Macro Wrap-Up

Blame the Shutdown

Topics - Macroeconomics

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Blame the Shutdown

It may surprise you to learn that the U.S. government is partially shut down. 1 1 Close I am assuming the Wrap-Up is your only source of news. The shutdown is already the longest in U.S. history and we don’t know when it will end. 2 2 Close The current government shutdown started on December 22, 2018 and has lasted 27 days as of January 18, 2019. The second-longest government shutdown was 21 days, starting on December 15, 1995 and lasting until January 6, 1996. Source: Congressional Research Service. It has affected thousands of government workers and limited some services. 3 3 Close The government shutdown has not halted production of AQR’s weekly Wrap-Up. Recently some folks have started to speculate as to how the actual shutdown might be affecting markets and the economy. So far it doesn’t seem like it has had a major impact on macro markets. Stocks have been up since the shutdown started and news headlines have not had an obvious effect on prices. It may be that market participants feel that they can ignore the shutdown because past shutdowns have only had transitory effects on the economy. One of the big concerns in past shutdowns had been the debt-ceiling, which raised the specter of a technical government default on its debt. This time there is no concern about the debt ceiling, so T-Bill owners do not have to check every maturity to see if they might miss a payment. 4 4 Close Really they should anyway. I mean you have one job…

As the shutdown drags on, it may start to bleed into the general economy. It will certainly have a big impact on government workers, but from a macro perspective it is a legitimate question as to whether it will be material. The shutdown is partial, which means that certain “essential” workers are still going to work though they may not be paid until after the shutdown ends. Government contractors are out of work. Because many workers spend a good portion of their monthly incomes, the lost or missed pay will directly reduce GDP and retail sales. However, we may not know how much for a while because those numbers will be delayed … because of the government shutdown.

Many of the regulatory agencies have been deemed non-essential. This means that investment bankers cannot get their deals approved by the SEC. 5 5 Close Wall Street Journal: "U.S. Government Shutdown Freezes IPO Market, Imperiling Expectations for 2019," 1/9/19. It also means that snarky journalists will write a lot of articles making fun of the bankers for complaining. 6 6 Close I know, snarky people in glass houses shouldn’t throw rocks. The regulatory backlog goes beyond mergers and acquisitions. If you’re more concerned with mineral extraction than paper-pushing, be aware that mining companies may also require government approval for projects. 7 7 Close Take that paper-pushing strawman! Some economists think the shutdown is hurting business confidence, and we have seen some signs in survey numbers that this may be true. However, the recovery in the stock market makes it seem that sentiment is okay for now.

The administration estimates that all of these effects together are costing the economy a little more than 1/10 of a percent per week of quarterly GDP. 8 8 Close On Tuesday, January 15, 2018, Kevin Hassett, the Chairman of the Council of Economic Advisers, said the shutdown was shaving 0.13% off GDP for every week the government remained shut down. Source: Council of Economic Advisers. Private estimates vary, but don’t seem too far off of the government’s number. 9 9 Close Not surprised to see herding, this is really hard to estimate. It’s easy to just go with the government numbers. If the shutdown continues, this number will probably increase. The big risk is that the government stops payments for programs such as food stamps, which come from the agricultural department. The proceeds from the programs go almost directly into consumption.

Economists are by no means spared from the hardship of the shutdown. It’s not just retail sales and GDP numbers that will be delayed. Grains traders won’t get to see the export sales numbers, so they have more guessing to do as to where soybean prices should be. 10 10 Close Bloomberg: "U.S. Shutdown Leaves Grain Traders With Nothing But 'Hearsay,'" 12/31/18. This week the delays have gone international. Statistics Canada says it can’t release trade data until the Census Bureau in the U.S. returns to work. 11 11 Close Statistics Canada: “Impacts of the U.S. government shutdown on the upcoming release of Canadian international merchandise trade data,” 1/17/19. The loss of data creates more uncertainty about the economy and may make it more difficult for businesses to plan. Luckily, the Bureau of Labor Statistics is still running employment and consumer price index releases on their usual schedule. 12 12 Close The CFTC is not releasing the Commitment of Traders report, so people looking for crowded trades will have to just ask their friends what futures they own. Many other releases, such as consumer confidence and purchasing managers’ indices, come from private sources.

There is a silver lining for economists, if not for the rest of the country: the shutdown gives them the gift of plausible deniability. Because it is so difficult to guess the effects of the shutdown on the economy and because so many of the numbers will be delayed, forecasters can blame any misses on the shutdown. Off by a few tenths of a percent on your CPI estimate? It was the shutdown effect! Need an excuse to delay a rate hike for a meeting? It’s uncertainty created by the shutdown! 13 13 Close The Fed has not made that excuse for delaying rate hikes ... yet. It is possible that equity markets are up because people think that economic uncertainty caused by the shutdown will lead to looser monetary policy. Don’t like this weekly write-up? That is the shutdown’s fault for being the topic. 14 14 Close Ok, that excuse is a stretch.

So far the economic effects are not so substantial as to justify serious concern. However, investors might start thinking that this type of government dysfunction will become a more regular part of the political landscape rather than a temporary annoyance. In the past few years, markets have been able to ignore political events for long periods of time. Then at some point investors start to care. Even in retrospect it can be challenging to figure out why attitudes changed at the times they did. The longer the shutdown goes on, the higher the probability of a market reaction becomes, even if economic fundamentals are still supportive. At some point investors may start blaming the shutdown.

What We Are Watching 

China GDP, Industrial Production, Retail Sales, Fixed Asset Investment (Monday) The Chinese economy faced multiple headwinds in 2018, as efforts to restrict off-balance sheet lending dampened domestic credit growth while trade tensions and a decelerating global economy weighed on manufacturers. Data has been pointing to slower growth for several months, but concerns about the health of the Chinese economy have grown more acute recently following unexpectedly weak PMI and trade data for December. This week, market participants will be paying close attention to 4th quarter GDP figures and December readings on monthly activity series such as industrial production and retail sales. Further evidence of a broad-based slowdown might weigh on local equities and commodities sensitive to Chinese demand.

European Central Bank Meeting (Thursday) While eurozone inflation remained subdued and growth slowed significantly over the course of 2018, the European Central Bank (ECB) stuck to its plans to wind down its asset purchase program by the end of the year. At the last governing council meeting in December, President Draghi made only small changes to the tone of his post-meeting statement, declaring that “the risks surrounding the euro area growth outlook can still be assessed as broadly balanced.” While Draghi did admit that “the balance of risks is moving to the downside,” the ECB has yet to formally soften its guidance and has left open the possibility of a rate hike later this year. This may reflect optimism that transitory factors, such as changes to E.U. auto emissions standards, have played a significant role in recent weakness in economic data. If President Draghi begins to signal a more cautious approach at this month’s meeting, it might push down the euro and provide some support to local equity markets.

Australia Labor Market Data (Thursday) Australian employment data has been one of the brighter economic indicators in Australia recently. The number of job vacancies is at an all-time high, the unemployment rate is near its lowest level since the end of the Financial Crisis and the participation rate has been trending higher, aided by a notable increase in participation from women. One of the weaker components of the labor market has been wage data, which grew at its slowest rate in 2017 since at least 1999. However, wage data has been improving over the last few quarters, likely aided by the tighter labor market. With recent trade and housing data pointing to slower growth, it wouldn’t be surprising to see some moderation in employment gains. Weaker than expected employment data could have an outsized impact on Australian assets, as a disappointing number for this currently bright indicator could be further confirmation that risks to the Australian economy are to the downside.

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