A Downshift in the Global Economy Adds Risk
There is never a good time, but the recently ended partial federal government shutdown came at a bad time. As the global economy appeared to downshift, the shutdown put sand in the gears of the U.S. economy, and resulted in a partial economic data blackout at a critical time. The Census Bureau and the Bureau of Economic Analysis were closed through January, leaving a big gap in economic reporting. Their reopening is shedding some light on the U.S. economy, but the lighting may be inconsistent in the near term as data procedures and schedules get reassembled.
Inconsistencies in data can be seen in the January employment report from the Bureau of Labor Statistics, which was not shut down but was still impacted by the shutdown. The BLS jobs report is based on two separate surveys. The establishment survey shows employment by place of work and gives us data on employment in specific industries. The household survey shows employment by place of residence and is the source for the unemployment rate. The establishment survey showed that January payrolls increased by a very strong 304,000. December payrolls, which were previously reported as up by 312,000, were slashed to now show a gain of 222,000. Furloughed federal workers were counted as employed in the establishment survey in January because they will eventually get paid. The household survey showed a major drop of 251,000 jobs in January. Furloughed government workers were counted as not employed in the household survey. As a result, the unemployment rate increased from 3.9 percent in December, to 4.0 percent in January.
The bulk of U.S. labor-related data points to ongoing strong hiring through January. However, business and consumer confidence fell at year end 2018, and some marquis companies announced that they were beginning to lay off significant numbers of workers. We believe the hiring story is more nuanced than “full speed ahead.” We expect the blistering pace of hiring through December and January to slow down in the months ahead, reflecting more cautious behavior from U.S. businesses as U.S. and global conditions cool in early 2019.
While U.S. economic data has been inconsistent, recent data from China has been consistent in a bad way, showing slower growth in the world’s largest single economy. The Caixin Composite PMI for China for January dropped to a barely positive 50.9, with a big drag coming from the manufacturing sector. The Caixin China Manufacturing PMI dropped to a contractionary 48.3 in January. Likewise, the IHS Markit Eurozone Manufacturing PMI fell to a barely positive 50.5 in January, showing that the world’s largest trading bloc is losing momentum. Weaker economic growth is putting pressure on tax collections in Germany according to a recent Finance Ministry report. Japan, the world’s third largest economy, is also losing momentum. Global trade is clearly cooling, crimped by the U.S.-China trade war.
In addition to pressure from the U.S.-China trade war, the global economy is feeling pressure from the Federal Reserve due to higher U.S. interest rates. The Fed has responded to increased downside economic risk by emphasizing “patience” in recent announcements, speeches and press conferences. At the conclusion of the Federal Open Market Committee meeting over January 29/30, Fed Chairman Jay Powell sounded like he was in no hurry to continue raising rates. We expect the next dot plot, to be released by the Fed on March 20, to show reduced expectations for rate hikes, compared to the dot plot from December 19. In our February U.S. forecast, we have only one 25 basis point increase in the fed funds rate this year, coming at mid-year. We believe that the Fed is already very close to the top of its interest rate cycle for this expansion. Also, we expect the Fed to gradually wind down asset runoff this year, settling at a balance sheet of about $3.5 trillion.
For a PDF Version of this report, please click here: February 2019 U.S. Economic Outlook
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