Government Shutdown - Potential Effects
The government shutdown might resume on February 15th.
As for now, the CBO released the potential effects from the shutdown on past and future GDP growth. Negative impact on Q4 GDP growth will be 0.2% and the negative impact on Q1 will be 0.4%.
Government Shutdown - Reports Still Delayed
It’s very important to be careful when reviewing GDP effects from the shutdown. Some economists are acting as if 2% growth in Q1 is likely. They take 0.4% off the 2% estimate and call that the final estimate.
That’s way off because we don’t have the complete data picture from November and December, let alone information about Q1. The median estimate from the CNBC rapid update shows Q4 growth will be 2.9%. These estimates will all change upon the release of the delayed November and December data.
BEA stated it is working with the Office of Management and Budget to get its economic reports out. Q4 GDP report, Q3 GDP by state, December personal income and outlays will be delayed. Also, December international trade in goods and services reports will be delayed.
New release dates for the Q3 U.S. international investment position, November international trade in goods and services, and Q3 GDP by industry reports will be set.
It would be unfortunate if the government shuts down again just as the BEA works through its new schedule of release dates.
It’s important to recognize fund managers are getting private reports on the economy which help them make trades.
Government Shutdown - Stocks will still react to the economic reports when they come out.
Private estimates of government economic reports always exist. But stocks still react to the government reports. It could be algorithms reacting to the headlines.
Either way, they still matter. I use the government reports to color my thinking on the economy.
Government Shutdown - Firms Are Mentioning The Shutdown
The chart below shows 28 firms in the S&P 500 have mentioned the government shutdown on their earnings calls. Only 15 of them said it is having a negative effect on business.
Of the 15 complaints, 7 said their government approvals/reviews were delayed. Those will likely be delayed by a few weeks. But it won’t cause long term issues for these firms.
As the original table in this article showed, the shutdown is expected to have a 1% positive impact on Q2 GDP growth.
If the shutdown resumes in February, the effect on Q1 will be worse and the effect on Q2 will be better if it ends before April.
Government Shutdown - Hurt Economic Optimism
On conference calls, 4 firms stated the specific impact of the shutdown on their business and 4 stated it was too early to state the impact. 3 firms stated the shutdown contributed to client or economic uncertainty.
The shutdown, stock market volatility, and trade war with China all combined to hurt consumer sentiment in the January University of Michigan preliminary poll. I wouldn’t be surprised if people didn’t switch to being optimistic after the government re-opened because a potential shutdown looms again in about 3 weeks.
As you can see in the chart below, the percentage of Americans who stated they see economic conditions getting worse for the country exceeded those saying it’s getting better for the first time in over one year.
Personally, I prefer when questions ask people about their own lives and neighborhoods because some people don’t have a good reading on the direction of the economy.
Either way, people are becoming more negative. I’m curious to see if that negativity translates into lower spending growth.
Redbook same store sales growth report from the week of January 19th showed year over year growth was 7% which increased from 6.7%. Modest deceleration in year over growth that occurred in the first half of January could be abating. Obviously, 7% growth is still strong and nowhere near a recession.
Government Shutdown - Strong Chicago Fed National Activity Index
The December Chicago Fed national activity index increased from 0.21 to 0.27. This beat estimates for 0.15 and the high end of the consensus range which was 0.2.
The chart below shows this was the first back to back increase since October 2017. This helped boost the 3 month moving average from 0.12 to 0.16. According to the report, production sectors showed strength, sales/orders/inventories were neutral, employment improved slightly, and consumer/housing weakened.
That’s no surprise because industrial production growth was strong in December and the housing market was very weak.
Government Shutdown - Dallas Fed Report Improves
The January Dallas Fed general activity index increased from -5.6 to 1. That beat the consensus for -4.6. I think the increase in oil prices this month helped the index.
As you can see from the chart below, the index only spent 1 month in negative territory. The production index increased 7.2 points from 7.3 to 14.5. New orders fell 2.8 points to 11.6. The growth rate of orders fell from 5.8 to 1.2. Inflation indexes fell. Prices received fell 0.2 to 6.4 and prices paid fell 7.6 points to 21.2. Capex increased 1.8 to 16 and the company outlook increased from -3.4 to 7.1.
However, the uncertainty index increased 6.4 points to 15.6. The political environment and global slowdown are reasons to be uncertain.
The 6 month forward looking index increased spectacularly. General business indicator was up from 8.5 points to 11.7. Production index increased 20.7 points to 53.4. New orders were up 12.3 to 44.7. The growth rate of orders and capex were up 15.4 points and 9.5 points to 38.5 and 34.2. Company outlook index was up 13.5 to 22.3.
Government Shutdown - Conclusion
In summary, the Dallas Fed index showed modest improvement and the forward looking indexes showed sharp improvement.
This was one of the better regional Fed reports. This is a good sign, but since it’s only one of five reports, I won’t change my expectations for the manufacturing ISM PMI by much. The December ISM PMI was 54.1.
Consensus for the January PMI, that comes out this Friday, is 54, with a range between 53 and 56.8. I expect the report to slightly miss estimates.
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