KEY DATA: Confidence: -6.4 points; Expectations: -10.4 points/ Jobs Index (Over-Year): -0.96%/ Home Prices (Monthly): +0.4%; (Over-Year): +5.2%
IN A NUTSHELL: â€œThe shutdown not only hurt the economy but it battered household feelings about the future.â€
WHAT IT MEANS: Itâ€™s time to get back to real economic issues and put the partial federal government shutdown behind us, which may take some time. One place where the insane decision to close government offices had a major effect was, not surprisingly, on consumer confidence. The Conference Boardâ€™s January reading of household sentiment dropped sharply. While current conditions were largely flat, an indication the economy continues to expand decently, the expectations measure cratered. Itâ€™s hard to be confident about the future when the government is so dysfunctional. Still, the economic impacts of declining confidence that results from political events are usually modest, so donâ€™t expect households to suddenly start cutting back spending sharply.
Friday, the employment report is expected to be released. It may be a little better than expected as the Paychex/Markit IHS small business jobs index rose slightly in January. Still, it is likely to be a lot weaker than the huge 312,000 gains reported for December. I think it could be closer to 125,000. Looking forward, the downward trend in the small business jobs index points to softer job gains in the future.
The S&P CoreLogic Case-Shiller national index rose moderately in November, but the year-over-over gain continues to decelerate. Costs in the largest metro areas seem to be easing back faster than in other areas. Growing economic uncertainty is likely to restrain housing demand, but at least mortgage rates have backed down, which should keep sales from faltering.
MARKETS AND FED POLICY IMPLICATIONS: Well, the government shutdown is over and hopefully this will be the last one for a while. Every once in a while, the wackos who run Washington think that refusing to fund government operations is a good idea and they proceed to do that. And as usual, they learn that government shutdowns are not very good ideas. Of course, most politicians have very short memories, so I cannot rule out another one, though I doubt that will happen at the end of the current deadline. That said, the Congressional Budget Office made it clear that there will be lasting effects and the total is likely a lower bound. The impacts on businesses not able to operate effectively, whether it was due to regulatory or lending issues, is hard to estimate. And donâ€™t think going forward that the government workers will spend at the pace they had been before the shutdown. Their rainy day funds will look more like hurricane funds. The Fed is meeting today and tomorrow and with little indications the chaos in Washington will subside anytime soon, the better part of valor is to punt. Look for the statement and the comments of the Chair to mention that the uncertainty will be watched carefully. That, in real world language, means the members will take their time deciding when to raise rates again. With the trade situation with China in flux, that wait could last a while. I originally put on my forecast an April/May meeting move and that is still possible, but I am not so sure. The Chinese economy is not likely growing anywhere near the 6.5% pace the government claims and until we see demand pick up, a significant slowdown in the worldâ€™s second largest economy has to be taken into consideration when setting monetary policy. My point is that the rate hikes were not the major problem facing the economy and the markets; the trade war was and is. Until this issue is settled, the Fed is likely to move very slowly as a full out trade war could send the world economy into recession.