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Navigating a fog bank

| January 18, 2019

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.

The federal government shutdown has been in force for almost a full month, making it the longest in history.  There are many important problems that a federal government shutdown presents.  One that is far down the list for society at large but especially meaningful for financial markets and economists is the interruption of the collection and release of key economic data.  At a time when there is an unusual amount of debate and disagreement on the near-term outlook for the economy, now is a particularly bad time to be flying blind with respect to the economic data.

Lucky for a While

The timing of the federal government shutdown was unusually fortuitous with regard to the economic data calendar. For monthly releases that typically come out in the last week of the month, federal agencies tend to accelerate the calendar in December in an effort to get everything out well before Christmas.  Releases like GDP, personal income and spending, the PCE deflators, and durable goods orders were all published just before the federal impasse began on December 22.

Another mitigating factor in the current government shutdown for the economic data calendar is that the Labor Department is among those agencies that had already received its funding for fiscal year 2019. Key releases such as the monthly employment report and CPI have been compiled and released on schedule. In contrast, the Commerce Department is among the cabinet agencies that are currently shut down. That department includes both the Census Bureau and the Bureau of Economic Analysis (BEA), two of the primary federal economic data producers which are responsible for a number of important data series, including retail sales, GDP, personal income and consumption, and housing starts.

The data release casualties of the first three weeks of the federal government shutdown – which was the longest shutdown up until the current episode – were mostly second-tier data releases that probably would not have had a major impact on financial markets anyway. The list of delayed releases over the first three weeks after the shutdown began on December 22 can be seen in Exhibit 1.

Exhibit 1: Economic Releases Delayed over the First Three Weeks of the Shutdown

  • November New Home Sales (Census Bureau)
  • November Advance Trade and Inventories (Census Bureau)
  • November Factory Orders (Census Bureau)
  • November Construction Spending (Census Bureau)
  • November Trade Balance (Census Bureau)
  • November Wholesale Inventories (Census Bureau)
  • December Treasury Budget (Treasury Department)

This collection of releases rarely evokes significant financial market reaction in normal times. In contrast, the most important economic data scheduled to be released over that three-week period all came out on time, highlighted by the December Conference Board consumer confidence gauge, the December ISM manufacturing and non-manufacturing reports, the December employment report, and the December CPI.

Entering a Fog Bank

One might have imagined on December 21 that a three-week duration or less would have been a reasonable bet for the length of the federal government shutdown. Unfortunately, that bet would have been a loser, and as the impasse extends to a month, we are beginning to miss out on economic data releases that are more noteworthy. There are a number of  tier 1 economic data releases that were slated for the second half of January, as shown in Exhibit 2.

Exhibit 2: Major Economic Releases Originally Scheduled for the Second Half of January

  • December Retail Sales (Census Bureau) – Jan. 16
  • December Housing Starts (Census Bureau) – Jan. 17
  • December Durable Goods Orders (Census Bureau) – Jan. 25
  • December New Home Sales (Census Bureau) – Jan. 25
  • Q4 GDP (Bureau of Economic Analysis) – Jan. 30
  • December Consumer Spending (BEA) – Jan. 31
  • December PCE Deflators (BEA) – Jan. 31

Several of these releases will be sorely missed, especially at a point where opinions regarding the economic outlook are unusually divided. An extended shutdown is going to begin to have a meaningful impact on the ability of economists to gauge the tenor of activity. Fed Governor Clarida noted that the absence of key data is beginning to make the Fed’s job more difficult. To be fair, the Fed is essentially off the clock until at least March anyway, and recent comments suggest that officials are currently inclined to pause in March, providing a longer opportunity to monitor volatile financial markets and downside risks associated with markets as well as flagging growth in the economies of some of our major trading partners – most notably, China, Germany, and the UK. Although Fed officials may complain about the lack of data, the added uncertainty is not likely to alter the course of monetary policy.

In contrast to the Fed, market participants have to mark themselves to market every day, which includes having an up-to-date view of the economic outlook. There are particular reasons for uncertainty and concern in the housing and manufacturing sectors. Housing activity cooled off considerably in 2018, so there have been some fears that this sector is sliding due in part to higher mortgage rates, while others take a more benign view that building activity has merely plateaued and home prices are moderating to a more sustainable rate of increase. Missing out on housing starts in December as well as new home sales going back two months makes it more difficult to have a timely view on this industry. Luckily there are a number of private sector proxies, including existing home sales (published by the National Association of Realtors), mortgage applications, the homebuilders’ sentiment gauge, and commentary from national builders. There is decent news on this front lately, as some builders have suggested that the pullback in mortgage rates in recent weeks has brought some renewed buying interest, a notion backed up by a modest rebound in the homebuilders’ sentiment index for January and a jump in mortgage applications for both purchase and refinancing in the latest week.

It may also be a pivotal time for the manufacturing sector, as this part of the economy is bearing the brunt of the uncertainty around trade policy as well as the price impacts on inputs caused by tariffs. The recent plunge in the ISM factory sector index for December raised concerns that manufacturing activity is sagging, so the December durable goods orders report would have provided welcome insight. For now the industrial production figures should be helpful, if not definitive when it comes specifically to the investment outlook.

Ordinarily markets would be less than two weeks away from getting the first estimate of fourth quarter GDP growth, at a time when there is an unusually wide array of forecasts for the economy in 2019. Economists and financial market participants will feel the pain from the absence of GDP data, especially at the turn of the year, when there is so much speculation regarding the course of growth for 2019.

Economists and market participants can undoubtedly cope for another week or two with the relative scarcity of timely economic data due to the government shutdown, but the longer the impasse drags out, the hazier the assessment of the economy will be at a time when financial markets were already skittish and predictions for the economy and monetary policy this year are all over the map. Financial markets hate uncertainty, but that is exactly what is being served up in generous portions early in the new year.

When the Government Reopens

When the federal government finally reopens, the federal statistical agencies will pump out all of the delayed releases on an amended schedule. No weekly or monthly data will get skipped, but the cascading effect means that releases will continue to be delayed even after the Commerce Department is back to work. For example, the BEA cannot complete its Q4 GDP estimates until the Census Bureau has issued the relevant component series, such as construction spending, trade, and factory orders for November. The longer the shutdown persists, the more extended the period over which the data schedule will have to be rejiggered. For every two weeks that the shutdown continues, the data calendar will likely be disrupted for another week or so.

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