Welcome to the longest government shut down on record. Beyond the hundreds of thousands of federal employees who are feeling the most direct impact, economists are estimating how the closure might impact growth. “This shutdown could shave approximately $1.2 billion off real GDP in the quarter for each week that part of the government is closed. That may seem like pennies for the world's biggest economy, but it means a lot to those workers trying to cover their household costs without their paychecks," said Beth Ann Bovino, chief U.S. economist at S&P.
The previous longest shutdown on record reduced growth by 0.4 percent in the fourth quarter of 2013, which is why many economists are adjusting first quarter estimates by about 0.25 percent. Unlike an event like a natural disaster, where there is usually a bounce back, this shutdown could be different. That’s because while many workers will recoup lost wages once Uncle Sam is open for business again, many contractors will not. Economists are paying close attention to consumer spending and housing, the two areas likely to feel the impact most directly.
Additionally, with many agencies shuttered, it will be tougher to gauge the nation’s progress. Although the Labor Department and Federal Reserve are both open for business, the Census Bureau is not. (One bit of good news for the geeks among us: the Census website is up so there is access to previously published data. And the Bureau of Economic Analysis, which is housed under the Commerce Department, is shuttered. That means the first estimates of fourth-quarter and full-year 2018 gross domestic product, could be delayed beyond the scheduled release date of Jan 30. Without data, it will be hard to answer these five questions that will frame 2019.
1) How will the U.S. economy perform? 2018 was likely the strongest year of growth since 2005 (final figures will be available in January), but with the impact of the tax cuts receding and interest hikes already causing a slowdown in some sectors like housing, the economy is likely to lose momentum in 2019. Estimates for Gross Domestic Product (GDP) range from 2.5 - 2.8 percent, which should still be strong enough to create jobs, maintain a low unemployment rate and keep wages rising. But if the government shutdown persists, these numbers may be too optimistic.
2) Will interest rates keep rising? The Fed raised short-term interest rates four times in 2018 to a range of 2.25 - 2.5 percent. Based on their recent predictions, they expect two increases in 2019, as growth moderates. (The first policy meeting of the year will be held on January 28 and 29, but few expect officials to make any moves until the March meeting or perhaps not until June.) Investors threw a temper tantrum in the last quarter of the year, when it became clear that Fed Chairman Jerome Powell seemed resolute in his belief that the central bank had to normalize rates.
However, minutes from the December policy meeting note that the FOMC “could afford to be patient about further policy firming.” Clearly a prolonged shutdown would likely keep the Fed on the sidelines.
The Fed does not control longer-term interest rates, those move based on supply and demand, and are measured by the yield of the 10-year Treasury note, which ended 2018 at 2.683 percent, down from an intra-year high of nearly 3.25 percent, but up from 2.409 percent a year ago. The increase pushed up 30-year mortgage rates from 4 percent at the start of the year to 4.6 percent by year-end.
3) What’s next for trade wars? The 90-day trade time out between the U.S. and China will run out at the end of February, which is why investors were happy to see President Trump’s Dec 29th tweet, reporting “big progress” in the talks. Analysts at Capital Economics note, “Although this [trade war] will have a negative effect on some sectors and markets, the consequences for global economic growth should be modest.”
4) Do we still have to think about Brexit? Negotiations over the UK’s withdrawal from the European Union could keep jittery investors on edge throughout the first quarter of 2019, as the official Brexit date of March 29 quickly approaches. The process has restarted and the House of Commons vote to move the process forward is scheduled for January 15, although without consensus, it could be delayed again.
5) How will U.S. stocks perform in 2019? Nobody knows the answer to this one, but by now you have read the headlines: It was the nastiest December since 1931 for the S&P 500 and Dow Jones Industrial Average, contributing to the worst annual performance for U.S. stocks since the 2008 financial crisis. (That statement sort of makes you chuckle at the summertime fight over whether or not this bull market was the longest or the second longest in history.) Before you panic, remember that stocks have fared pretty well over the past nine and a half years and most investors have diversified portfolios, which means that they are likely down less than the headlines proclaim.