People carry retail shopping bags during Black Friday events on November 25, 2016 in New York City.
One major cluster of data shows the U.S. economy is doing well despite concerns of a potential recession.
The hard data, which refers to actual numbers about the economy such as unemployment and retail sales, continues to reflect economic strength.
The U.S. unemployment rate fell to a 50-year low in September while retail sales grew more than expected in August. However, stocks have struggled in recent months amid disappointing soft data, which includes corporate and consumer sentiment surveys as well as purchasing managers’ index (PMI) numbers.
Soft data is often seen as a leading indicator of the economy and the recent batch has stoked fears of a recession as the U.S.-China trade war drags on. But those fears may be overblown as the hard data shows the U.S. economy remains strong.
“While the survey data have been steadily disappointing expectations, hard data have been a source of positive surprises,” said Doug Peta, chief U.S. investment strategist at BCA Research, in a note. “The labor market remains vibrant enough to exert downward pressure on the unemployment rate, and services continue to expand despite the contraction in manufacturing, both here and abroad. The expansion has slowed, but it’s not finished yet.”
The Bureau of Labor Statistics said Friday that the U.S. unemployment rate dropped to 3.5% in September, its lowest level since December 1969. The rate dropped even as the pace of U.S. job growth slowed last month. Nonfarm payrolls expanded by 136,000 in September, down from 168,000 in August.
The U.S. consumer is also in a solid place. Retail sales rose 0.4% in August, topping a Dow Jones estimate of 0.2%. The better-than-expected retail sales increase came after a 0.8% jump in July.
But despite the solid hard data, the major stock indexes are all down over the past three months as weak soft data has raised concern over the economy moving forward. The Dow Jones Industrial Average and S&P 500 are both down more than 1% in that time. Meanwhile, the Nasdaq Composite has lost more than 2%.
The Institute for Supply Management said last week that its U.S. services PMI fell in September to its lowest level since August 2016. ISM also said U.S. manufacturing activity contracted last month to its lowest level in more than 10 years.
Meanwhile, the University of Michigan’s Surveys of Consumers said last month that a near-record number of consumers are worried about the U.S.-China trade war. A survey released Monday by the National Association for Business Economics showed respondents expect the U.S. economy to grow by less than 2% next year as the trade war rages on. That would be the slowest pace for U.S. economic growth since 2016.
Jan Hatzius, chief economist at Goldman Sachs, said this divergence between the hard and soft data is “is the inverse of what we saw in the first 18 months of the Trump presidency.” He noted the hard U.S. data was lackluster in that time period while the soft numbers pointed to strong growth further down the road.
Equities performed well during President Donald Trump‘s first 1½ years in office. The S&P 500 advanced more than 23% in that time.
But “one reason to worry that history might not repeat itself is that the weakness in business sentiment dragging down the soft [data] reflects a rise in policy uncertainty that looks unlikely to go away anytime soon,” Hatzius said in a note, referring to the trade war.
U.S. and Chinese officials are set to meet later this week in Washington to try and get closer to a trade deal. Both countries have slapped tariffs on billions of dollars worth of their products since last year, dampening expectations for corporate profit and economic growth.
“Even so, there are good reasons to think that output and employment will continue to expand at a trend or slightly above-trend pace, and that worries about a recession will continue to prove too pessimistic,” Goldman’s Hatzius said.
— CNBC’s Jeff Cox contributed to this report.
Surging SUV demand is canceling out the environmental benefit from electric cars
A woman fuels her SUV at an Exxon Mobile gas station in Chicago.
If worldwide demand for SUVs continues to grow at its current pace, the carbon emissions from these larger vehicles will outweigh the benefits from electric vehicles, a new study from the International Energy Agency found.
The number of SUVs on the road around the world grew from 35 million in 2010 to over 200 million last year, representing 60% of the increase in the global car fleet over the 8-year period.
The surge in popularity is having a big impact on the environment since SUVs are less fuel-efficient than their smaller counterparts.
From 2010 – 2018, SUVs were the second-largest contributor to the global increase in carbon emissions behind the power sector, the study found. This places SUVs ahead of trucks and aviation in terms of carbon footprint. The study also found that 100% of the increase in demand for oil for passenger cars was driven by the popularity of larger vehicles.
“If consumers’ appetite for SUVs continues to grow at a similar pace seen in the last decade, SUVs would add nearly 2 million barrels a day in global oil demand by 2040, offsetting the savings from nearly 150 million electric cars,” the researchers found.
48% of car sales in the United States last year were SUVs, which was the highest percentage worldwide, but other countries are catching up. Large cars can be seen as a status symbol, and sales are rising in countries like China and India where the middle class is growing.
The shift towards bigger, less fuel-efficient cars is somewhat at odds with the auto market generally, where heavy R&D spending is fueling developments in energy-efficient vehicles.
Given the advances in electric vehicles, as well as the knowledge that SUVs are less fuel-efficient, the researchers called the growing number of larger cars and the impact on global emissions “nothing short of surprising.”
China’s pork shortage could give US farmers a chance to cash in
Pigs raised by farmers are seen at Linquan county on December 5, 2018 in Fuyang, Anhui Province of China.
Visual China Group | Getty Images
BEIJING — China needs more pork imports than ever as the country grapples with an outbreak of a swine disease — and that could become a business opportunity for U.S. farmers if the two countries can reach an agreement on trade.
