Washington Insider -- Friday

The Consumer Economy Continues to Shrug Off Industry Woes

Here’s a quick monitor of Washington farm and trade policy issues from DTN’s well-placed observer.

US December Ag Exports Hold Near $12 billion

The value of U.S. ag exports in December moved down to $11.85 billion, down from $12.66 billion in November, putting total exports for the first three months of Fiscal Year (FY) 2020 at $36.59 billion.

Ag imports rose to $10.75 billion in December, up from $10.31 billion in November, putting the FY 2020 total at $31.98 billion. The monthly trade surplus was $1.1 billion pushing the quarterly surplus to $4.62 billion.

So far in FY 2020, exports have totaled more than $1 billion above the year-ago period, while imports have risen nearly $100 million. The rise in exports compared with year ago is an encouraging sign but even more surprising is that imports have not risen more.

The overall U.S. December trade results showed that imports rose significantly in December, a trend not matched in the agricultural data.

Now the focus will shift to how USDA alters their outlook for U.S. ag exports later this month, in particular how they account for the Phase One agreement with China and the ag purchase commitments in that pact.

USDA Sees 2020 Net Farm Income Rising Despite Government Payment Downturn

USDA forecasts U.S. net farm income to increase $3.1 billion (3.3%) from 2019 to reach $96.7 billion in 2020. Net cash farm income, however, is forecast to decrease $10.9 billion (9%) from 2019 to $109.6 billion in 2020, according to USDA.

The difference between net farm income and net cash farm income is based on what is included in each forecast. Net cash farm income encompasses cash receipts from farming as well as farm-related income, including government payments, minus cash expenses, according to USDA, but it does not include noncash items—such as changes in inventories, economic depreciation, and gross imputed rental income of operator dwellings — reflected in the net farm income.

Some are playing up that USDA is “forecasting” a downturn in government payments. But that was well known or should have been ahead of the USDA update as no 2020 Market Facilitation Program (MFP) effort has been announced.

Total direct government farm program payments are seen at $14.98 billion in 2020, down $8.7 billion from $23.65 billion in 2019.

But farmers will still receive some MFP money in 2020 as USDA projects eligible producers will still get nearly $3.7 billion in MFP dollars.

Washington Insider: The Consumer Economy Continues to Shrug Off Industry Woes

Well, the economic outlook continues to show signs of both strength and weakness and to defy easy interpretation, Bloomberg is reporting this week. It highlights the warning from Caterpillar Inc. that “sales of its heavy machinery are expected to slump for a second straight year in 2020 amid continued global economic uncertainty.”

Still, Bloomberg emphasizes that Amazon.com Inc., added $72 billion in market value — about the size of Caterpillar — after reporting robust holiday season sales. The report says that shows “how much the U.S. industrial and consumer economies have diverged.”

The report explains that the manufacturing sector went through a mild recession last year as the administration’s trade war with China “added costs to supply chains and curtailed business investment.” And it says that “new data from the Institute for Supply Management show U.S. factory activity barely expanded in January after contracting in the last five months of 2019. However, it notes that “this industrial downturn was at most a blip for the still-roaring consumer spending spree.”

CSX, 3M, and other industrials joined Caterpillar in reporting sluggish sales predictions but McDonald’s and Starbucks reported healthy gains for the final three months of the year. Even Target Corp., which warned last month of weaker-than-expected demand for toys and electronics, over the holiday season, managed to project sales at stores open at least a year to be up more than 3% in 2019. U.S. consumer sentiment reached an eight-month high in January, according to University of Michigan data.

One reason there hasn’t been a broader recession is that manufacturing’s share of the economy continues to shrink, Bloomberg thinks. Factory output accounted for 11% of U.S. gross domestic product in the third quarter, which is tied with the second quarter for the lowest level since 1947, the report says.

Another is that this wasn’t a typical slump. What happened in 2019 was a “policy-driven slowdown,” says Gina Martin Adams, chief equity strategist at Bloomberg Intelligence—that is, the trade war.

While U.S. whiskey, motorcycles, and myriad other products are subject to European Union tariffs, the consumer sector emerged largely unscathed from the spat with China. The administration’s threat on Aug. 1 to apply a 10% tariff on $300 billion of Chinese products, including toys and iPhones, was watered down and then partially rescinded, the report notes.

The industrial sector, by contrast, bore the brunt of the back-and-forth in 2018 and 2019 as it dealt with broad U.S. taxes on aluminum and steel imports and tariffs on $250 billion of mostly manufacturing-related products. Those Chinese imports remain subject to 25% tariffs.

The tariffs appear to have stalled an industrial recovery that was gaining traction following a mini-recession in 2015-16 amid plunging oil prices, the report concludes. Already, companies were dealing with rising labor, raw material, and logistics expenses. But the will-he-or-won’t-he debate around the U.S. tariff push created an “impossible environment in which to make major purchases of expensive machinery.” Industrial companies’ sales suffered.

A belief that things would recover quickly if the U.S. and China reached a trade deal changed how companies responded to the slowdown, Bloomberg suggests. Executives didn’t want to be caught flat-footed by a swift recovery or left without workers in a tight labor market.

Thus far, people have largely stayed employed and been active consumers. Even with all the volatility in 2019 – which also included a six-week General Motors Co. strike and the global grounding of Boeing Co.’s 737 Max jet – the manufacturing industry ended 2019 with a net gain of 46,000 jobs, the Commerce Department is reporting.

Asked on a Jan. 28 earnings call if aerospace supplier United Technologies Corp. would lay off employees to help it cope with the Boeing production halt, Chief Executive Officer Greg Hayes said “that would be the easiest thing to do, but quite frankly, given the scarcity of talented aerospace workers out there, we’re not going to.”

Most industrial CEOs say they expect a challenging economic environment to linger at least through the first half of the year. Emerson Electric Co. and 3M Co. announced fresh restructuring plans in their earnings releases that will almost certainly include job cuts. But a continued slow bleed in manufacturing combined with moderate cost-cutting probably won’t be enough to tip the overall employment picture negative, Adams says. With the Federal Reserve signaling that it’s unlikely to raise interest rates soon, things would have to change materially for that manufacturing weakness to leak into the consumer sector, she adds.

One wild card is the coronavirus and the impact it could have on consumer sentiment, particularly in China. Unlike the trade war, the outbreak threatens to hit consumer-facing companies equally as hard if not harder than industrial ones, with Apple, McDonald’s, and Starbucks shuttering locations in China and U.S. airlines halting travel to the country.

So, we will see. This will be a campaign year and there likely will be political interventions at the slightest sign of economic weakness – developments that should be watched closely as the elections approach, Washington Insider believes.

Want to keep up with events in Washington and elsewhere throughout the day? See DTN Top Stories, our frequently updated summary of news developments of interest to producers. You can find DTN Top Stories in DTN Ag News, which is on the Main Menu on classic DTN products and on the News and Analysis Menu of DTN’s Professional and Producer products. DTN Top Stories is also on the home page and news home page of online.dtn.com. Subscribers of MyDTN.com should check out the US Ag Policy, US Farm Bill and DTN Ag News sections on their News Homepage.

If you have questions for DTN Washington Insider, please email edit@dtn.com