disruptive and breaking down barriers previous administrations ran into. The thing is though, the United States of America is not a family real estate empire. It's not his place to risk our standing and well being by being crazy and seeing what happens. There is no bankruptcy court for mistakes at this level. There have been great Presidents and leaders that have shown strength and resolve without recklessness. Reagan, Churchill, Teddy (walk softly but carry a big stick), FDR. I've had business partners like Trump. Risk everything and dare someone to call your bluff. They don't care if it blows up because they can start over. Our country is not his to risk. I'm a life long conservative and I'm disgusted that we would accept this as our leader.

randy said...

BTW, those former business partners have gone through a handful of companies, lawsuits, marriages - a lot of "friends" - and still depend on the next deal to make ends meet.

Randy Johnson said...


I see where you are coming from because he is making things uncomfortable. I just don’t believe uncomfort equals economic collapse.

Our standing in the world standing is related to our economic and military power and very little about what our president tweets about or the way he acts. The US economy is much stronger than the actions of one person and a little bit of discomfort doesn’t mean our future is being mortgaged.

Also, the presidency isn’t the same thing as being a CEO (which is why I think trump had trouble getting his ideas off the group quickly). A CEO is like being a dictator where 100% of the decisions fall on the leader. Our democracy is does not operate in that manner. Checks and balances.

ckhajavi said...

Guys - don’t you think building a coalition through the tpp would have been a much wiser route to take to fight unfair Chinese trade practices - again I don’t find fault with the spirit of what he is griping about / wants to accomplish but his methods are of a petulant child and at some point someone is going to call his bluff and he’s going to escalate things to a point that is massively counterproductive for all involved - it’s just shocks me that people as intelligent as all of you guys somehow think there is some tactics to his madness - he wakes up - watches tv - doesn’t read - has no empathy - he is massively flawed emotionally - I have trouble buying risk assets with this maniac at the helm - seems like the market is doing the same - Scott - the one month forward ois curve has inverted at the 2 year forward point suggesting the market is pricing in rate cuts in q1 2000 - the fed needs to slowdown or market is going lower in my humble opinion

Scott Grannis said...

Cameron, re Fed: If the economy slows down, the Fed will too. They are not hell-bent on destruction, and they don't need to fight inflation. I think the minor inversion at the front end of the OIS curve is just the market's way of worrying that there might be a trade war that could negatively impact the economy and the Fed won't believe it. It think that the chances of all those things happening (trade war AND negative GDP impact AND Fed continues to tighten) is pretty slim. But if people don't get worried, then Trump's strategy won't likely work.

Holman Jenkins in today's WSJ has a nice piece talking about just this sort of thing.


[We} should not lose sight of the same basic context in today’s trade fight: Both sides are putting guns to their own heads and saying, “Give me what I want or the idiot gets it.”

Such incentives strongly favor the parties reaching a deal and declaring victory for the benefit of the home fans. Both know the U.S.-China trade relationship is too important not to put it on a sounder basis.

So the real question is, “Do we have confidence in the wisdom and perspicacity of the Chinese and U.S. administrations?” Mr. Trump is not a child. He has been in negotiations all his life. It’s the one skill he brought to office that can’t be gainsaid.

ckhajavi said...

Scott - I spend most of my time in equities and huge swaths of the cyclical equity securities are flashing massive skepticism around a rising economic tide - airline multiples keep compressing - consumer cyclicals like boat manufactures / rv dealers and manufacturers - auto retailers - are trading at high single digit to very low double digit pe s - as you have said the market seems to have little faith in material pickup in growth - might be an enormous buying opportunity but so many indicators flashing yellow lights - rates down - commodities rolling over etc - citi surprise index plummeting globally - again markets often get it wrong but second derivatives were weakening in February well before the tarriff announcements - as bill McBride has said the narrative in markets has changed and there are a growing number of risks that were less pressing the past few years - again I am more focused on the market because that’s how I make my living - the real economy and market don’t always have to track in short term

randy said...

@randy Johnson: Probably this thread has rolled off of everyone's vision - but wanted to say my choice of phrase wasn't very good. I'm disgusted with Trump, but obviously a lot of people smarter than me, and well meaning, feel differently and their judgement shouldn't be dismissed. I maybe should have said I'm perplexed about support for Trump.

Scott Grannis said...

Thanks, randy, for accepting that well-meaning people can disagree.