African swine fever hit Chinese pig farms last year, causing a severe shortage in the meat that is a staple for hundreds of millions of Chinese households.
Prices have nearly doubled, and publicly available data indicate China’s production of pork this year will likely fall a few million tons short of demand.
In December, a kilogram of pork cost about 22.50 yuan, or $1.46 a pound, according to Beijing-based BRIC-Agri Info. By last week, a kilogram of pork had jumped to 42.46 yuan, or $2.75 a pound, according to figures released by the Ministry of Commerce.
At the same time, one of the U.S. demands in ongoing trade negotiations is that China purchases billions of dollars’ worth of American farm products. At the conclusion of the latest round of trade talks last week, U.S. President Donald Trump said China agreed to a “very substantial phase one deal” that includes purchases of about $40 billion to $50 billion American agricultural products. Beijing has yet to publicly confirm the figure.
China to buy US farm products
The phased aspect of the deal is encouraging to the Chinese side, said He Weiwen, executive council member of the China Association of International Trade, which comes under the leadership of the Ministry of Commerce.
According to a CNBC translation of his Mandarin-language remarks, He said the Chinese will show their sincerity by increasing purchases of American agricultural products.
However, there’s a catch. It’s become increasingly clear that Beijing would like to push the U.S. to remove the tariffs it’s applied on billions of dollars’ worth of Chinese goods.
“If China has promised to buy agricultural products, but the U.S. only delays the additional tariffs instead of lifting them, then it doesn’t make much sense to China,“ He said. “This is the crucial point.”
On Thursday, China’s Ministry of Commerce spokesperson Gao Feng emphasized that Beijing would like the U.S. to cancel all additional tariffs in order to reach a final deal on trade. Gao noted that Chinese companies are increasing their purchases of American agricultural products according to market needs and market-based principles, and that the two trade delegations remain in communication with hope of reaching a phased agreement as soon as possible.
“I think there will be talk for more pork purchase,” He said earlier in the week, noting he does not speak on behalf of the Chinese government. “China’s soybean shortage is not that big. China can cope with it by adjusting feed formula.”
Soybeans are used as animal feed in China and a shrinking pig herd is dampening demand for the oilseed.
China’s import of US pork
U.S. pork accounted for about 14% of Chinese imports of the meat in 2017, about the same as the year before, according to CNBC analysis of Chinese customs data complied by BRIC Agri-Info Group.
That proportion dropped to 8% in 2018 as trade tensions escalated, falling as low as 2% in the fourth quarter of last year, the analysis showed. As of May 2019, the data showed U.S. pork recovered a market share of about 8%, still far short of pre-trade war levels.
US market share of China pork imports, % by year
Source: BRIC Agri-Info, China Customs
That gap potentially creates an opportunity for American farmers, such as those from the nation’s largest pork producing state of Iowa.
Pork prices to remain high for now
China’s pork shortage will likely persist for at least a few months, if not longer. On Thursday, China’s Ministry of Agriculture and Rural Affairs said that it expected pork prices to remain at a high level through the New Year holiday and China’s Spring Festival in late January 2020, according to a press conference transcript from financial database Wind Info.
Authorities have also released pork from national reserves in an effort to ease the shortage.
Chris Rogers, research analyst at supply chain data company Panjiva, also pointed out that Chinese imports of U.S. agricultural goods covered by retaliatory duties climbed 317% year-on-year to $8.3 billion in August. “(The rise) suggests Chinese purchases are already being increased aggressively even before the new deal has been signed,” Rogers said.
However, it’s not a given that China’s increased need for pork will result in more purchases from the U.S.
“China will import from all its trade suppliers, including the U.S., but the American price has to be competitive as well,” He said. “There have been cases where the transaction price did not have market competitiveness and the company had to drop the purchase.”
Chinese pork producers such as Muyuan have also seen their share prices soar as traders bet on greater profits.
Don’t expect IBM shares to rebound any time soon
IBM’s stock tanked after earnings and investors should not expect the situation to improve any time soon.
The technology company issued weaker-than-expected revenue for the third quarter, marking the fifth-straight quarter of falling revenue.
A month after similar declines, shares of IBM trade negatively 71% of the time, and underperform the broader stock market, according to hedge fund analytics tool Kensho. The similar negative trading periods that were studied occurred seven times across the past five years.
In the third quarter, IBM had lowered its full-year earnings estimate to take into account the impact from its acquisition of Red Hat, among other factors.
The company’s cloud business has not done enough to offset sluggish sales in its services, hardware and financing businesses. Even with contributions from Red Hat, an acquisition that closed in the third quarter — and Red Hat revenue growing 19% in the quarter on a normalized basis which was better than its growth rate during its last quarter as an independent company — IBM’s Global Technology Services unit, its largest, struggled with revenue of $6.7 billion down 5.6% from the year ago period and slightly below the consensus estimate.
Some Wall Street analysts remain positive on IBM.
“We think the combination of new products should enable the company’s Systems segment to revert to growth in CY20 following recent declines (wind down of z14 cycle),” Evercore ISI analyst Amit Daryanani, who has the equivalent of a buy rating on IBM stock, wrote in a note distributed to clients on Monday.
IBM shares are up about 25% since the beginning of the year.
IBM said it continues to forecast at least $12.80 in earnings per share, for the full year 2019. It beat by a penny in the third quarter — $2.68 per share vs. $2.67 analyst expectation. Analysts polled by Refinitiv expect $12.81 in earnings per share for the year.
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