U.S. economic data released this week was mixed. The U.S. economy is in a transitional state beset by policy headwinds and a cooling global economy.
While the levels of many data streams are good, the direction of change in recent releases (the deltas) is not good. Inflections in economic data combined with financial market volatility coming at a time when the corporate sector looks increasingly vulnerable to cooler profits is a witch’s brew for the U.S. economy.
At this crucial time, many federal government data sources are not operational due to the partial federal government shutdown. Fortunately, private data sources, the Federal Reserve and some federal offices, including the Bureau of Labor Statistics, are still releasing data. It remains to be seen whether crucial fourth quarter GDP data will be released by the Bureau of Economic Analysis next week as scheduled. Even if the BEA gets back to work soon, it may take some time to process their data and publish it.
Now that the federal shutdown has extended through two government pay cycles, conditions are dire for many affected households. A disruption to air travel due to the lack of pay for TSA workers could be a choke point for the economy. Nonetheless, we believe that the drag on first quarter GDP from the shutdown will be small. However, through this expansion cycle first quarter GDP growth has often been the weakest of the year. The BEA has worked to reduce the residual seasonality in the GDP data, so that may no longer be an issue. But the potential for residual seasonality in the GDP data plus the government shutdown through at least a third of Q1 could result in a weaker than expected Q1 GDP print.
Each additional week of the government shutdown will put more sand in the gears of the U.S. economy. It is conceivable that a shutdown measured in months could be a contributing factor for a U.S. recession.
The Federal Open Market Committee meets next Tuesday and Wednesday. We expect the Fed to leave policy levers unchanged. However, the messaging may be important. Fed Chairman Jay Powell may use the policy announcement and his post-meeting press conference to reinforce the Fed’s “patient” stance toward interest rate hikes. We believe that the fed funds rate is getting close to its maximum for this cycle and a patient Fed may only increase the fed funds rate one or two more times. We expect to see no rate increase until June. Also, we might receive some clarification from the Fed about its balance sheet reduction program. There is growing speculation that the Fed could end balance sheet reduction (mature asset runoff, quantitative tightening, whatever you like to call it) sooner rather than later. The floor for the Fed’s balance sheet appears to be rising as headwinds increase for the U.S. economy.
The Conference Board’s Leading Economic Index for the U.S. dipped by 0.1 percent in December. This is the second decline in the last three months.
Initial claims for unemployment insurance fell by 13,000 for the week ending January 19, to hit 199,000. Federal workers who are not receiving paychecks are eligible for unemployment benefits, so we expect that category of UI claims to increase sharply through January.
Existing home sales decline by 6.4 percent in December, to a 4.99 million unit annual rate.
For a PDF version of this report, click here: Comerica Economic Weekly, January 25, 2019
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